Rating the Quality of Banks - Scary!

 
     

Bank Ratings, then...

...and now.

Financial analysts, like military types, are fond of using acronyms. These abbreviations can be useful in either simplifying overly complicated ideas and concepts, or putting a snappy name on irredeemably inscrutable notions. Anyone who has had his/her 401k and IRA whiplashed by CLOs, ETFs and MBSs issued by BAML, DBS, CS, ING etc. over the past few years knows what I am talking about.

The criteria used to assess the health of banks is no exception. For many years now, a commonly used method of analyzing the quality of banks has been the CAMELS grading system. It stands for Capital, Asset quality, Management, Earnings, asset/Liability management, and Sensitivity to market risk. Banks are scored 1 to 5 on each criterion. The US bank regulators utilize this system on a regular basis and provide the results to banks’ management teams (though not to the public). In theory, this is all well and good – no one would argue that the CAMELS components are not the correct ones to focus on. However, it’s hard not to think that CAMELS is a misnomer. Banks are hardly the type of creatures that can steadfastly trudge their way through a hostile environment and remain standing when others would drop of dehydration and exposure.

Now, we have an alternative. Berenberg Bank, a small, steady German private bank (the type that services an elite clientele), has come up with another acronym to rate the durability of European banks – SCARY. It stands for Solvency, Complexity, Adaptability, Risk, and ‘Yes, we do believe in structural change’. Okay, the ‘Y’ is a bit of a stretch, but at least it tries to capture a very important feature of a bank’s profile – its culture. Not surprisingly, Berenberg’s analysis revealed that the riskiest European banks are those in Italy, Spain and France. Some of the global banks such as Barclays and UBS received a mixed report card. The winners tended to be the stiff-backed and stingy northern European banks. The good news for Asia is that HSBC was among the strongest names.

So Berenberg Bank is on to something; if nothing else, SCARY is a better reflection than CAMELS of the zeitgeist of the times. And Berenberg should know something about adaptability. After all, they’ve been around since 1590, making them one of the oldest banks in the world. OMG!

LINK: http://www.efinancialnews.com/story/2013-01-29/scary-the-terrifying-new-banking-acronym?mod=sectionheadlines-AM-IB

Bo vs. Bo

Competing e-books on the Bo Xilai Scandal

Two e-books were released in late 2012 describing the sordid and eye-glazing details of the life and scandals of Bo Xilai (the recently disgraced rock-star Chinese Politburo member and head of the Communist Party’s Chongqing branch) and his wife, Gu Kailai. The first book out was The Bo Xilai Scandal by Jamil Anderlini, an FT reporter. It was published in September by FT Edits. That book was followed in November by Penguin with The Rise and Fall of the House of Bo by John Garnaut, a reporter with the Sydney Morning Herald.

The two books are similar in many respects. They are similar in length, roughly 70-80 pages, and only available digitally. They read like extended newspaper articles, and each can be devoured in a few hours. Both deal with Bo Xilai’s career and family history, his scheming wife and overindulged son Bo Guagua, the murder of Neil Heywood by the Lady Macbethian Gu, and details about Bo’s chief of police – Wang Lijun – who built a career on intimidation and brutality before turning on Gu by exposing her murder of the Englishman.

So which book should readers focus on if they want to bone up on one of the most intriguing tales of political excess to come out of China in a generation? Personally, I found that reading both accounts back-to-back was not a chore. On the contrary, they complemented and reinforced each other. First of all, there are loads of names and events involved that can be difficult to sort through unless you are already a seasoned China guy. For the rest of us, the repetition can help to follow the story more clearly. Secondly, the books have different treatments and angles. The FT Edits book is more lurid and character focused. It starts off describing the Heywood murder and goes into more gory details of the event. The book also describes more of the family relationship and personalities of Bo, Gu and their son. Therefore, it unfolds more like a thriller than Garnaut’s Penguin Special book.

However, Garnaut’s book delves deeper into the details of the political wranglings and hazardous interplay that characterize the Chinese Communist Party. Therefore, Rise and Fall is a more intellectual read. There is marginally less about Gu and Heywood. There is a more thorough coverage of Bo’s past links to the Cultural Revolution and his career ascendancy through the patronage of his Maoist father and leaders such as Jiang Zemin. The role of police chief Wang Lijun is explored in greater detail. Lastly, there are some captivating characterizations of modern Chinese politics – how the Party came to lean “more heavily on its monopoly of violence... as it was losing its monopoly on truth”, how the first rule of surviving the bureaucracy is to have “collective ownership and equal vulnerability for all actions at all times”, how politics in China is a “world of staggering brutality, corruption, hypocrisy and fragility.”

