Thomas Piketty: Le Monstre Sacré

Over the last few weeks, much ink has been spilled in an attempt to refute, undermine and marginalize the book “Capital in the 21st Century” by Thomas Piketty, a French economist. In some, unsurprisingly British quarters it has even reached the level of “the lady doth protest too much, methinks.” You cannot convince people of your viewpoint by just silencing the opposition. It’s a safe bet that, had a British economist said the same things or reached similar conclusions, no British institution would have attacked him so publicly. But who knows, perhaps “Le Monde” would have done so with gusto and joie de vivre! It’s clear that the Financial Times is not a proper forum to argue about economic time-series with any seriousness. Although one can find fault with the Mona Lisa, doing so does not take anything away from its value as a work of art.

Alibaba’s business model

Two days ago, Business Insider published a good summary of little known facts about Alibaba. Several facts highlight how the mega trade-web dwarfs competitor e-commerce platforms in the U.S. and in China on several critical measures, including employees, registered users, web visits, sales throughput (on track to handle $1 TN in transactions) and revenues ($1.8 BN in 3Q2013). Another competitive advantage of Alibaba is that it blocks search engine spiders, thereby retaining the control and benefit of most of the information published on its site. The March 23 2013 Economist article on Alibaba discusses the spider tactic in more detail and offers a deeper discussion of Alibaba’s information advantage generally. But the most interesting aspect of Alibaba is one that has received almost no attention. That is Alibaba’s role in transforming and developing China’s SME financial services market. Alibaba, together with its financial backer and deal sponsor Orient Securities Asset Management, is the micro-loan securitization pioneer in China. Approval was granted by the CSRC in June 2013 for the creation of Alibaba Separate-Account Asset Management, a master trust structure. It will issue 10 series, each backed by RMB 100-200 MM, with a 1-2 year maturity. The first series, backed by RMB 500 MM, priced with three tranches (A: 75%, B: 15% and C:10%) of a 15-month maturity. The bonds were listed on the Shenzhen Stock Exchange on September 25, 2013. With this foray into self-financing, I believe it is well worth reconsidering Alibaba’s business model. Is it really a giant, diversified trade web? Or is it (as I believe) a brand new banking model for the 21st Century?

When an article on subprime goes bad

Floyd Norris, chief financial correspondent for the New York Times, gives a disturbingly uninformative  account of RMBS and CDO markets in his article, When a Deal Goes Bad, Blame the Ratings, November 14, 2013. Not having done the research to really understand the causes of the credit bubble, he fails to see the irony of his words: Did you make an incredibly bad decision during the great credit bubble? Don’t worry. Join the crowd denying responsibility.   

Industry wrote provision that undercuts credit-rating overhaul

By Greg Gordon | McClatchy Washington Bureau
WASHINGTON — Moments before the Senate overwhelmingly passed a bill to overhaul the credit ratings industry seven years ago, Republican and Democratic sponsors took turns touting its promise for ending an entrenched oligopoly. The bill, they said, should break the viselike dominance of three agencies – Standard & Poor’s Ratings Services, Moody’s Investors Service and the smaller Fitch Ratings – in an industry that serves as a crucial watchdog over the nation’s financial system. What’s escaped public scrutiny until now, however, is that the law’s tough criteria defining when a newcomer could join the industry weren’t written by Congress. They were crafted by a yet-to-be-identified official of one of the big three ratings agencies, a former aide to the Senate Banking Committee has told McClatchy.
Read more here:

Six FDAs or Six Feds?

“Imagine the pharmaceutical industry having six FDAs, all competing to approve drugs,” said Rob Dobilas, who founded Realpoint LLC, the credit-rating company bought by Morningstar Inc. in 2010, referring to the U.S. Food and Drug Administration. “Everyone would be dead.” See Matt Robinson, Bloomberg News, Ratings Shopping Revived. Striking quote, but the analogy needs to be tweaked. Many people confuse the credit quality on corporate bonds with that of securitizations and structured bonds. Corporate bonds are backed by the entire balance sheet of an operating company, with competing payment obligations and a portfolio of assets of different value and liquidity. Structured bonds are backed by cash flows. Thus different ratings on the same security is tantamount to working in different currencies. Each currency is pegged to an exchange rate a.k.a. the credit rating scale. Thus, the valid comparison would be “imagine six different Feds” who control the money supply on their own terms. Everyone would be broke, except their patron clients. Oh, wait a minute. And what’s the solution? Very simply, to adopt a unified numerical rating scale for structured. It would considerably curtail ratings shopping and limit the probability of another subprime bubble like the last one.

Rating Agency Flashpoint

On May 8, 2013, Sohu Business picked up an article in the HK press about a JV ratings agency between SEC-designated Egan-Jones, a Chinese agency, Dagong, and a Russian agency, RusRating, targeted for listing June 25 in HK. It is called, appropriately, “World Ratings.” Perhaps not coincidentally, the SEC’s credit rating roundtable is scheduled for May 14 with some industry and academic participants selected by the SEC as well as the heads of the Big Three participating. The goal is to eliminate “ratings shopping,” ie, the search by financial intermediaries for ratings on new structured bonds that impose the absolute lowest capital cost regardless of the actual risk. The search for cheap substitutes is not a crime; in finance, it keeps the price of capital competitive. A problem arises only when cost and price become decoupled. The cause is usually asymmetrical information. Ratings shopping in structured finance is precisely that: an information problem arising from the failure to develop and promulgate credit risk measurement standards that are valid over the life of the security.

Has Anything Changed?

Plus ça change, plus c’est la même chose…..”  the more things change.. The rules have gotten more complicated and voluminous but has anything changed? Risk is back in fashion, five years after the March 2008 that Bear Stearns was taken over by JP Morgan Chase at a price of $1.00 per share. To be honest, I wonder if a lot has changed. Furthermore, I have noticed that there is growing number of voices raising similar concerns about the appetite for risk and the resurgence of products reminiscent of the heady days of 2005 and 2006.

Leading Change

This is the title of a classic on change “management,” Leading Change, by John Kotter. The word management is in quotes because the premise of the book is that change cannot be managed, it must be led. Going in a straight line to get off the beaten path and on to a new one seems preferable, but it won’t lead you there. You need leadership to change course. The essential value-add of Kotter’s book is that he linearizes the process of institutionalizing change so it looks like a dotted line. He identifies eight characteristic errors of change leadership that are like the holes between the dots. Reading Kotter’s book, I was nagged by one question, the same one that had bothered me in a change-offsite sponsored a large NY based bank in the early 1990s. The session leader put up a power point slide similar to this one and asked, how would you advise Red Arrow to motivate the Blue Arrows to change direction? Right there, he lost me. 
  1. why does Red Arrow want to turn at a right angle to the crowd of Blue Arrows? Is he really smart or incredibly stupid? 

Addressing the Jobs Crisis

In Brain Dead, Arianna Huffington asks, “[W]hat accounts for the epidemic of illogical thinking in Washington, where policy makers refuse to grasp what’s plainly right in front of them?” She is talking about the employment crisis, of course. Denial is the answer, obviously. But, denial of more than the fact of an employment crisis. This denial goes deep, casting doubts on the capabilities of our brightest economic experts. Expertise in today’s market means proficiency in a way of thinking. We have ample reason to believe this way of thinking is part of the problem.


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