A recent e-mail from a friend extolling the virtues of Walmart in providing cheap goods to the American masses persuaded me to pen this response: You get what you pay for as I have said elsewhere on the blog. We wanted goods, cheap goods, really cheap goods to fill our homes. Initially Walmart sourced those from Americans who were happy to get the work. But the goods were not cheap enough so Walmart began to source those goods from overseas. Of course, Walmart was not the only one. Dozens of corporations began to outsource their production facilities. One can hardly find a product these days that is not labeled Made in China or, to a lesser extent, some neighboring Asian country. Continue reading
The stranger, a Western businessman, slipped into the chair next to me at an Asia Society lunch here in Hong Kong and asked me a question that I can honestly say I’ve never been asked before: “So, just how corrupt is America?” Thus begins a column by Thomas Friedman that ends with a line that I have repeated again and again: Which is why we don’t just need a financial bailout; we need an ethical bailout. Read the whole article. There is an eye-opening accompanying article in the NY Times outlining how Fairfield Securities fed money to Madoff Securities and how much the Noel family who ran Fairfield made and charged for, in retrospect, doing nothing. One wonders whether this is all corruption or just good, old-fashioned incompetence. Why, one wonders, would people put millions of their own money into a fund about which they knew absolutely nothing?!
How one wonders does one get away with a $50 billion fraud over such a long period of time? And, how does a fraudster become Chairman of Nasdaq? Does no-one check the integrity of the accounting firm that is supposedly doing the audit? Where were the accounting firms peers when it came to (supposedly) doing a peer review? Continue reading
I have been asked to give a talk to a Rotary Club today. This is what I am going to try to tell them:
CDO’s and CDS’s
Our first mortgage was a face-to-face affair with a local company. That got replaced by financial intermediaries who converted our mortgage into CDO’s. And then to protect themselves against this financial skullduggery, everyone bought CDS’s. The market is huge and completely opaque – witness the billions being poured into AIG. We need to either make a market or to shut the CDS market down completely. Lehmann Brothers CDS’s closed at 90 cents on the dollar so things might be OK. Continue reading
One of the delights of reading the newspaper in these troubling times, is seeing columnists reach back for the great quote to capture the moment. A handful of my favorites follow. I shall add to the list as I see them:
“If you jump off the top of an 80-story-building, for 79 stories you can actually think you’re flying. It’s the sudden stop at the end that always gets you.” Thomas Friedman quoting a friend.
“We suffer more when we fall from a better to a worse situation, than we ever enjoy when we rise from a worse to a better.” Aline van Duyn quoting A. Smith
“A simple rule dictates my business: Be fearful when others are greedy, and be greedy when others are fearful.” Aline van Duyn quoting Warren Buffett
“We have reached a critical point . . .” If governments do not act then “we must expect the progressive breakdown of the existing structure of contract and instruments of indebtedness, accompanied by the utter discredit of orthodox leadership in finance and government, with what ultimate outcome we cannot predict.” Ed Crooks quoting John Maynard Keynes
“To the possessor of money capital, the process of production appears merely as an unavoidable link, as a necessary evil for the sake of moneymaking. All nations with a capitalist mode of production are therefore seized periodically by a feverish attempt to make money without the intervention of the process of production.” John Plender quoting Karl Marx
“I used to think that, if there was reincarnation, I wanted to come back as the president, or the pope, or a top baseball hitter. But now I want to come back as the bond market. You can intimidate everbody. John Plender quoting James Carville
One of the great theories that underly all of modern finance as taught in every business school across the world is coming under attack these days. Simply stated the theory, known as the “Efficient Market Theory” states that prices at any point in time capture all the publicly available information at that point in time. Continue reading
A credit default swap (CDS) is nothing but a gamble between two people that a company or an individual, not necessarily connected with them. will get into financial trouble. Sears, for instance, sells stoves on long-term credit. Some purchasers might not be able to pay. So Sears finds someone else willing to pay the purchaser’s debt in case they fail to pay, that is default on their loan hence the term “credit default.” Continue reading
When all the debate about arcane securities has died down, it will then become even more apparent that this financial crisis is at heart a moral issue from start to finish. As Gillian Tett noted on Thursday in the //Financial Times//when “the banking crisis hit Japan a decade ago, bankers bowed to show their public remorse; this time, however, barely a single western banker has even said ‘sorry'”. John Gapper in the same issue commented that bankers “did many foolish – and in some case, unethical – things during the boom. But they did not force people to buy houses or take out mortgages; they mostly provided rope for borrowers to hang themselves.” In short, it is time that all of us bowed and said sorry. Sorry to our young people, sorry to our children, sorry to future generations because in our greed we all created this mess and in so doing we have left them a world worse than the one that we inherited.
Coming home last night, I just caught the tail end of the second presidential debate. I was so glad that I had been working and was unable to hear the rest of the debate, which would have just left me even more depressed about the two candidates and the electoral process. The piece that I caught was about whether we would bomb Iran, if it attacked Israel. Continue reading
My mother always told me that you get what you pay for. I was reminded of it this past week when among all the bad news about the market and the uproar about the bailout bill, we were also dealing with tainted milk products from China. We want cheap. We demand cheap. We have websites that offer to search the neighborhood for the cheapest product. We seem to have completely forgotten my mother’s advice that you get what you pay for. If you want a product that is safe, then you need to be willing to pay a little extra for it. Not only will the ingredients be more expensive such as non-lead based paint, but one also has to pay for inspectors to ensure that the product is produced to the required standard. If we want cheap, we can get it. But don’t ask for cheap and quality and safe for your health. That combination doesn’t work.