Traders, Betrayers and Taking Responsibility

jp morgan chase, The Myndset Thought Leadership

Getting chased...

Unless you live in a cave, you will have heard that JP Morgan has taken a (minor) hit to its balance sheet as well as its “balanced” management reputation.  As several articles have pointed out (I refer you to the Daily Beast), there have been three celebrated cases of “rogue” French traders causing substantial losses at three different banks.

First, there was the famed Jérôme Kerviel, who generated a 5B euro loss at  Société Générale in early 2008.  Then, in 2010, there was “Fabulous” Fabrice Tourre, whose employer, Goldman Sachs, had to pay out half a billion dollars in fines related to his “ingenuous” creation of the “Abacus synthetic collateralized debt obligation.”  Talk about a complex product.  And, then last week, we now have the third muskateer: Bruno Iksil, implicated in a $2B loss at JPMorgan Chase.  Known as “The Whale,” he seems to have been beached.

The outcome and who takes the blame?

For Kerviel, he has been sentenced to five years in prison and ordered to pay €4.9 billion ($6.7 billion) in restitution to the bank.  Good luck in getting that back.

According to Wikipedia, the outcome of the Tourre scandal was that “Goldman agreed to pay $550 million – $300 million to the U.S. government and $250 million to investors – in a settlement with the SEC. The company also agreed to change some of its business practices regarding mortgage investments, including the way it designs marketing materials….”  Goldman has not admitted wrongdoing.  Tourre’s future, meanwhile, is still hanging in the balance.

Who knows what the future holds for the London Whale?  But, already there has been a major fallout among the senior ranks who have been dismissed/resigned as a result.  Management has clearly been held responsible.

In what I found a brilliant summary, the way the banks, Société Général and JP Morgan,  handled their respective cases, led my brother to write the following comment to me:

“The difference is that in the French bank, it is the poor little trader that takes the hit and in American banks it is the management that takes its responsibility.”  I think that the Goldman case shows it is not quite as black and white.  But, the point is that upper management is and should be, by definition, held accountable even if one of its employees are guilty.

The sub plot of all three of these scandals is the French Connection, related to a strong educational system in France that focuses on mathematics and enables the French students to tackle and, indeed, invent such complex matters as derivatives.  The second thread is that, as in the case of Tourre and Iksil, there is an evident attraction by certain French young men to the Anglo-Saxon world (of banking) and an equally evident ability to tolerate risk — a characteristic not regularly attributed to the French.  A third point is the age of these men.  Kerviel and Tourre were both exactly 31 years old at the time of the ‘infraction.’  And, if you check out the other major recent rogue trading scandal (not involving a Frenchman) with UBS’ London-based Ghanian, Kweku Adoboli, who was nabbed for a £1.3billion loss, he too was 31 years old. Iksil is apparently “in his 30s.” (Anyone know his exact age, please comment!).

Some conclusions (and I’ll gladly look for yours!):

  • we need more mathematics in the English and American curriculum
  • management should always be held accountable, especially when such huge sums are involved
  • there is something about the testosterone-charged thirty-something men that creates an aura of invincibility?

Cicero, the Roman Statesman, Called for a Balanced Budget …

Cicero Called for Balancing the Budget … 2000 years ago

Cicero, the Roman statesman (106BC-43BC) is said to have said the following (you can check here)*:

“The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.” — Cicero , 55 BC


When I googled, I found that this exact sentence has been referenced in over 100 sites/blogs. Clearly, it has hit a chord. While the first lines of Cicero’s quote are very a propos, it is the last line to which I fully subscribe and takes on importance in much of the mature Western World.

I wondered this morning what the original text was, but came up empty on the ‘net. Not much way I am going to remember my O’Level Latin how to cobble together a genuine translation. A friendly online translation service (intertran — the only one I could find for Latin) comes up with the following translation of the English back into Latin:

“budget should exsisto pondera. Publicus debitum should redeo. superbia of persona should exsisto tempero, quod suffragium ut extrarius terra should exsisto velum lest Rome decoctum.”

Don’t you love it. Not too fond of the conditional? I am inclined to use “Fiscus” for the noun budget (my Langenscheidt pocket dictionary didn’t have it). Fiscus postulo exsistere ponderum? Surely, some Latin scholar will jump in and set me right?

