Killing it like a hooker in Hong Kong

Goldman Sachs hearing: Liveblogging 11.55 am

Susan Collins

– voice is shaky, sounds like an old aunt

–  picks on Josh Birnbaum, bad idea. He comes across as a straight shooter and he actually is able to explain some of the financial terms.

-The net short position Collins picks on is like “us being long a hundred dollars on Google and short a hundred dollars on Johnson and Johnson” that doesn’t make us neutral.

April 27, 2010 Posted by | Uncategorized | Leave a comment

Goldman Sachs hearing: Liveblogging 11.30 am

Watching the hearing now.

Hilarious – discussing the Timberwolf deal. “This is one shitty deal”

Yet Goldman sold pieces of the deal after the date of the comment.

Of course they did, no bad bonds, only bad prices. Sparks trying to get that across, but also trying not to provide any firepower for future lawsuits.

Unfortunately, even when Goldman Sachs is in the right, Sparks comes across as a boy scout trying to kill with kindness. Does not come across as honest.

Carl Levin is looking like a rockstar, even though he has many of the technical points wrong.

April 27, 2010 Posted by | Uncategorized | | Leave a comment

Goldman Goldman on the wall…

I couldn’t resist breaking my long blogging fast to post a quick comment on Goldman’s run-in with the SEC

Firstly, I don’t think Goldman did anything illegal, and therein lies the tragedy, because at the very least what they did commit fraud, but did it without breaking the current laws in existence. Investment bankers are, if nothing else, masters of the fine print, and what this will end up revealing is really that the regulatory and legal system is so far behind the banking sector, that they have little chance of catching up. The SEC is still trying to use circa 1930s laws to prosecute modern fraud, but bankers have figures out all the little details. What do you think the whole compliance and risk management divisions are for.

Some other quick notes on what people are saying from the American Situation:

The investors who took long positions – the US’s ACA and German bank IKB – were what are referred to as “sophisticated investors” (i.e., big boys who should know that “buyer beware” applies everywhere in investment). They knew what mortgage securities they were betting on. As William Cohan wrote in a New York Times op-ed piece, “No one forced them to buy Abacus.”

Ah yes, the so called big boys. One thing you quickly learn in the hedge world,  is that not all boys are equally big. Institutions like ACA and IKB, run by professionals who get paid meagre salaries and bonuses, most of whom do not have the budgets to do independent, sophisticated research, are like 3 or 4 rungs below hedge funds run by owner-managers. An MD at IKB can’t for example, do independent credit analysis of each credit in a CDO portfolio. He simply does not have staff or budget. And in fact, the whole reason IKB is buying AAA securities is because it doesn’t trust itself to do credit analysis.  Furthermore the triple AAA yields do not lend themselves to management fees or big research organization.

So the fact of the matter is, this was the equivalent of a city boy from New York being subjected to the old Texas slow poke, you run a scam on someone who you know won’t or can’t do the analysis, and you don’t tell them that there is some real smart money on the other end.

When you can’t afford to do real credit analysis on your own, besides credit ratings, who is selling you the securities is also important. If you knew a real game player was on the other end, you would not do the deal. That is precisely was Goldman did here.

At the time the investments were made, there was no certainty that the funds would fall in value. Many were still bullish on the subprime market. And if the assets had risen in value, would the SEC be charging Goldman today?

True, the SEC wouldn’t be charging Goldman if the assets had gone up in value, but that doesn’t mean they shouldn’t. Unfortunately the SEC has limited resources, and doesn’t go after cases where the harm isn’t clear. That’s an argument for more resources for the SEC, not one about selectivity in this case alone.

The media is excited about the “billions” involved. In fact, Paulson made about $1 billion. Which, in the world of investment banking and toxic assets, is akin to Dr. Evil’s ransom claim for “one…million…dollars”.

This argument is so ridiculous, I don’t even know how to address it. Would you like a billion dollars? Nuff said.

Goldman itself lost money on the deal ($90 million), making it a fraud to deceive… itself?