Both books are worthwhile and approachable accounts of an event – the spectacular downfall of a charismatic Princeling - that, together with cracks that China's micro-blogosphere has created in the otherwise closed media, could be a needed spark to catalyze political reform to the opaque and labyrinth world of China’s leadership. However, real change can only be brought through the reversal of billions of ill-gotten gains by the corrupt power elite and much greater transparency and accountability in the country’s governing structure. For now, at least, that prospect is so daunting that it may be easier to imagine as epic fantasy fiction.

When Greed Seems Good - a Warning Sign

I could not help but see the article below as a disturbing corollary to my previous piece on how unhappy wealthy Asians are due to their cutthroat competitive existences. The fact that 40% of young Koreans value wealth over integrity is a major concern, particularly considering that the percentage is nine points higher than for older adults. Young people’s fears for their future, real or imagined, is acute. The need to address their fears as a society is increasingly so.

Thanks to Tom Coyner of the Korea Economic Reader (a valuable commentator on all things Korean) for bringing this to my attention.

Korea’s Youth Integrity Survey Results

The majority of young people in Korea are prepared to forgo values of integrity in the pursuit of wealth

“Anti-corruption education is vital in schools and educational institutes to reverse this trend”

Transparency International
23 January 2013

With the support from Transparency International-Secretariat (Berlin, Germany), TI-Korea (South) conducted the Youth Integrity Survey (YIS) between July and October 2012. Through the survey, TI-Korea found following key results: Young people in Korea are more likely to forgo values of integrity in the pursuit of wealth than adults are, with 40% the young people surveyed said that they thought that being rich was more important than being honest, against 31% of adults.Our survey identified 3 main sources of influence: education system/school, their family circle, and media.

It is worrying to see that so many young people willing to relax their integrity for the sake of getting a good job, high position, and more riches. This puts young people in a vulnerable position in Korea, at risk of being both victims and perpetrators when taking exams, passing a job interview, getting a document or license, or evading the police (such as fines, etc.). This creates an unlevel playing field for all young people and for Korean society as they become leaders in business and politics.

It is clear from the results of our survey, that there is a need for young people in Korea to be provided with ethical role models, moral standards and an ethical education in order to rebalance the views of this generation. And with our survey also identifying the education sector as a key sphere of influence for young people and one which is held in high regard with respect to the integrity of educational institutions, a key message for the new government is that it is imperative and an opportune time to establish anti-corruption and/or integrity related education and policies to be implemented as soon as possible in all levels of education in various educational settings in both public and private institutions. Dr. & Rev. Kim Geo-Sung, the TI-Korea’s Chairperson urged that “Anti-corruption and integrity education are essential and necessary in school curriculum and education institutes.”

Background to survey

The Youth Integrity questionnaire is originally made by TI-Korea and developed by TI-Secretariat. Young volunteers conducted the survey to more than 2,000 persons (1,031 youths and 981 adults), in the areas/regions of Wonju, Suwon, Namyangju, Yongin, Guri, Ansan and Seoul. Since Seoul (the capital city) accommodates the largest population, it was divided into four major areas: the North, East, West and South. TI-Korea, anti-corruption activists, K-PACT Council members, youth volunteers (university/college students, recent graduates, high school students), and Hyundae Research Institute (data analysis), among others conducted and took part in the whole process of the survey.

The full results of the survey will be published in March 2013

Media enquiry

Dr. Steven Kim
Executive Director
Transparency International-Korea (South)
#1006 Pierson Bldg., 89-27 Sinmunno-2ga, Jongno-Gu, Seoul 110-761, Korea (South)

Asian Nations and Their Frowning Glories

                 

                       Work hard...

...play hard.

Unhappy that your life is dominated by one or more of these nagging issues?

1. Feeling poor next to your universally workaholic neighbors, despite your country’s per capita GDP of up to US$50-60,000
2. Experiencing claustrophobia because astronomically high real estate prices force you to live in concrete shoeboxes as small as twelve square meters per person
3. Feeling compelled by a cutthroat education system to spend $5-10,000 per month on private tutors
4. Losing an arm or leg in an accident and realizing that getting more than basic medical care will cost you the remaining limbs...
5. Having achieved the five C’s (cash, credit card, car, condo, club) but still feeling like Crap
6. Owning an insufficient quantity of leather products emblazoned with a LV, Chanel or Hermes logo
7. Fighting spiritual hunger pangs because trying to devour wealth has left you starved for the arts, culture and hobbies

Welcome to wealthy Asia! In almost every ranking of countries on a “happiness” scale, irrespective of the metrics used, advanced Asian countries such as Hong Kong, Singapore, Taiwan, Korea and Japan generally rank very low, despite the affluence of their citizens. (A recent South China Morning Post article provides updated figures http://www.scmp.com/news/hong-kong/article/1131222/singapore-hong-kong-face-happiness-deficit ). The reasons cited for the prevalence of all these blues are invariably amongst those listed above.