Meanwhile, of all the other Cicero quotes I have read, I retained this one: “As an old proverb says ‘Like readily consorts with like.'” I enjoyed this quote, particularly, because I do believe it is true and also because it reminds us of the oral tradition and the importance of proverbs in our culture(s).

And if you feel like swotting up on some more Latin, try this page of useful Latin phrases (except the last section which is a little fantasy).

*Full disclosure: I got this quote via my friend Nicole this morning. Thanks.

AMENDED June 25, 2009

Courtesy of my son’s Latin teacher (thank you Mr S.), I received the following information:

“The only work of Cicero’s which I know to have been published in 55 BC is the De Oratore (usually known as ‘The Ideal Orator’ in English).  But the content sounds more like something from the De Re Publica (‘On The State’), but that was published in 51 BC and is thought to have been begun in 54 BC.  Here is a Latin translation of it, but I’m sure Cicero would have put it a lot more elegantly (I didn’t know what to put for ‘budget’ either, and my dictionary gave ‘fiscus’ for ‘treasury’).



Libranda est pecunia, replendus fiscus, deminuendum aes alienum, continenda et temporanda praefectorum superbia;  necnon auxilium quod aliis patriis detur coartandum est ne Roma perdita fiat.  Necesse est cives ipsos iterum laborare;  e publico subsidio non pendendum est.

INSEAD – Celebrating the 15 Year Reunion (2008)

15 YEARS LATER : MY 15-YEAR REUNION AT INSEAD

I have just completed my 15-year reunion at INSEAD in Fontainebleau. There were some 59 fellow classmates (out of about 205) who came in from 16 countries (3 came from Australia). It was a lovely way to reconnect – among other things to remind us of the importance of facetime and networking. As big a fan as I may be for virtual worlds and social media networks, the prescient words of John Naisbitt in High Tech/High Touch ring as ever true today.

There were three themes that seemed to keep coming up, no matter the topic at hand:

- The financial crisis
- The work-life balance
- Sustainable development

On the heels of the record-setting one-day stock market swings (the DJIA gyrated from a low of 7773 to a high of 8989 only to finish down 1.5% on October 10th), a devastating eight days of doom and gloom and a drop of -22% on the DJIA, the financial crisis had a bearing on absolutely every activity discussed. How is the financial crisis going to impact sustainable development? Will the financial crisis hurt social media and “metaverses” (with Professor Miklos Sarvary)? There were no contrarians to be heard. The concept of a worldwide recession was widely used. Clearly, we have not seen the end of the bad news as it will now roll out into other fields, including a predictable credit card crunch and down swing in sales of large ticket consumer goods. And, of course, it certainly will have an impact on executive MBAs coming to INSEAD and current MBAs looking for jobs.

The question of work-life balance was systematically raised, and not just by Gen Y MBA students. I think my wife summed it up rather accurately: work-life balance is a myth. There may be moments when when you are able to achieve more family life, but you are inevitably compromising work and vice-versa.

And on sustainable development, much of the conversation seemed to be focused on reinforcing the existence of global warming, and less about the [clear cut] solutions. We heard from Mohan Munasinghe, Vice president of the United Nations Intergovernmental Panel on Climate Change (IPCC) (and Nobel Peace Prize Laureate, 2007 along with Al Gore), who exposed the framework of “sustainomics.” The notion of sustainomics “draws on three basic principles: (1) making development itself more sustainable through immediate actions, (2) balancing the economic, social and environmental dimensions of sustainable development, and (3) transcending traditional boundaries of academic discipline, space, time, and stakeholder actions, to produce the most effective solutions.” Of course, I am not sure of the application in my immediate world. Anyway, good to listen to. {Read more on the subject here}.

Bottom line, attending the reunion was grand. Reunions are about seeing old friends, but I also got a lot out of listening to some good lectures and panels on contemporary topics. One of the recurrent conclusions of reunions, though, it is clearly NOT a French thing. Of the 34 French classmates, a total of 7 came (un grand merci à vous d’être venus), of which 3 live overseas — and only a couple of the French came for the whole weekend–too many other priorities elsewhere! Without talking about their lack of participation in alumni giving, it is a shame that the French culture does not seem to enjoy these types of reunions. I am, nonetheless, hoping that for the 20th year reunion (2013) we will get a fuller turnout — and with a bit of luck will be talking about rosier economic times. Thanks to all of you who did come. We certainly have our work cut out for us to bring some order to the world. In the meantime, all 1993 INSEAD alum are welcome to join the Facebook INSEAD ’93 group (assuming the company Facebook survives the current management exodus).