Another ridiculous argument, only possible when someone doesn’t know finance, or knows finance and is trying to be facetious. If Goldman had a long position of 90 mil on Abacus, but was overall short 10 bill on the mortgage market, then they were short the mortgage market and made money. At the end of the day, the big banks look at risk from a portfolio perspective, so the risk manager at Goldman would have said OK we take on 90 mil of mortgage risk here, but we already have a overall very short position in the mortgage market, and we earn 15 mil in fees immediately, so that makes economic sense, let’s do it.

We already know that Goldman was net short the mortgage market, so this whole 90 mil exposure may have been something they took on just to do the deal. The loss on it was more than offset by the short, so it’s completely facetious to only point to the loss.

It appears that only one Goldman executive, Fabrice Tourre (who referred to himself as “Fabulous Fab”) was involved, with no connection to the top executive team.

Well this is the obvious defense, that Fab got himself into this by being a loquacious Frenchman with a flair for words. The fact of the matter is that he was not a rogue trader and that the deal was approved by Goldman’s credit, risk and legal. That means the firm is implicated. How much of the details were made known to the upper level guys remains to be seen, but I think senior management below the C-suite were aware of the details.

Unfortunately for Fab, his comments have been embarassing to the Firm, so any opportunity GS counsel sees to hang him out to dry in order to save the Firm, they will take. He’ll join the long list of ambitious youngsters who have been crucified in the last three years, poor kid.

The case might drag on for months if not years, and, since this is a civil (rather than criminal) case, the most that is likely to happen is that Goldman, if found guilty, would face a fine (that would probably represent a tiny portion of its assets).

I agree here. It’s highly unlikely that GS is touched too deeply by this, unless other allegations can be found and a snowball develops.

April 22, 2010 Posted by | Uncategorized | , , , , , , | Leave a comment

The US needs to become a nation

I’ve been thinking about this for a while, and one thing that has become clear in the past decade is that the US needs to centralize some of the functions that are currently administered by the states.

The op-ed in the NYT about national standards for education has some of this flavor:

Each of these seemingly unrelated developments is part of a crazy quilt created by one of America’s most cherished and unexamined traditions: local and state control of public education…

Our lack of a national curriculum, national teacher training standards and federal financial support to attract smart young people to the teaching profession all contribute mightily to the mediocre-to-poor performance of American students, year in and year out, on international education assessments. So does a financing system that relies heavily on local property taxes and fails to guarantee students in, say, Kansas City the same level of schooling as students in more affluent communities.

In an era with more technology, it is possible to standardize and administer larger areas from the center.It might have been impossible for a administrator in Washington to oversee a school district in Texas when a stagecoach journey would take two weeks, but with telephones and flights, and especially modern CRM and ERP systems, it is possible.

Furthermore, standardization matters more now, because that same student from Texas is ever more likely to find himself working in Washington rather than Texas. So sharing the standard body of knowledge allows for less frictional unemployment and deadweight losses.

The same argument can be applied to most licensing programs. It is ludicrous that the US has medical licensing on a state basis. It is basically entrenched local doctors protecting their interests from outsiders.

The only area it may make sense is in the legal profession, where state laws differ to a great degree and are based on the community’s normative standards of decency.

Insurance, banking and many other areas are rife for centralization. The only fear is that is that currently states have acted as a check and balance. For eg, the Justice Department is controlled by the administration, and if in a Republican administration, Justice refuses to take action against say the insurance industry, then Democratic controlled New York’s attorney general can take action instead. This is precisely what happened in the Eliott Spitzer-George Bush years.

So how do can you have centralization and yet have the same check and balance? It’s a real conundrum. Perhaps what you could is have the power to appoint and fund a shadow bureaucracy. I.e if you have a Republican president, then the Democrats can appoint and fund an alternative Justice Department, with the same access to information and power to sue, but not the power to administer or rule making ability. Ie prevent selective enforcement by allowing both parties the right to enforce.

March 22, 2010 Posted by | Uncategorized | , , , | 1 Comment

Unreasonable Investment Expectations (I)

I have a friend who just joined the newly set up Asian division of an international investment firm. So I went out to lunch with him to figure out what they want to do. Let’s call my friend Pa.