The happiest countries tend to be in Latin America (e.g Panama, Paraguay, Costa Rica) or in cold climates (e.g. Finland, the Netherlands, Canada, Denmark) where the governments tax their people heavily but try to provide high quality social services and keep wealth disparity in check. To be fair to Asia, a number of Southeast Asian countries also rank highly in happiness, including the Philippines, Thailand, Indonesia and Malaysia. And let’s not forget that Bhutan famously uses a Gross National Happiness index to measure welfare.

The North Asian countries' widely admired achievements in economic development and wealth have been costly on the human level. A clear by-product of all that hard effort is a society full of long faces and unsettled stomachs. The “1% class” is so designated precisely because its members are few and far between. That means that the vast majority of the population will not be able to cram into that room. But luckily, wealth is not inextricably linked to contentment. A sense of belonging to a fair and even-handed community, on the other hand, is necessary. In the already prosperous Asian countries, elevating the GNH index, whether so named or not, needs to be a rising priority. Policy focus should be on achieving fewer frowns, not more crowns. 

For Who I Am, Not What I Am

Look at me, not the Dad-figure on my left

This SCMP article (http://www.scmp.com/news/china/article/1124650/billionaires-daughter-im-rich-and-boyfriendless) that profiles Zong Fuli, the 30-year-old daughter of the richest man in China, is meant to be light-hearted. In the article, she describes herself as “rich and boyfriendless” and suspicious that men who approach her are mainly interested in her wealth and/or finding ways of doing business with her. Naturally, being the offspring of Zong Qinghou, a man reputed to be worth somewhere between US$10-20 billion as the head of Wahaha (a leading soft-drink producer), does have its share of complications. Dad can be a tough act to follow in many guys’ eyes. Fortunately for Zong Fuli, she seems to have her head on straight and be capable of taking care of herself. She received a business degree from Pepperdine University in California, and is gainfully employed at Wahaha. She is competent enough to be considered the heir-apparent to her father’s position at the head of the company.

In largely-patriarchal Asia, it’s good to witness such examples of women’s achievement. As the region continues to industrialize and achieve higher per capita income levels, more modern and meritocratic views of gender are increasingly evident. There is probably no more striking case-in-point of changing public opinion towards women in prominent positions than in macho-man Korea, which has elected its first woman president. That’s the good news. However, a few cases of women such as Zong Fuli rising to power on the coattails of preceding men in their lives (Park Geun-hye and her father, Yingluck Shinawatra and her brother, Ang San Suu Kyi and her father) are only the beginning steps of real change. On a much broader basis and down at street level, Individuals need to be seen for who they are and what they can be, beyond the configuration of their chromosomes. Wages for equal jobs lag for many women. Treatment at home is still known to be oppressive, even brutal. And successful women are often seen as intimidating and un-feminine. The faster those attitudes can change, the better off Asia will be. The region’s emerging leadership in the world will only be solidified by tapping further into its brainpower, rather than low-cost structure. And the last time anyone other than the Taliban checked, women are at least the equal of men on that front. Of course, women are more than just amazing economic and political resources. Given half the chance, they are often great people. And what’s more gorgeous than that?

Updated Statistics on RMB-millionaires

Much more where these came from.

China’s Caixin Online, a financial media group, has come out with some interesting statistics regarding China’s 1% households. Caixin finds the following:

- 19.4 million households comprise China’s 1%.

- That group owns average assets of approximately 3.05 million RMB, or $491,000, and earns annual income of 1.51 million RMB, or $243,000.

- Of those households, 9.8 million (roughly half) households have assets exceeding 5 million RMB ($805,000)

- A lucky 3.7 million households have assets exceeding 10 million RMB ($1.6 million)

http://www.marketwatch.com/story/millions-of-china-households-are-yuan-millionaires-2013-01-15?siteid=YAHOOB

2012 Luxury Market in China – Winners and Losers

Still in.

Also still in, but with less bling.

2012 was a mixed year for the luxury market in China, given the slower economic growth and global macro risks. Below is my re-cap of 2012 winners and losers in the luxury goods market related to China. For more on this, check out Jing Daily’s Year in Review article of luxury and art trends. http://www.jingdaily.com/jing-daily-2012-year-in-review-five-key-luxury-art-trends/22872/

Winner: Ultra-high end luxury. Loser: Everyday luxury.

The top global brands such as Prada and Hermes recorded strong 20-50% sales gains among Chinese consumers, despite the nervous markets. Yacht sales also remained very strong. More “common” foreign brands such as Burberry, Cartier and some LVMH brands experienced slower to no growth.