See you next time.

Global Power Rankings China versus ROW

China Global Power RankingChina is making progress up the Global Power Ranking if you count market caps.

Chinese publicly traded companies are now dominating the top 10 list of biggest market capitalizations worldwide. This Figaro article of 30 October highlighted that 5 out of the top 10 largest market caps are Chinese, including world #2 PetroChina at $446 billion USD, behind the ExxonMobil at $511 billion. China Mobile is fourth at $398B.

There are 3 US companies in the top 10 (ExxonMobil, GE #3 at $413B and Microsoft #6 with 327B). Royal Dutch Shell and Gazprom (Russian with $253B) round out the top 10. In other words, there is only one [true] European country represented.

Of course, this is just a snapshot before a currency revaluation, a downward shift in oil prices [what?] or another Enron were to occur. Nonetheless, it speaks to the prospective valuation of future earnings.

Another interesting slice of the top 10 shows that 5 of the companies are in Petrol & Gas, 3 are financial institutions (including GE which is classified as diversified financials by Fortune, but go figure), and 1 each for computer software & telecom.

On another angle, and not to be forgotten is the size according to sales… The Fortune 500 is still widely dominated by US companies (162) with Japan (67) #2 and France at #3 (with 38), just ahead of Germany (37) and England (33). Six of the top 10 are US and the first Chinese company in the Fortune 500 is Sinopec at #23, albeit with the fifth highest sales growth. But, one can expect the composition of the top 100 to change dramatically over the course of just the next five years.

Of note, tracing back the data from Fortune 500, as limited merely to US companies, there are now 4 financial-related companies in the Fortune 500 top 10, as opposed to just one basically since 1955 (always the same company, GE which, naturally, couldn’t always be considered a financial company). Since 1955, there have been between 3 and 4 oil & gas companies year in and year out, with communications and computer (IBM) rounding out the top 10 historically.

For an interesting blog and further reading about the shifting balance of power, visit Global Power Europe. Plenty of commentary and numbers on the world balance and the need for a stronger, united Europe. I also enjoyed this post from America vs the World, a subjective listing of the International Power Rankings dating to last year ,but still pertinent. Last posting on the topic was August 2006. I loved the fact that the Football World Cup is included in the concept. Note to Gordon: time to update! Meanwhile, thanks to Gordon, I found this link to an IHT article referring to Paris’ perception of the US and the terminology of ‘hyper power.”‘

And for a thread that seems plentiful and dynamic, try the World Affairs Board, Whose Who… Power Ranking. An interesting point: can a super power be a power if a large portion of its population remains illiterate?

Tech Crunch gives award to MINT

Tech Crunch (Jason Calacanis) announced the winner of the TechCrunch40 award and I was naturally a little curious about the winner: MINT. With the award, Mint receives $50K. See Financial Crunchbase Stats. Here is a description of the Mint application (direct from Tech Crunch site):

“Mint is a personal finance application that lets users track and monitor their financials in one place without the need of routine maintenance or accounting knowledge. Their application tracks bank, credit union and credit card transactions and alerts users to upcoming bills, low balances or unusual spending. Mint’s patent-pending technology automatically categorizes transactions, so users know with precision where they are spending money, what their bank and credit balances are, and how much interest they have earned.”

It’s free and it offers the online agglomerator of all my different financials that I have been doing for the longest time manually. A great tool. Sign me up!

See Mint Blog

Read more on Tech Crunch: Productivity and Web Apps: Session 5

China: Do you see 2020?: Financial Ascent vs Demographic Descent

Last night, at the MSG (not-in-my-salad) Arena, there was a curious heavyweight boxing match between two Chinamen. One, in the gold shorts, was the China of Optimism (CO). In the other corner, wearing satin red shorts, was the China of Porcelain Doubt (aka PCDo). The bout was about to enter into its 10th round when I curled up and went to sleep. It is probably going to go on for a while further. In fact, the match may just as easily step outside the ring and resound throughout our global arena. In any event, here were some of the highlights of the match.

