Liquidated - Parallels between Wall Street and the Singapore Civil Service

I recently finished reading Liquidated by Karen Ho. It wasn't an easy read; in fact I skimmed through large chunks of it. Satyajit Das was right in saying that it reads like a doctoral dissertation.

Still, what struck me were some of the similarities between Wall Street investment bankers and how the Singapore civil service governs the country. Perhaps because I had been reading Constructing Singapore concurrently that the similarities popped right out. The parallels may or may not be spurious though; I'll leave that up to the readers of this post to decide for themselves. 

First: Wall Street investment banks like to hire the best students from the best universities. Harvard and Princeton are the main hiring grounds, and potential hires are feted and treated like rock stars. Although I attended a relatively second tier institution in the United States during my time in university, even I felt the lure of the investment banks. All week during career week, students came walking out of the Glass Pavilion (an exhibition space in my school) carrying coveted swag from the banks.

Ho in her book postulates that the reason why Wall Street banks focus their hiring almost exclusively on the top universities is because they in effect leverage on the stellar reputation of top-tier universities to give themselves the sheen of prestige and extraordinary capability. That in turn helps to capture business. e.g. Goldman Sachs hires only the best students from Harvard. If you hire Goldman to represent your corporation, you've got the smartest guys in the room playing on your team.

It's not important that the people the investment banks hire really are individuals of the highest calibre. What's really the most important thing is that the perception that Wall Street investment banks hire only the best legitimizes why they can charge the astronomical fees they charge and how they can get away with the financial equivalent of murder when things fall apart. After all, if the smartest guys couldn't have saved the day, whocouldhaveknown???

In my mind, this doesn't seem so different from how the Singapore government insists on academic excellence in its highly credentialed acolytes, and has metrics like the infamous Current Estimated Potential. It's part of the reason why the government can make the boldfaced claim that we have to pay the highest ministerial salaries in the world to keep the good people we have in government, even if the actual performance of our ministers seems to be mediocre unremarkable. 

Second: In her book, Ho talks about the myth of "increasing shareholder value". It's like a religion to investment banker types. Everyone in investment banking drinks the Kool-aid and uses the shareholder value argument to justify all kinds of business actions, such as mergers and acquisitions, even though years of academic research have shown that M&As typically destroy more value than they create. But investment bankers can't just sit on their asses doing nuffin'. Got to git them fees rollin' in.

The irony of course, is that the more bankers talk about creating or increasing shareholder value, the less they actually improve it. The opposite is truer more often than not.

Within the Singapore context, the concept of shareholder value is obviously irrelevant. Instead, here, GDP growth is the overriding concern. And every civil servant in Singapore is subject to what I call the tyranny of KPIs.

With regard to GDP growth, the problem is not growth per se, but the quality and sustainability of that growth. What use is growth if it is goosed by massively unsustainable immigration policies, finanical repression (think forced savings, high residential property prices, and low interest rates paid on depositors' funds) and suppressed wages? Worse, the positive aspects of growth are not spread evenly but accrue to those at the top of the income ladder. Yet we reward our highest civil servants and elected officeholders chiefly on the basis of this number. Is it any wonder that we have achieved spectacular GDP growth, but that the fruit of this Pyrrhic victory is bitter indeed?

As for KPIs, the concept is not unsound in theory, but excessive adherence to KPIs blinds the user to other, less tangible measures of performance. If something cannot or will not be measured, then it can't be important, can it? One is reminded of that story of the man searching for his lost keys beneath the streetlamp on a darkened street.

Like the red herring of shareholder value that bankers put forth, we have ministers and CEOs and other high priests telling us that such and such KPIs have been met or even surpassed. That everything is going according to plan. Yet that fails to assuage the disquietude in so many of us, that there are things happening here which are viscerally wrong. Like income inequality. Housing (un)affordability. Rising costs and the fast fading possibility of a comfortable retirement. Or any retirement for that matter. Of how this Singapore ... this place, just doesn't feel like home anymore.

