Blood in The Street.
By Sin-ming Shaw
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.
Thaksin can help reawaken the Thai tiger
By Sin-ming Shaw
Former Thai prime minister Thaksin Shinawatra was gracious when he ended his exile in Hong Kong: "Thank you, Hong Kong, for having me here," he said. "Hong Kong is a place where I would always like to come."
If Thaksin is sincere, he could serve Thailand by bringing back a few of his host city's more admirable virtues. Two stand out: a largely uncorrupt, efficient, transparent and accountable government; and an open and competitive economy.
Hong Kong is, of course, by no means perfect: mainland China's politics and habits are slowly infecting the city. Nevertheless, Transparency International, the world's premier corruption rating agency, ranked it the 14th cleanest society last year.
From 2001, when Thaksin first became prime minister, to 2007 under military rule, Thailand's corruption ranking plunged from an already low 61 to 84, which puts it in the same league as Gabon and Swaziland, two countries notorious for violent and corrupt leaders who routinely trample on their citizens' rights. Thailand's public sector is historically plagued by frequent military coups, managed with rare exception by incompetent generals and civilians who rule with condescension towards the people who pay them to serve. Public accountability, government transparency and official integrity remain largely slogans.
Thailand was once touted as a future "Asian tiger". None of the four "tiger" economies - Singapore, Hong Kong, Taiwan and South Korea - were as blessed with natural resources and fertile soil. And, unlike Thailand, all of them had suffered from war or internal strife. Yet, there is a vast gap in economic performance between them and Thailand in the past 50 years.
The cause is obvious: the inferior quality of governance in Thailand. While a relatively small business, military and political elite misgoverned Thailand, others in Asia, with more selfless and competent public servants, succeeded in finding their competitive niche in the modern world. Much of Asia, including China, focused on meeting the challenge of globalisation, whereas Thailand's elite has protected the country's economy to serve its parochial interests.
Thus, in the Heritage Foundation's annual rankings of countries by how free and competitive their economies are, Thailand routinely comes up short. Last year, it ranked 54th, compared to first and second place for Hong Kong and Singapore, respectively. China was at the bottom of the rankings 30 years ago but, at its present rate, it will soon overtake Thailand. In several key sectors, such as financial services and retail, it is already more open than Thailand.
Likewise, China has identified three universities as candidates to join the world's top 10 in the near future. Without quality education, there can be no quality workforce, without which no country can hope to compete. China is injecting public capital, while its wealthy graduates pour in private money in the style of American alumni donors.
By contrast, Thailand's government and local elite seem content for it to remain a provincial country shielded from global competition in science and technology. Foreign employers are appalled by the quality of Thailand's education system, whose graduates have little foreign language proficiency and possess scant analytical skills.
Competition is not a zero-sum game. The successes of Hong Kong, Singapore and mainland China should serve as a powerful reminder that Thailand has great potential.
As one of the nation's rare politicians who understands economics, and how to put the government to good public use, Thaksin is in a unique position to serve Thailand well. As a "non-politician", he can tell many of his business and political friends to chart a new course for Thailand, to help it become a "near tiger". Or he can let history judge him even more harshly.
Sin-ming Shaw is a former visiting
scholar in history at Princeton, Columbia, Harvard, and Oxford universities. Copyright: Project Syndicate
Thaksin and the Lessons of Hong Kong
By Sin-ming Shaw
HONG KONG – Former Thai Prime Minister Thaksin Shinawatra was gracious when he ended his exile in Hong Kong: “Thank you, Hong Kong, for having me here, so warmly. Hong Kong is a destination where I would always like to come.”
If Thaksin is sincere, he could serve Thailand by bringing back a few of his host city’s more admirable virtues. Two stand out: a largely uncorrupt, efficient, transparent, and accountable government, and an open and competitive economy.
Hong Kong is, of course, by no means perfect: Mainland China’s politics and habits are slowly infecting the island. Nevertheless, Transparency International, the world’s premier corruption rating agency, ranked Hong Kong as the 14th cleanest society in 2007.
From 2001 when Thaksin first became prime minister, to 2007 under military rule, Thailand’s corruption ranking plunged from an already low 61 to 84, which puts the country in the same league as Gabon and Swaziland, two countries notorious for violent and corrupt leaders who routinely trample on their citizens’ rights.
Thailand’s public sector is historically plagued by frequent military coups, managed with rare exception by incompetent generals and civilians who rule with condescension towards the people who pay them to serve. Public accountability, government transparency, and official integrity remain largely slogans.
Thailand was once touted as a future “Asian Tiger.” None of the four “tiger” economies – Singapore, Hong Kong, Taiwan, and South Korea – were as blessed with natural resources and fertile soil. And, unlike Thailand, all of them had suffered from war or internal strife. Yet, even the most cursory analysis reveals the vast gap in economic performance between them and Thailand in the past 50 years.
The cause is obvious: the inferior quality of governance in Thailand. While a relatively small business, military, and political elite misgoverned Thailand – often cynically, and sometimes incompetently – others in Asia, with more selfless and competent public servants, succeeded in finding their competitive niche in the modern world. Much of Asia, including China, focused on meeting the challenge of globalization, whereas Thailand’s elite has protected the country’s economy to serve its parochial interests.