In the first rounds, CO was all over PCDo. Some ringing hits to the upper body as well as inside on the chin(a):

* In China, as evidence that access to the stock market is truly democratizing, there are on average 200,000 new brokerage accounts opened each day. In 2005, there were just 2 million opened all year.

* In May 2007, the Chinese government plopped down $3B for 10% of the Blackstone Group.

* US trade deficit with China hit $232B in 2006 up from $50B in 1997.

* China will overtake the US in number of Internet users in 2009: “There are now an estimated 137 million Internet users in China, and that number has been growing by 18 percent since 2004 until it picked up even more steam in 2006, going up to 23 percent. The United States has 165 million Internet users, according to Pew, with 25 million of those users being aged 12-17. At the current rate of growth in China, the number of Chinese web surfers will surpass the number of American users some time in 2009, and it will continue to rise sharply afterward. With more than half of Americans already online, China’s growth over the next 10 years will easily dwarf that of the United States.” — Jeremy Reimer . As my friend Mitch reminded me from Singapore yesterday, one of the interesting facets of the Chinese internet boom is the censorship of Beijing and the permeability of the Great Chinese Firewall (see BusinessWeek article).

But, PCDo was not to be outdone, storming back with some profound counterattacks for the remainder of the evening. Even though PCDo is slightly chubby around the midrift, his age and world-famed wisdom pulled its weight.

* There is much to say about the Chinese demographics, notably that the total population will spiral up to a peak of 1.5 billion people by 2030. More important is the composition of that 1.5B population. By 2040, the UN projects that the elderly (60+) share of the population will jump from 12.8% (or 174 million according to a document issued by the China National Committee on Aging in 2006 to 28 percent, a larger elder share than it projects for the United States. By 2040, assuming current demographic trends continue, the Chinese elderly will number nearly 400 million–more than the total current population of France, Germany, Italy, Japan, and the United Kingdom combined.** When you compare the span of time and the rate of increase of elderly in China to the West — whose elderly share rose from 10% in the 1930s to an anticipated 25% a hundred years later — one has to assume that such a meteoric change will have rude consequences in the social climate and economic dynamics. Courtesy of FuturePundit.

* Currently, the Chinese Fertility Rate is 1.82 births per woman. In 2001, the average was estimated at 1.98 in rural areas and 1.22 in urban areas. (Hamayoun Kahn study). See right: the People’s Republic of China’s Fertility Rate 1949-1999 as estimated by the US Census Bureau graph.

* The UN projects that the size of China’s working age population, on whose shoulders will be the burden of creating wealth and taking care of the burgeoning elderly class, will peak in 2015. The rate of decline after that point will depend on future fertility rates. If the fertility rate remains constant (an optimistic viewpoint for some), the population of the working-age Chinese will drop a staggering 18% between 2005 and 2050. And, it could be considerably worse than that as well if the fertility rate declines. The risks would point to wage inflation due to a lack of workforce supply.

* Considering the socio-economic pressure, just 25 percent of China’s total workforce, urban and rural, have any pension provision at all.

* Bare Branches offers some statistics on the ratio of boys to girls. “In China, the official ratio is 117 boys born for every 100 girls, but the reality is probably 120 or more. In India, the official birth sex ratio is 111-114 boys per 100 girls, but spot checks show ratios of up to 156 boys per 100 girls in some locales [around New Delhi, for example]. For comparison, normal birth sex ratios are 105-107 boys born per 100 girls.” (Still debated in biologist circles, human beings apparently naturally create more boys than girls.) Courtesy of IHT article published in 2004. The disarming prospect of an overstretched economy, insufficient funding for retirement, fewer children (and fewer still women) to take care of the eldery — China’s main instrument of retirement — as well as the fact that the future wave of elderly will not have reached affluence (unlike today’s baby boomers), is bound to be a very heavy strain.

CO put in some good later rounds, however, reminding us that education is as gold as discipline.

* Higher education is on a fast track in China with 12 percent of senior high school graduates entering universities and colleges for further study in 2001, compared with 3.4 percent in 1990. There are now more than 4 million students at college or university in China, with an estimated half million Chinese students at higher education abroad.

* China provides universal health care. However, clearly, there are substantial cracks in the system, as witnessed by the Avian Flu issue, Hepatitis B (affecting est. 10% of the population), widespread smoking and escalating HIV/AIDS.