Third: The investment banking industry has notoriously low job security. Job turnover is tremendous. You would think that investment bankers, hired and fired so easily, would have some empathy for the massive numbers of layoffs they're directly responsible for when they advise their client companies to layoff and outsource operations to cheaper countries. Turns out to be the opposite, according to Ho's research. Apparently, it is precisely because bankers have to hustle all the time in their highly volatile industry that they have precious little sympathy for others who can't do the same. Not being able to scramble when the times call for it is considered by bankers to be a personal failing rather than an unfortunate consequence of circumstances.

The highest levels of government in Singapore operate the same way. It's dog-eat-dog within the Admin Service, as is well known, and everyone there aspires to be the top dog. As a purported meritocracy, it was designed that way. A fall from grace from that height would be ... crushing. As a corollary, our senior commanders in the SAF devote great amounts of energy feathering their own nests and constantly keep half an eye on that coveted ministerial, GLC or statboard position for post retirement.

In such a situation, the problems that ordinary people face become mere abstractions, to be described in clinical terms like "structural unemployment". The same sentiment underlies brazen, clueless and flippant exhortations of workers to work "cheaper, better, faster".

That the highest levels of our government are paid handsomely for their work could in fact, be part of the problem, and it's not just me saying this. Research from Harvard indicates that "The More Leaders Make, the Meaner They Get."

"Stuy Town - Who got 'stuffed'"

The story that follows my post below is clear enough if you understand a bit of finance. But for those who don't, here's the 'friendly' neighborhood analogy.

Imagine, if you will, Franny Maeck, a real estate investor in a run-down, broken town. The town mayor is offering "housing credits" - basically payments, to the investor to incentivize her into putting money into real estate in the town.

Franny agrees, and her investments take the form of loaning out funds to people to buy houses in the town. Franny has no problems raising funds, because she has the mayor himself backing her, so she can borrow at very favorable interest rates in the market. We'll leave aside the thorny issue of why the mayor, who is backing Franny, doesn't just invest in the real estate himself.

Back to the real estate investor. Now of course, Franny wants to get other investors on board to spread the risk and increase the investment pool of funds. So she ropes in Gullible InCorporated, from a faraway town that is swimming in wealth, but nonetheless has citizens that scrounge in trash bins for metal cans to sell.

Gullible InCorporated is only too happy to invest, thinking that Franny is an expert at these things, and what's more, Franny has put her own money in this. She has skin in the game!

Too bad for Gullible InCorporated though, that Franny knows only too well that the particular houses that they're investing in are run-down, prone to collapse, and could spontaneously burst into flames at any time.

Franny has wisely bought insurance on the houses, so she can collect when, not if, the houses burn down. So her money's safe. She didn't mention this to Gullible though, who's still blissfully unaware. Until, that is, months after the houses have already burnt down. In the meantime, she's toting up her insurance gains on her Abacus.

______________________

Good thing we don't have something called Gullible InCorporated here. It's such a relief we have really competent people looking after our money. After all, these are the people that keep our streets free of floodwater, our public transportation system secure, and limping, incapacitated would-be terrorists safely locked up. And if they didn't manage to do all these things, our nation-building press would certainly call them out on it and subject them to the strictest scrutiny.

And our very, very competent people certainly are worth every penny we pay them. Heck, if we want things cleaner and safer, just like our town councils, we should definitely pay them even more.

________________________
Stuy Town – Who Got “Stuffed”?
Via: zero hedge Posted: 2010-06-22

Stuyvesant Town in NYC is possibly the worst RE deal in US history. This 2006 vintage mega ($5.4b) deal finally went bust in January. Fannie and Freddie together hold $1.5 billion of the $3.0b senior mortgage bonds. The equity and mezzanine lenders have been wiped out. The WJS did a piece on this horrible deal back in January. In that article they had an interesting quote from a Freddie Mac spokeswoman:

"Freddie Mac doesn't expect any losses"

I thought at the time that this was one of those things that might come back and bite them in the ass. It was not clear to me that the senior mortgage was money good. If it were, then the mez. and equity guys would not have folded as fast as they did.