Thus, in the Heritage Foundation’s annual rankings of countries by how free and competitive their economies are, Thailand routinely comes up short. In 2007, Thailand was ranked 54th, compared to first and second place for Hong Kong and Singapore, respectively. Taiwan was ranked 25th and Korea 41st.
Korea’s relatively low ranking reflects the inclusion of North Korea. Yet several South Korean companies, such as Samsung and Hyundai, have become global household names competing successfully against far more established brands, such as Sony and Honda.
Indeed, South Korea has shown how a poor country without natural resources can become a world-class economy. China was at the bottom of the rankings 30 years ago, but at its present rate it will soon overtake Thailand. In several key sectors such as financial services and retail, China is already more open than Thailand. The quality of China’s roads and telecommunication puts to shame Thailand’s uneven, badly maintained streets and its slow and expensive Internet service.
Likewise, China has identified three of its universities as candidates to join the world’s top 10 in the near future. Without quality education, there cannot be a quality work force, and without that, no country can hope to compete in a world where the march of globalization cannot be stopped. To that end, the government is injecting public capital, while wealthy graduates are pouring in private money in the style of American alumni donors.
By contrast, Thailand’s government and local elite seem content to remain a provincial country shielded from global competition in science and technology. Foreign employers are appalled by the poor quality of Thailand’s education system, whose graduates have little foreign language proficiency and possess scant analytical skills.
Competition is not a zero-sum game. The successes of Hong Kong, Singapore, China, and South Korea should serve as a powerful reminder that Thailand has great potential, if only its elites would stop behaving like spoiled children playing a game at which only they are allowed to win.
Thaksin has unique qualifications to serve Thailand well. He is one of the country’s rare politicians who understands economics, and how to put the government to good public use.
In his new life as a “non-politician,” Thaksin can tell many of his business and political friends to chart a new course for Thailand, one that would help the country become a near “tiger.” Or he can let history judge him even more harshly. The choice is his.
Sin-ming Shaw is a former visiting scholar in history at Princeton, Columbia, Harvard, and Oxford Universities.
Copyright: Project Syndicate, 2008.
When pride comes before a fall from grace
By Sin-ming Shaw
Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong will step down in 2009 not with a bang but with a whimper. The news that he was going, unceremoniously leaked by an anonymous government source, was a powerful signal that his presence at the HKMA is no longer required, and he is not irreplaceable.
It is rare for Hong Kong, a city usually generous to a fault, to treat in such a manner a man who many consider a hero for defeating global currency speculators in 1998.
Hong Kong's civil servants must retire at 60. Alan Greenspan, the former chairman of the US Federal Reserve - to whom Mr Yam is known to have wanted to be compared - retired last year aged 79 after having served four US presidents for a total of 18 years. Mr Yam will be 61 when he steps down, after having served 16 years, thus failing to beat Mr Greenspan on both counts.
Mr Yam had argued, in defence of his extravagant salary package (around six times that of Mr Greenspan), that his position should not be governed by civil service rules regarding pay or length of service. He may have got his financial rewards, but he has, nevertheless, failed to obtain his longed-for Greenspan-esque glory.
How is it that the news of the departure of Mr Yam, who has been feared and revered by so many for so long, was leaked to the public in such a humiliating way? Here are a few clues.
Over the years, he has not discouraged the widespread impression that he has scant intellectual respect for his boss, Donald Tsang Yam-kuen, who is now the chief executive and was formerly the financial secretary, who has statutory authority over the HKMA. That was too arrogant by half.
Second, Mr Yam made few bones about claiming credit for his "victory" against the speculators in 1998. In fact, many in the private sector thought - correctly - that Mr Yam should have been fired for his initial incompetence. After realising his mistakes, he finally unveiled his now-famous "seven measures" - suggested to him a year earlier by respected local economists. Without those measures, he would have pointlessly exhausted Hong Kong's reserves in five more trading days.
The first paragraph of the official announcement at the time all but acknowledged this. It said: "The HKMA introduced ... a package of technical measures to further strengthen the currency board arrangements and make them less susceptible to manipulation."
The attacks on the Hong Kong dollar and the massive sell-off of Hong Kong stocks, even by the most conservative pension funds around the world, came about precisely because every professional knew about this "susceptibility".
Baptist University professor Tsang Shu-ki, a currency expert, tried to alert the HKMA as early as 1996 to the fact that the currency system was vulnerable.
Global investors correctly concluded that Mr Yam was providing them with a virtual ATM machine to make a quick profit.
Then there is the fact that, in carving out a de facto empire at the HKMA, Mr Yam began to act as if the life and death of the Hong Kong dollar rested on his expertise alone.
To circumvent civil service rules, he floated the idea that, as head of the HKMA, he was also a fund manager and therefore should be paid as such. It was easy to get what he wanted: the Exchange Fund Advisory Committee, which rubber-stamped his package, is made up mainly of bankers regulated by the authority.
The manner in which all this was done alienated him from many senior financial professionals in the private sector, as well as his cohorts in the government.
Students of classics, however, will not be surprised by Mr Yam's fate. To borrow a famous Greek saying: Those whom the gods destroy, they first make proud.
Sin-ming Shaw, a private global investor, was a guest scholar at Princeton University in 2006/2007