Me: So what sectors are you guys looking at?

Pa: Infrastructure, pan Asia.

Me: Ahh, so developing stuff, greenfield power plants and all?

Pa: Nope, we’re only doing developed assets. No greenfield.

Me: What’s your return hurdle?

Pa: Mid to high teens.

Me: Ahh, and are you taking small stakes?

Pa: Nope, we want majority stakes in these firms.

Me: Ok which countries in Asia again?

Pa: Japan, Korea, Taiwan, Singapore. No India, no Indonesia. China is a maybe.

Wow, I mean wow. I was sitting there thinking, I wish I could find someone willing to give me a fixed deposit with high teens interest. I mean wtf? Have you forgotten that there is a relationship between risk and return expectations?

It’s funds like these that litter the Asian infrastructure scene now. These idiots went out and did fundraising making all these promises, and then sit in Singapore and Hong Kong rejecting deal after deal after deal. They complain about dealflow, and take their management fees off the top.

See these guys were all setup to emulate Macquarie, who in the pre crisis days played this game better than anyone. Lever, relever, management fees, listing at IPO, more management fees.

But those days are long gone. Anyone who owns infrastructure with mid teens equity cash flows is sitting on it like being glued to your seat during a Jenna Jameson money shot.

So you want mid teens infra returns, I have one word for you pal. Develop. Another word being Greenfield.

I met a guy in India last year, who bought a developed airport, in a non-competitive negotiated bidding process. If all went well and he got reasonable tariff increases, he would get 12%.

There is a direct parallel between these infra funds, and the venture capital funds left over from the Internet bubble era. Both raised money based on bubble expectations, and then proceeded to invest when those expectations were gone. It’s taken over 10 years, but it looks like finally over the next 2-3 years, those venture funds will die out. So I hope all those investors in infra funds are prepared for a long wait to see nothing much come of their great expectations.

(Yes and I did throw in Jenna Jameson in there to see how many hits I can get from people searching for “Jenna Jameson infrastructure”

March 9, 2010 Posted by | Uncategorized | , , , , | Leave a comment

The GIC exodus

Nemo made a comment in my post about Temasek that there are a lot of GIC people leaving, and I wanted to cover it in a little more detail than a simple reply.

First the GIC and Temasek are completely different institutions and can be seen as almost competing entities, trying to prove themselves to ruling power structure. Some of the decisions they make are to impress party elders and for the personal political goals of their managers rather than pure economic sense.

The GIC is far more cerebral and professional. They have been hiring foreigners into their ranks for ages, paying them fairly well, promoting them based on merit. They’re essentially a large multi-strategy hedge fund, very professionally run. The key man behind the GIC is former Deputy Prime Minister Tony Tan, who is currently the Executive Director. He is a very sharp character, and has LKY’s deep respect if not affection. TT has been willing to take on the government whenever he feels it’s in the wrong, a rarity in Singapore.

Temasek is a keiretsu. It’s was formed as the holding company for state assets and current portfolio still includes majority stakes in Singtel, Singapore Air etc. To a large extent its was merely a warehouse cum overseer for state assets till Ho Ching took over. She wanted to remake it into her own personal private equity firm. Unfortunately she was stuck with a group of staff who were all former employees of all these companies like Singtel and had joined the parent. So Temasek, though it is trying to change, is largely composed of Singaporeans. The other issue is that even though Temasek is technically the major shareholder of all these firms, they can’t exercise effective control over them. If Temasek tells Singtel to do something, the head of Singtel lobbies the government directly on what he wants to do. This was what forced Charles Goodyear, the BHP CEO who was brought in to take over from Ho Ching, out. He came in and actually wanted to take firm control of the assets on the balance sheet, something which Temasek simply couldn’t tolerate.

So running Temasek is like trying to run an international PE firm making investments in emerging markets, while your staff are largely a bunch of bureaucrats with state owned enterprise experience with little international experience, and about half your balance sheet is forever frozen and beyond your control.