The Fannie and Freddie mortgage bonds were equal in legal status (parri passu) to a $1.5 mortgage loan provided by Wachovia. After the deal closed Wachovia put this debt into a much larger CMO. Fitch did an analysis of the CMO in April. The report concluded that the Wachovia/Stuy Town mortgage was not money good. I called Fitch and got a confirmation. The Fitch assessment of the property value is $1.8b. This value was based on a discounted analysis of the rent and future Capex requirements. (See 4/1 Fitch report, Wachovia C-30)

This information was in direct conflict with the Freddie claim back in January that they expected no loss. I thought I had a “gotcha” story. To confirm it I asked the FHFA some questions. Consider this exchange:

BK: Comment on Fitch value of 1.8B?
FHFA: This is Fitch’s estimate. Other firms estimates place the values between $1.6 and $2.2 billion depending on the cap rate.

BK: Did F/F put the securities in a larger CMO transaction?
FHFA: No, they did not put the securities into a CMO. The GSEs approached this as typical investors.

BK: Did F/F have other credit enhancement?
FHFA: F/F had enhancements for this deal that were typical for large loan deals. Other investors had the same enhancements.

BK: Did F/F do this to get low-income housing credits?
FHFA: They did receive housing goals credits and did so in the context of meeting their standard securities investment criteria.

Some thoughts on this.

-The market will ultimately determine the value of Stuy Town, but for the FHFA to provide a range of estimates that are all below the mortgage value is a confirmation that this deal is upside down.

-Consider the second and third comments together. They did not put the bonds in a CMO transaction where they would take back the highest rated tranches. They chose instead to obtain other “enhancements”. This means they bought a form of single name CDS protection. This information confirms the Freddie statement that they would not incur a loss. Color me shocked at this.

-F/F were arbitraging their balance sheet. They were able to borrow at spreads over treasuries back then. They bought risky Stuy Town bonds that had a fat coupon with taxpayer guaranteed money. But then they paid away most of that premium buying CDS protection. They did not trust the deal from the get go. So why did they do it? The answer is in the last response. A motivating factor for Fannie and Freddie to participate in a highly leveraged RE deal was to get housing credits. There is a lesson in this. These housing credits are ass backwards. They do not encourage low-income housing. They encourage speculation.

-The statement, “Other investors had the same enhancements” is interesting. The question comes to mind, “What other investors had the credit enhancements”? This is the list of suspects.

Wachovia Bank
Government of Singapore
CALPERS
CALSTERS
Florida State Pension Fund
Church of England
S/L Green
Black Rock
Tishman Speyer
DG Hypo Bank
Hartford Financial
Allied Irish Bank

I am willing to put long odds that it was not Wachovia that bought the protection. They tried to enhance their position by putting the mortgage and a bunch of other crude in a CMO. It was not the Government of Singapore (GIC). They have confirmed that they have written off their investment of $675 million.

Someday we will know who those “other investors” are. I wonder if Singapore was aware of the fact that F/F was buying enhancements on their senior position at the time the deal was struck. If the senior guys were nervous, then the mez. guys should have been quaking. But that is not they way this played out. This disclosure issue is somewhat like the problem Goldman has with Abacus. Did everyone in the deal fully understand the interests/objectives of the other participants? Would any of the other investors backed out if they understood F/F were hedging their bets? Did everyone have the same objectives for participating?

-Having two government agencies provide $1.5b (25%) to a transaction gives the deal credibility. But the evidence suggests that the anchor lenders did not believe in the transaction. I’m sure the Singapore government is upset with the results. I wonder how they will feel knowing that some of the investors are getting out whole while they took a bath.

-I would love to know who was the provider of the CDS that enhanced the F/F Stuy Town bonds. Back in 2006 it could have been anyone. One name that comes to my mind is AIG. I hope it's not them. We have had enough financial Greek tragedies.

-F/F have no loss. Wachovia split its share of the mortgage up and sold it a hundred ways. The old mez debt and equity have tossed in the towel. A question to ask at this point is: why not resolve this problem by condoizing Stuy Town? The pricing would reflect the current value of ~$2b. The long-term renters would be able to benefit from this. Others would be able to find housing at an acceptable cost. Stuy Town was never worth $5.4b. F/F should move to get this off their books without loss. That way the people of NYC would be the beneficiaries of the worst RE deal ever.