Winner: Germany. Loser: Japan

German car brands – Porsche, Audi, BMW – continued to show strong demand for their cars, registering annual growth of 30%. Japanese manufacturers, on the other hand, were hit (sometimes literally) with Chinese fury over the territorial rights with Japan related to the Diaoyu (or Senkaku) islands. Driving a Lexus in China was a hazardous endeavor for much of the year.

Winner: Bricks and Mortar Stores. Loser: Luxury e-commerce

There were a large number of high profile store openings across China and Hong Kong, including the following names – Aston Martin (Shanghai), Phillip Lim (HK), Richemont (Shanghai), Zegna (Shenyang), Harry Winston (Shanghai), Montblanc (Beijing), Gucci (Chongqing), Christian Louboutin (Beijing), Saint Laurent Paris (Shanghai), Hublot (Xiamen). GILT-like e-tailers and other e-commerce operators on the mainland continued to founder, despite best efforts of entrepreneurs and brand owners to try to establish strong direct sales through the internet. E-tailing still felt kinda “wild west”, and not in the Ralph Lauren sense, either.

Winner: Burgundy. Loser: Bordeaux

Thankfully for much of the wine world, the First Growth Bordeaux bubble burst in 2012, with prices (as measured by the Liv-Ex 100 wine index) falling as much as 30% from their 2011 highs. Of course, one party’s gains are often another party’s losses. Buying interest shifted over to the top-flight burgundies, particularly DRC and Henri Jayer wines, raising already-lofty prices for these rarities further into the stratosphere. Oh well, at least now we have more egalitarian usury at play.

Winner: “Coal bosses”. Loser: Government bureaucrats.

The nouveau riche of China continued to shop till they dropped, snapping up uber-expensive cars, watches, jets etc. Politicians, on the other hand, got slapped in July with anti-corruption laws that prohibited civil servants from spending government funds on luxury goods. Pity the poor bureaucrats who have lost their regular supply of fine leather goods, gold belt buckles, premium wine and jewelry.

Concluding Winner: China. Concluding Loser: US

If it has not become abundantly obvious already, China is rapidly overtaking the US in its place among the top two luxury markets in the world. Or so says Bain and BCG consulting groups. China’s luxury market could be $87 billion strong by 2015, or 23% of the global market, according to BCG. The China art and wine auction markets have already eclipsed New York’s. With the US’s ongoing struggle with its fiscal situation and stagnant growth, the overtaking has a clear air of inevitability about it. What is less clear is whether this is a good thing or bad.

A Bicycle Built for Two... Hundred Thousand RMB

Out with the old...

In with the new.

Gone are the days when the humble but steadfast Flying Pigeon was the symbol of Chinese two-wheeled transportation, suitable for all. Now that four-wheel vehicles are the standard means of mobility across the land, buying a bike is more choice than necessity. And as with so many other material things, no one knows how to turn a utilitarian object into a high end, high flying status symbol better than the wealthy Chinese.

How much would you pay for a high end bike? As an avid cyclist and stumbling, bumbling triathlete, I know a thing or two about the topic. Professional bike racers – those dope-injected masters of arcane race routes through the mountains and plains of Europe -  can spend up to $20,000 on experimental ultra wind-cheating time trial bikes in order to shave seconds (not minutes) off their times over a 50 km race. More pedestrian endurance athletes such as this humble blogger are commonly known to spend $5,000 – $8,000 on their ride. This amount of money will get you a spiffy and featherweight 6 kg set-up that features carbon fiber components everywhere possible – including the wheel rims and hubs, saddle and levers. Rigs like this are the pride and joy of international level triathlons. For 99.999% of bike riders, anything more expensive will not help them go any faster, since ultimately, the engine is the rider’s legs and lungs, which has nothing to do with money.


However, like cars, status symbol bikes are not meant to be ridden quickly. They are meant to be gawked at, poked and prodded, none of which can be done zooming around the roads at their design speeds. As the linked article [http://www.cnbc.com/id/100338066/For_Wealthy_Chinese_Bicycles_Become_Status_Symbols] details, high end custom bikes that can run to US$30,000 (my god, what are they made of, rare earth elements mined on Mars??) are growing in popularity as a prize possession of China’s well-heeled who are already overstocked with wine, cigars, and other high end goodies. To them, owning a custom Colnago or Look that costs (a) 100 times more than the Flying Pigeon, (b) three years’ average workers' salary, or (c) as much as a really nice car is a way to showcase “uniqueness in taste and healthy lifestyle.” Of course, that’s assuming the owner doesn’t also have a prosperous waistline and a looming battle with diabetes.

Still, when it comes to bicycles, the more the merrier. There is no mode of transportation that beats it for all-around benefits to body, soul and the environment. So, let’s hope the trend of bike ownership continues to filter back down to the masses, just like in the good ol’ days. The Pigeon is dead. Long live the Pigeon.