What’s happened in the last 2-3 years, is that Temasek and the GIC have started to converge. The UBS equity infusion deal was done by GIC because one of the senior managers wanted to show that “Temasek isn’t the only one who can do big deals”. The financial services equities team were overridden by senior management, and were told to justify the deal. Meanwhile, Temasek has been in a real push to change the DNA of the organization from the entry level up, ever since the Thaksin deal, hiring foreigners and foreign trained Singaporeans, trying to become more institutional and less idiosyncratic in decision making.


Why is there currently an exodus of people from the GIC? It’s largely a result of a couple of things.

Firstly, there is a huge pay differential between an international multi-strat and the GIC. Enormous. So as the financial services and private wealth markets develop in Asia, guys at the GIC are finding that they can just tap a few rich families, raise a hundred mill, and do their own thing. The stars at the GIC, who are promised that someday they will lead the organization, watch as less talented peers leave the organization and make multiples of what they make. The pay differential was fine when the GIC was the only game in town for Singaporean and Asian finance guys who couldn’t tap Western institutional investors, but that time has now passed.

Secondly, the guys at the GIC are some of the few people with extensive Asian investment experience, dating back 10-20 years, who are still available in the market. Everyone else who has that much experience is either dead, retired, or running their own thing.  So they are very much in demand.

So the environment for these guys to get some family money to run is very conducive. And so more and more of them are leaving after gaining the necessary experience.

February 27, 2010 Posted by | Uncategorized | , , , , , , , , , , , | 2 Comments

Greece: You can never escape taxes…

Watching Greece, which is no doubt a prologue to this decade’s saga of sovereign defaults, has made me thing of a couple of things.

Firstly, the Greeks don’t like paying their taxes. In a country of 10 million, less than 6 people reported income of over EUR 1 million last year. Only something like 30% of its citizens pay their taxes, and a vast grey economy exists in the country.

Secondly, the so called obvious solution that many rational economists are crying out for, is for devaluation of some sort. This comment by Simon Johnson in the WSJ is fairly typical:

If Greece (and the other troubled countries) still had their own currencies, it would all be a lot easier. Just as in the U.K. since 2008, their exchange rates would depreciate sharply. This would lower the cost of labor, making them competitive again (remember Asia after 1997-’98) while also inflating asset prices and helping to refloat borrowers who are underwater on their mortgages and other debts. It would undoubtedly hurt the Germans and the French, who would suffer from less competitiveness—but when you are in deep trouble, who cares?

Since these struggling countries share the euro, run by the European Central Bank in Frankfurt, their currencies cannot fall in this fashion. So they are left with the need to massively curtail demand, lower wages and reduce the public sector workforce. The last time we saw this kind of precipitate fiscal austerity—when nations were tied to the gold standard—it contributed directly to the onset of the Great Depression in the 1930s.

Now what he doesn’t mention is that the process of refloating borrowers through devaluation is also a process of robbing savers whose money is in the banks. Anyone who had the good sense to save gets to watch the value of their of their savings decline.

Now the question is, where does that value go? It goes to everyone who has payments due in the local currency, but has access to external currency revenues or borrowings.

So in effect its going to the exporters, and to the government who collects taxes from these exporters, ie increasing competitiveness.

You can actually think of devaluation as a massively regressive tax, which forces middle class savers to ante up to save their government and large companies.

In effect, nations which are politically unable to balance their budgets through taxes and reduced spending can then use exchange rate devaluation to unilaterally tax their citizens.

What genius!

This is precisely the reason libertarians like Ron Paul want to bring the gold standard back, because they are fighting the good fight for the middle class. Force politicians to make tough decisions earlier, force companies to go bankrupt and change hands when they’ve made fatal mistakes, rather than bailing out the elite business owners by in effect taking dollars from the pockets of middle class to give them to the ultra rich. Devaluation is the ultimate regressive tax.

February 14, 2010 Posted by | Uncategorized | , , , , | 3 Comments

Breaking News: Temasek sets up its own hedge fund

From Bloomberg:

Seatown Holdings International will employ a multistrategy to invest in assets from stocks to bonds, targeting absolute returns, the people said, asking not to be identified because the information is private.