"Temasek made big gains"

A cheery article courtesy of the Straits Times vindicating one of our sovereign weath funds. Coincidentally, I went to school with the reporter who wrote this; he used to crib shamelessly from my notes for literature class (funny, he's the one who ended up in journalism!).

Ah, but time to inject some anti-spin, here and here. The wizards of Temasek aren't as smart as they like to think they are. 

"Singapore state fund counts Merrill losses"

I have reproduced an article below, sourced from singapore-window. If it's good enough for the Financial Times, it's definitely good enough for this blog. Maybe not good enough for the Straits Times though, that paragon of publishing excellence.

Do note that this is a follow-on from a previous post.

Singapore state fund counts Merrill losses 
Financial Times 
Januray 8, 2009
By Saskia Scholtes and Greg Farrell in New York

TEMASEK, the Singapore state investment fund, is sitting on significant paper losses related to its stake in Merrill Lynch, the investment bank acquired by Bank of America last week. 

The state agency's unrealised losses could amount to more than $2 billion, excluding any hedges, according to a Financial Times analysis based on publicly available filings.

The loss is emblematic of the damage the financial crisis has wrought on sovereign wealth fund investments in the banking sector and helps explain why funds have been reluctant to commit further capital to banks.

Some 40 per cent of Temasek's portfolio is in the financial sector. The fund has suffered paper losses on other investments including those in Barclays, Bank of China and China Construction Bank.

Temasek on Monday, Jan 5, disclosed it had converted its 13.7 per cent stake in Merrill into BofA shares following the acquisition.

On December 31, the last day of trading before the deal closed, Temasek's remaining stake in Merrill - for which it paid an average of $23 a share - had dropped to $12.10.

After ploughing $5 billion into Merrill between December 2007 and February 2008, and with a further $900m commitment last summer, Temasek owns 189m BofA shares, according to Monday's disclosure.

At yesterday's opening price, they were worth $2.7 billion.

However, Temasek appears to have sold more than 30m shares of Merrill stock in the first and third quarters of 2008, according to regulatory filings. And, even if Temasek sold at the lowest possible prices in these periods, the sales would have generated a modest profit to defray some of Temasek's unrealised loss.

Temasek declined to comment.

It could have been worse - Temasek's initial investment allowed it to buy more than 104m shares at $48 per share.

But, after Merrill was forced to raise further capital in July, the terms of Temasek's original investment were reset. This effectively bought Temasek 151m new shares in Merrill for just under $6 per share, bringing the average price paid per Merrill share to a little over $23.

Temasek's investment suffered again in September, as Merrill shares plunged on concerns about the US banking sector.

Any losses seemed to vanish when BofA agreed to buy Merrill in an all-stock deal that valued the latter at $29 a share. In the immediate aftermath of the announcement, it appeared that Temasek stood to gain about $1.5 billion from the acquisition.

BofA's shares have since slumped, however. When the deal closed, BofA's shares were trading at $14.08. According to the terms of the transaction, every share of Merrill Lynch, which had about 1.6bn shares outstanding, would be exchanged for 0.8595 shares in BofA.

Additional reporting by John Burton in Singapore
 

"Hong Kong watchdog may sue banks over Lehman minibond sales"

The Channelnewsasia link to this story is here. I do not recall reading a similar report on this story in the Straits Times. If someone has, please notify me by making a comment of it in this post. If the Straits Times did omit this story from their line-up, then it's one more annoying thing I can chalk up to our national paper.

There is no indication that Hong Kong's Consumer Council, the watchdog cited in the headline, will actually proceed with the suit. FYI, the Consumer Council is the equivalent of Singapore's CASE.

Still, this story is significant. One thing the Straits Times had right is that the Hong Kong and Singapore authorities are both looking over each other's shoulders in trying to calibrate the right response to the Lehman Minibonds (and DBS High Notes) fiasco. And this is not merely altruism in trying to find the right resolution for investors who have lost massive amounts of money, although the Straits Times didn't specifically mention this point.