* Percentage of Chinese living in poverty has dropped from 73% in 1990 to 32% in 2003.

* China’s economy has averaged over 9% annual growth since 1978.

There it was, the end of the 9th round. Most people were still looking for CO to cruise to victory. The panel of famous international judges, including Hugo Capex, Harold Persons and Sly Dettor
, were wringing their hands and shaking their heads. The arena was a buzz with chat. I know it seems odd, but zzzzzzzhangzu, I started to snore. So, I let you commentate the next rounds as I zzzzzzzzzzinzhua away at night.

———

I approached this particular post as if I were a universal (not exactly university) student starting out on a research paper. Aside from the content of this post — on which I freely invite comment — I am fascinated at how different is the process of research in today’s world compared to our traditional methods back when… Where appropriate, I have given a link rather than outright citation of credit. Not exactly scientific, but part of the web 2.0 of dealing with multiple sources. This post is not intended to be a definitive study, but a collection of some miscellaneous facts about China that lead me to be confused about the future, more than make me more entrenched. No doubt there is a silver lining or black cloud behind any number. And the above “match-up” limits itself to internal issues. Jokers in the future will include developments in Korea, Japan, as well as the role China takes on internationally once it has the measure of the world.
_________________________________________________________________

** Richard Jackson and Neil Howe, The Graying of the Middle Kingdom, Report published by Center for Strategic & International Studies, April 2004, p.2.

What’s a Finance Minister?

As much as we might spend time defining the role of the different functions in a company (what is the title? whose responsibility is what? what are the measurable objectives?…), an article in Le Figaro on 21 May presented the conundrum of the definition of the role of the “Finance” Ministers of the G8. Whereas competitive companies may not liberally share this information, governments are obliged to understand each other’s structures & responsibilities. The article, entitled “Les droles d’avatars du ministere des Finances,” explains that in the US, the Treasury Secretary [Paulson] is responsible for the management of the economy, including taxes, financial regulation and the USD. However, he is not responsible for the Federal budget, international commerce, industry… In Japan, meanwhile, the Finance Minister [Omi] is responsible for public finances and the Yen. The role of overseeing the economic strategy falls to the man in charge of the Minister of the Economy, Commerce and Industry [Amari], who is widely seen as the man who rebooted the Japanese economy over the last five years. In the UK, the title is “Chancellor of the Exchequer,” again another angle. One can imagine the complication of deciding who to send to which international meeeting – an affair of State. In any event, the separation in France of the roles under Jean-Louis Borloo, the new Minister of Finance, Economy & Employment–whereby one side handles the creation of wealth and the other handles the wealth distribution and obligatory withholdings–seems quite sensible. In any event, it sort of follows a capitalist (“liberal”)-to-socialist split.

I was curious to see what Breton (outgoing) said to Borloo. During the transfer of power, the former Minister for Finance warned his successor that, with the change in responsibilities, he was going to have to comment on the figures of the French economy, “an exercise which is not always simple, which requires a little tact, much of modesty and humility”.

Paying taxes in France

After attending a briefing meeting by KPMG on how to pay French taxes (we are getting close to tax day here), I found a few items worthy of note.

Unlike most [modern] countries, there is no salary with-holding (by the employer) for taxes. Just for social security — proof of the importance of the social system. Don’t worry about paying your taxes (which are always paid a year later); but we need the social security!

The location and organization for where you send in your tax return is separate from the tax collector. A very antiquated system — sounds like a hangover of the regal days. For extra headache, the return should not be accompanied by any payment. Just a little more bureaucratic inefficiency and overhead.

You have to love the CSG/CRDS taxes which were originally temporary “surtaxes” to fund social security deficits and public debt. Then they became permanent. First they were deducted on salary only. Now they form an additional income tax on investment income (flat 11%).

Tax credits take up a full page of the 4 pages of the 2042 form. Among the (sometimes rather obscure) credit options, you get a whopping 61E per child in further education at the ‘college’ level (5-8th grade). Just another incentive to have children (pervasive concept in the tax return).

Finally, there is a television tax in France (as in UK). The origin of this tax was to fund public television. Since tv is slowly dying out and tv’s will be mutating to computers, I wonder how long the government will take to figure out that the bigger money lies in computer screens (I.e. as multimedia center).

No taxes are fun or straight forward. But you have to love the history and “meanings” within.