Charles Ong, chief strategist at Temasek, is the chief executive officer, the people said. Nasser Ahmad, co-founder of New York-based DiMaio Ahmad Capital LLC, a hedge-fund firm specializing in credit products, is the co-chief executive officer, they said.

The size of the hedge fund may be $3 billion, AsianInvestor reported on its Web Site earlier today. Temasek spokesman Jeffrey Fang declined to comment.

Sounds like they are setting up a prop desk. Word on the street is that they will still pay their people very little. Also given Temasek’s traditional top down approach, I wonder how they are ever going to get a research edge when they have a high propensity to ignore the opinions of junior people.

It also sounds like Ho Ching finally got her margin account size increased ; )

Let’s look at the principles:

Charles Ong – chief strategist at Temasek, an ex Malaysian. Former head of Lazard and Deutsche SEA IB. 41, a very young high flyer, but comparatively an underachiever compared to his brother Richard, who was promoted to head of Goldman China. He’s also the man who did the Shin Corp deal, sending Thailand into its endless coup phase.

From China Economic Review:

Now we would like to bring your attention to the curious case of Richard Ong of Goldman Sachs. Ong, a Malaysian Chinese, was not allowed his promotion to head Goldman’s Beijing joint venture, Goldman Sachs Gao Hua Securities, because he failed a government mandated Chinese-language proficiency exam.

That seems odd. Ong was co-head of investment banking in Asia and headed Goldman’s Singapore office before moving to Beijing. He was clearly well-qualified, and, at the age of 42, also on a rapid ascent up the ranks. Goldman is supposed to be the world’s most profitable investment bank, and enjoys special status in China, since it’s one of only two foreign brokerages with management control over its JVs here (the other is UBS). According to the FT, many exemptions have been given in the past to foreign executives whose Chinese wasn’t up to scratch.


But can we glean a clue by examining Richard Ong’s resume? According to the FT again, Ong was “instrumental” in Singapore government investment vehicle Temasek’s purchase of ousted Thai PM Thaksin Shinawatra’s Shin Corp last year. But just how instrumental was he? The Nation, a Thai paper, noted that Richard’s brother, Charles Ong, is Temasek’s head of overseas investment strategy and “right-hand man” to Temasek chief Ho Ching. According to Goldman’s website, its Singapore office counts Temasek as a “key client”.

So Charlie is a card carrying member of the Singapore elite oligarchy.

Nasser Ahmad

Nasser Ahmad is the Chief Investment Officer and Manager of DiMaio Ahmad Capital, an investment manager with its headquarters in New York.

Prior to co-founding DiMaio Ahmad Capital in 2005, Mr. Ahmad was a Managing Director of Credit Suisse Capital and the Chief Investment Officer for the Diversified Credit Hedge Fund Group.  Mr. Ahmad spent twelve years at Credit Suisse First Boston (CSFB) where he held senior positions in the Fixed Income trading division. Before moving over to Credit Suisse Capital, Mr. Ahmad ran the Global Credit trading business for CSFB.  Mr. Ahmad started his professional career at Salomon Brothers in 1992.

Mr. Ahmad is on the boards of Breakthrough for Human Rights and the Soros Economic Development Fund.  He is also a board member of the South Asian Action Forum (SAAF), a Political Action Committee (PAC) consisting of community and business leaders that promotes a progressive policy platform with key rising and established U.S. policymakers.  In addition,Mr. Ahmad is a term member of The Corporation Development Committee (CDC) of MIT which helps secure critical financial resources for the Institute.

In 2008, Mr. Ahmad joined the National Finance Committee (NFC) of the Obama presidential campaign and was appointed co-chair of the Asian American Finance committee.

Mr. Ahmad was born and raised in Pakistan.  He graduated from the Massachusetts Institute of Technology where he received a B.S. and M.S. in Electrical Engineering.

What happened to DiMaio Ahmad, well the long and short of it, is that these guys were spun out of CS during the boom era, then Dow Kim at ML (you remember the guy who was single handedly responsible for ML’s horrible credit book) took a stake in them and committed capital. They then embarked on a disastrous strategy of buying high yield notes yielding 10%, levering it up 4-5 times at 6% in order to get a return in the mid teens. They got slaughtered by the crisis, illiquid book, facing future cash calls, a long wind down process for investors to get back their money. Having failed, Jack Dimaio got hired to take over Morgan Stanley’s credit book, leaving everyone else to hunt for their own exits.