At first blush, it would seem that the actions of the HK Consumer Council and Singapore's CASE should have no bearing on how the governments of the two territories manage this public relations and financial regulation disaster. After all, they are both NGOs and consumer advocacy groups. However, as this is Singapore we are talking about, how NG an NGO actually is is far from clear. I have no idea how non-governmental the HK Consumer Council is (especially since Beijing has called the shots in Hong Kong since 1997), but I think it's a safe bet that CASE isn't a very pure NGO, as NGOs in Singapore go. For example, if you think that NTUC is run without government "input", I have a bridge I want to sell you (and BTW, NTUC is the parent organisation of CASE).

Without even meaning to, the differential treatment (HK vis-a-vis Singapore) of this Minibonds fiasco threatens public embarrassment for the government of one of the two territories. Because consumer advocacy groups are perceived (never mind the reality, whatever it may be) to be linked to their respective governments, how vigorously the consumer advocacy groups in HK and Singapore assert their stakeholders' rights in this financial debacle will have direct implications on how the citizens in their respective territories view their government's willingness to prioritize their citizens' interests over, say, the big banks.

In short, Singapore risks embarrassment if it is seen as doing less than the HK government. What aggravates the matter is that DBS is at the heart of this financial fiasco, since it is not only a distributor, but also the bank that structured some of these products (DBS High Notes). Now, the government is fond of saying that it does not take an active role in the day-to-day management of the companies that it holds in its investment portfolio (via Temasek Holdings and GIC), and even if this is indeed true (which, for the record, I largely, but not totally in all circumstances, believe), it does appear unseemly that a major government owned bank has now lost considerable face after losing the money of investors who also happen to be citizens, and as I have mentioned before, been unendingly portrayed in the media (also government controlled, how ironic), as poor, defenseless retirees.

This is just sooo perfect. Now bear in mind, the irony that a major government owned bank has been responsible for losing the life savings of citizen retirees through selling them risky, questionable and inappropriate financial dreck is a news angle that has NOT been explored in the local media. Don't hold your breath for that tasty little story.

Separately, I'm not a lawyer (and readers who are in law, I would appreciate your comments here), but it seems to me that this is just crying out for a lawsuit. If investors in Singapore and/or Hong Kong file a class action lawsuit against the relevant banks for mispresentation, mis-selling or just plain old fraud, then perhaps the consumer advocacy groups should also be filing amicus curiae briefs, at a minimum. If anything, at least this would help clear the air on what the banks should sell, how they should sell them, and how these products should be regulated in general. This would all help in making the retail investment scene that much safer.

Fed Swap Line Redux

I mentioned the Fed's swap line to Singapore in a previous post.

The Straits Times picked up the Fed release and published it in today's paper.

MAS has explained that the swap line is a precautionary measure, which is a reasonable explanation given what I, and many believe, to be the stability of our local banks. Having a swap line also means that the Singapore financial system is not disadvantaged vis-a-vis many of the Western European countries that have exising swap arrangements with the Fed. That's all good news indeed. 

Letters of credit

Thanks to the ongoing financial crisis, it wasn't so long ago that the public had to be educated on formerly esoteric finance jargon like subprime security and collateralized debt obligation (CDO).

The next finance term that the public is likely to be acquainted with depends on which shoe is the next to drop. Until recently, I had thought that it would be credit default swap (CDS), which we are hearing increasingly more of.

(Personally, I believe that CDS's had something to do with the Lehman Minibonds and DBS High Notes that we had been hearing so much in the news about. Specifically, our poor Singaporean retirees who had been bilked out of their life savings were unwittingly writing credit protection to the big banks. But I digress.)

Now, I think it likely that the next (trade) finance term the public is going to hear about is letter of credit (LOC), which strangely enough, I came across for the first time in Robert Jordan's Wheel of Time fantasy fiction novels (I swear, I'm not making this up).

Anyways, there's been a substantial amount of blogging and news about how the ongoing credit crisis is resulting in banks refusing to guarantee transactions between importers and exporters. This in turn has caused problems in shipping. All this is occuring in the background, with a plunging Baltic Dry Index in the foreground.

Recommended, but technical, reading is here, here, here and here. [And yes, in addition to being a full-time engineer, I am also something of a finance wonk.]

What's the likely fall-out from this side-effect of the financial crisis? Yves Smith from www.nakedcapitalism.com writes that it could metastasize into "Smoot-Hawley on steroids", or a manufacturing shut-down plus depression scenario (which is, no pun intended, really depressing to contemplate).

My interpretation of that is that in addition to severely depressed economic activity as a direct result of a slow-down in trade, we might also see persistent shortages of goods as well as higher prices. Inflation, or more properly, stagflation, could stage a come-back.

Of course, given the gravity of the situation, I can't imagine that governments around the world would sit back and do nothing. So perhaps such a dire situation is unlikely to come to pass. Still, it's one more thing to worry about.

The Fed provides Singapore with a swap line

I caught wind of this from one of the blogs I frequent: www.nakedcapitalism.com

The Fed is providing Singapore with a USD30 billion swap line. Now I wonder why this didn't make the local news? 

Some quick thoughts on the Minibond fiasco

I have less time these days to blog in-depth about topics I am interested in, but nonetheless, I will pen down some quick thoughts. This post is on the Lehman Brothers Minibond fiasco.

I wrote a post on structured products about 3 months ago, and it is as relevant now as it was before.

Notwithstanding the plight of retirees losing their lifesavings (which is regrettable), I can't say I have much sympathy for the people who lost thousands of dollars in this most recent investment debacle. The golden rule is: don't know, don't touch. If people were more diligent with their investments, asked a few more questions, had a healthy dose of skepticism, and weren't swayed by the greed for an improved yield of a few percentage points over the fixed deposit rate, without questioning the disproportionately higher level of risk they were shouldering, they wouldn't find themselves in this situation today, gullible things that they are.

As it stands, my opinion is that their only case for getting their money back is to sue for misrepresentation of the product they were sold. And the chances of success for that are slim to none. After all, information on the product could be found in the prospectus, in black and white. The investor should take responsibility for their own actions. Even if he or she was unable or unwilling to read and understand the prospectus, he or she could have sought professional advice in doing so.

[To would-be flamers, please note that I am NOT indulging in an exercise in schadenfreude. I just think that investors should bear some responsibility as well for their losses. Ignorance is a poor defence for one's actions.]

Some other quick thoughts:

How much do I think investors will get upon dissolution of Minibonds? At best, pennies on the dollar, and more likely, nothing at all. Numbers like 50-70% are pure fantasy.

Separately, if the local banks (like DBS) do compensate investors out of their own balance sheets under overwhelming public pressure, you should realize that this comes indirectly out of taxpayers' money. Why do I say that? Because the government has recently tweaked the laws to allow it to spend more of our reserves, and the government owns large stakes in many banks (including DBS and Citibank) through its sovereign wealth fund holdings. I am not presuming a judgment call on whether bailing out the 10000 disgruntled Singaporeans (including impoverished retirees) is the right thing to do (or not). I am merely stating categorically that thanks to the government's byzantine layers of ownership of stakes in local banks, there are taxpayer dollars involved here should investors be compensated.

As for MAS's laughable comment on local banks to "do the right thing" and PM Lee's remarkable silence on the fiasco:

MAS is showing how toothless it really is. It can say anything it wants on this matter, but it either lacks the power or (perhaps more likely) the political will to enforce any of it.

As for the PM, I think it's a good move (for him) to say nothing. As the old adage goes, if you have nothing good to say, don't say anything at all. If the PM comes out with a speech that is anything less than in strong favor of making investors whole, investors who have been incessantly portrayed in the media as being impoverished retirees who have lost their life savings, he risks huge loss in credibility, empathy, political capital...you name it. On the other hand, if he does make such a speech, you can kiss goodbye to all the hedge funds, slush funds, private equity and other monies that have made their way here thanks to our friendly, welcoming, lightly regulated, and most importantly, discreet and circumspect environment.

Whither now, Temasek's investment in Merrill Lynch?

Bank of America is buying Merrill Lynch. It should be all over the papers tomorrow, along with Lehman Brothers going into bankruptcy.

I mentioned Temasek's ratchet provisions in a previous post on its investment in Merrill Lynch.