I will blindly speculate that Nasser will cover all the brown countries ie Middle East, India, Pakistan and parts of South East Asia, while Charles will cover all the yellow countries ie North Asia and parts of South East Asia.  I’m not being racist or anything, but this is actually how the Singapore bureaucracy thinks.

Nasser and Charles are probably getting a share of profits, but no management fee. Few if any of the traders and analysts will get paid hedge fund money, so it will be a training ground for Temasek staff looking to exit to the private sector.

They will probably blow up and have to be bailed out by Temasek. I mean it’s such a clear moral hazard situation that I would expect them to gun the risk. You have an entity that can actually print its own money (Singapore is a hard currency) that is backing you.

Charles probably told Temasek he wanted to make some serious dough and he was thinking of setting up his own fund. Nasser wanted to be closer to his family in Pakistan, now that the parents are older and he’s done his New York thing. Asia is the place to be, so why not move out.

Anyway, will write more about these guys soon.

February 10, 2010 Posted by | Uncategorized | , , , , , , , , , , , , | 6 Comments

Investment Banking and Oligarchies

One of my favorite alltime articles is Simon Johnson’s piece The Quiet Coup in The Atlantic. His thesis is basically that investment bankers have become the oligarchs of Western society, extracting rents by manipulating politics.

One of the funny things that has occurred to me over the last year is that this is precisely the reason there is boom in investment banking across Asia now, where oligarchies are being legitimized by investment banking.

The Asian’s who have long been branded with the red letter of corruption and cronyism,  are now moving into the more sophisticated legitimate financial nepotism which has been the hallmark of Western capitalism for the last two decades.

The signs are there if you care to interpret them. In Hong Kong, Singapore and most of the other stock exchanges in Asia, insider trading is widespread and rarely if ever prosecuted.  Stock pools to manipulate prices are present on a level similar to the 1920s in the US. The regulatory bodies of these countries exist to hoodwink the populace and maintain the facade of fairplay,  allowing middle class money to be channelled en masse into the market.

Related party deals to channel profits out of public companies are present in many of the family owned businesses which are now public. Amankudari, the Japanese practice of bureaucrats joining companies that they regulate post retirement is present to a large degree in China and most of the North Asian countries. This is becoming blended with the Government Sachs model which is being adapted across Asia.

The Asian elites have become more experienced at hiding nepotism through the mask of meritocracy. Most tycoons and even upper middle class professionals in Asia pack their kids off to Australia, the US, and the UK for education. The much higher high school educational standards in the elite Asian high schools ensures that these kids outperform their peers in Western institutions. A mediocre student from the Island School in Hong Kong or Raffles Junior College will probably be in the top of his class at USC or Cornell as long as he avoids engineering.

Tycoons then cycle their kids through a couple of years of investment banking and a couple of years at the family business and then pack them off to  HBS  or Stanford GSB. The desks of Credit Suisse and Citi in Asia used to be filled with sons-and-daughters. Don’t even get me started on Goldman.

You want to look at the prototype:  here’s the Bakrie heir’s facebook and linked in profile

Grad School:
High Schools:
  • Finance Analyst

    Solmon Brothers Inc, New York

    (Investment Banking industry)

    July 1996 — June 1997 (1 year )

    Investment Banking

If I have one definition of investment banking, it’s legal rape. It’s about figuring out loopholes in laws and contracts and policies to extract low risk persistent profits. Investment bankers and hedge funds specialize in the fine print and plausible deniability. And this is the great gift that Western civilization has given the East. The old stigma of corruption and envelopes under the table, has been replaced by “consulting” arrangements and offshore transfers. Nominees and power of attorney are used to hide the ownership of assets, and every tycoon understands the use of SPVs (Special Purpose Vehicles) in BVI (British Virgin Islands), HK, Singapore etc.