I estimate that netting out the ratchet provision, Temasek's investment in Merrill Lynch was done at approximately $21 a share [Not verified]. Given that BofA is paying about $29 a share for Merrill, that's good news for Singapore taxpayers.

Then again, BofA is paying for Merrill Lynch in what looks to be an all stock deal. The credit crisis is hardly close to finishing; we could be looking at further losses. Who knows? Perhaps even BofA might go belly up further along the line.

Private Banking and Trickle-down Economics

My previous post on private banking focused on it as a career option. Thinking about private banking led me to consider the wider effect of private banking, and more broadly, finance on the economy.

Singapore has aggressively pursued the finance hub idea for the past decade or so to boost economic growth, but with decidedly mixed success. Just a simple glance at IPO figures and you’ll see that Hong Kong and Tokyo are leagues ahead, particularly Hong Kong. With the size of the larger Chinese companies listing on the Hong Kong exchange, it’s New York and London that are starting to feel the heat of the competition. Competition from Singapore is a non-issue for Hong Kong.

But in the area of private banking, we are doing much better. This is thanks mainly to the strong banking secrecy laws here (stronger than Switzerland, which has to comply with EU directives) and the Singapore government, which is, how shall we put it, politically stable and open to foreign investment.

While private banking does create a number of high paying jobs, it’s interesting to consider what the high-flying banking industry means to the ordinary population. This is especially so since doubt has been cast on trickle-down economics in the US of A.

Mainstream economics would contend that any industry doing well would lead to trickle-down effects. For example, a private banker needs teams of assistants and analysts (which means jobs), and their consumption would in turn benefit providers of other services (such as restaurants, real estate agents and nannies). This goes for the private banking clients as well, assuming they reside in Singapore at least some of the time.

But as a thought experiment, sometimes I do wonder how much the wider economy benefits from banking and finance as an industry. For example, while New York City does derive a large chunk of its tax revenues from Wall Street and spends this on public services, it’s undeniable that the greatest beneficiaries from Wall Street’s largesse, aside from the bankers themselves, are the luxury car dealerships, real estate agents, jewellers, luxury retailers and the like. We can include the $400 dollar a head restaurants, $300 a cut hair stylists, the highly paid Mandarin-speaking nannies, the couturiers, furriers and spa therapists.

It’s less than clear how much the general city population benefits from such an industry that consumes mainly high-end goods and services no one else can afford.

This is especially so when we consider the damaging effects of income inequality. The obscenely wealthy tend to bid up the prices of goods that they desire, and this causes knock-on effects on all sorts of goods. Real estate is a good example. We have had whole floors of condos purchased by foreign money in Singapore in the last two years for investment purposes, at the peak of the real estate boom. This surely influenced the affordability of HDB flats.

The economist Robert Frank has written on some of the pernicious effects of income inequality, and it’s worth thinking about whether gains from economic growth that encourage income inequality are worth their detriments.

What exacerbates problems in the case of private banking is that in general, wealth is not created through these activities. While many private banking clients that conduct their business through Singapore are nouveau riche, they didn’t create their wealth here. They created it in China, India, Indonesia…anywhere the pan-Asian and commodity boom touched. Singapore is merely a convenient place to park their funds.

Private bankers are essentially paid to push money around, and with the influx of foreign money into Singapore, it’s difficult not to suspect that at least some of the recent price increases in Singapore have been due to demand-pull inflation resulting from very large capital flows. Certainly, we saw it with real estate.

And with the rising cost (some say value) of real estate, we have escalating rents, higher business costs, and invariably … higher prices. Who knows how much of inflation something like private banking is responsible for?

Ratchet Provisions by Temasek

This is an update on a previous post.

runmondeo commented on GIC and Temasek's so-called batting average and that they are savvy investors. There may be something in what he says, although I also note that the share prices of financial companies are heavily underwater since the capital raisings.

In any case, the following makes fascinating reading. See Eric Sprott's "Markets at a glance" June post here and a definition of ratchet here.

Temasek's investment into Merrill Lynch comes loaded with ratchet provisions as a form of downside protection. This was little publicised as it was released only after, probably in the footnotes of a 10-Q filing.