What surprises me now is that Western MSM reporters are still enormously biased against these nepotistic arrangements in Asia, all the while ignoring what happens in Western markets on a daily basis. The FT has no problem identifying shady goings on in Indonesia (say in the Dipasena/Red Dragon) transaction, while shoving shadiness in say Sbir Energy to the Alphaville blog. I mean are they even able to come to terms on how corrupt the AIM market is? Once upon a time, every single shady two bit company with a license for something that I would come across in Asia would say they plan to list on AIM.

February 6, 2010 Posted by | Uncategorized | , , , , , , , , , , , , , , , , | 1 Comment

On Family

I often harp on how often important or advantageous family connections are in Asia, and wonder why most Western analysts, financial or economic, miss the point. When I really want to understand a local economy in Asia, I try (very tough without a few years of experience in the market) to draw a rough family tree connecting the characters. Unless you understand how players interact, you will often end up puzzled by why certain things are happening. When you do have this understanding, then some of the bewildering news reports that make you scratch your head will then seem like mere levers in game of influencing the public opinion.

An Indian example

When I visited a couple of weeks ago, I heard an interesting story from a friend of mine. It was about an airline called Paramount Airways, a 4-5 year old airline with a premium domestic service. Paramount, unlike Kingfisher or Jet Airways, which had grown from existing businesses, was a startup from a guy who had no prior experience in any business at all, let alone the airline business. So how the hell did, Thiagarajar, the thirty-something entrepreneur who owns Paramount, set it up?

Well, my friend told me, to understand that you have to go back to Thiagarajar College, a small university set up Mr. Paramount’s grandad. India being India, the College had been a source of favors for almost fifty years. If you had a smart kid, but were too poor to afford to send him or her to college elsewhere, you would go plead with the Thiagarajar family, who although they were not wealthy by Western standards, were still the trustees of the College, and they would make arrangements for a scholarship of some sort.

That’s just one example of course. Over time those favors get traded, someone needs some help with government, and the family once helped a government officials’ daughter get into university, so they arrange a favor exchange.

After fifty or so years of that, when young Mr. Thiagarajar goes to the local bank to get a loan for Paramount, the bank officer literally rolls out the red carpet for him. The loan applicant is regaled with tales of how the bank officer used to know Mr. T’s father and even grandad. How he is so thankful that his eldest sister’s son was able to go to College and is doing well now. And how can he help Mr.T now?

That buildup of social capital over decades is what is irreplaceable, and unfakeable. It is what we as Western investors will never have in the local market.  Where a Western investor has to dot the i’s and cross the t’s and even that is no guarantee that you won’t get ass raped when push comes to shove, the local guys often get by with much less. People voluntarily watch out for them, government officials warn them of regulation changes ahead of time, tax officials warn them of audits before they are done. No money changes hands most of the time. It is pure influence.

Even when they make mistakes, they are forgiven. The amount of time before the mistake gets papered over depends on the severity and if it hit the papers in a big way, but in general, few people (who aren’t competing with them) want to see these guys fail, and lots of people are rooting for them.

You see, the guys like the Thiagarajar family, the Bakries in Indonesia, any number of Malaysian political families, Communist party elites etc, Lee Kuan Yew and family, have been building influence for decades.They were providing jobs and livelihoods when there were none, education when schools were few and out of reach of middle class poor. They were rationing these scarce commodities according to their whims before these markets opened up, and the people who received those favors, and their kids, and grandkids remember.These guys were helping people in the dark old days when Asia was a proper third world kind of place. So in the modern era, when they call their favors in, many are glad to do what they can.

This is what confounds most Westerners about Asia. Even when there is no explicit corruption, these guys are like Teflon. They never go bankrupt even if they make the worst business decisions. They never go to jail even when they commit egregious crimes, unless the public opinion demands a sacrificial goat.

I have seen more than one tycoon snatch his wealth back from the jaws of bankruptcy. His Western lenders get screwed, but local lenders are almost always made whole. If his bank goes bust because he’s been embezzling money, the government steps in and saves him. A couple of years in the tank, and he’s out smelling like roses again, running for office even.

November 3, 2009 Posted by | Uncategorized | , , , , | 5 Comments