Quote of the week:
1 - 'Crises are now different in that they involve very large amounts of very short-term money. That is one aspect. Second, that the economy is highly leveraged around that money, so that when something happens, the whole house of cards collapses. And thirdly, the world economy is deeply global, through the financial structures and that means that when something happens anywhere, it happens everywhere. So that of course makes international financial crises today something really interesting.' - Rudi Dornbusch (Source)
2 - 'The Argentine case would thus seem to call into question just how valuable a modernized banking sector and capital markets actually are for developing countries.' - The Economist (Source)
Commentary of the week:
The Local Roots of a Global Crisis:
Sticking with our favourite cynical theme that the financial world is coming to an ignominious end then, how are we to make sense of this moment in financial history? After all, financial crises are nothing new and if it wasn't for the fact that correspondents like me have to write commentary, there is some merit in the suggestion that these crises would not even make the midnight news. What a simple life we would have then, if we actually didn't have to worry about our savings and investments and could simply outsource that worrying to earnest young men and women whose sole purpose in life was to make untold fortunes for clients such as us. Yes, a worry-free life. But alas my good friends, this financial nirvana escapes us, perhaps for some fault of our own.
What we do have is the exact opposite. Nobody really knows anymore if house prices are going to keep going up in Canada, why the stock markets are so 'up' here but not so 'up' just South of us or even in China anymore and if there is one theme that is evident from the recent spate of bad news, it is that the financial sector (which sadly includes me I think) is hardly as smart as it would have us believe. Such an economic context is of course crippling for any rational (or even pretend rational) long-term decision-making. As some accomplished speakers at a recent conference told us recently (yes, after many promises of good behaviour regarding cutlery [see the Blog], Ittihad is letting me go to conferences again), the Public markets are quite skittish and so private businesses are avoiding an Initial Public Offering (better known as an IPO - where companies raise money for themselves by selling their shares to the general public through exchanges such as the TSX). The one IPO of note, Sprott Asset Management, did not go off as the huge success that it would have been if they had waited for more certain times. As an exquisite and definitive example of what I mean by uncertainty, any Tom, Dick and Harry can now have an opinion on our financial future that is taken seriously (case in point); and you know that we are on dangerous territory indeed when people like me start second-guessing people like Eric Sprott (of the Sprott Business School fame). So why all this uncertainty then, and where does it come from?
Well, my theory is quite simple (and probably just as wrong, but bear with me). The reason there is such institutional paranoia and experiential deficit as to 'what is to be done' about this present crisis, is that this is really the first time since the 1930's that a North American financial crisis has its roots (both obvious and latent) within North America itself. The first crisis after the depression was really in the 40's and driven by events in WWII Europe and I don't really remember anything remarkable about the 50's except for the Korean War and the storied youth of Baby Boomers so we will have to skip that decade. In the 60's (and 70's) we had the Vietnam war which led to the decoupling of Gold and the US Dollar in the early 70's (a seminal event in finance that generates much contemplation and vituperation). Soon after the Gold Standard was abolished (Gold used to be $35/ounce) we had the Yom Kippur War (1974?) and then the Oil Embargo which did some short-term damage to the North American economy through higher energy prices and inflation. There was also the Revolution in Iran in 1979 which created yet higher oil prices and then the Afghan War in the 1980's where you had untold amounts of illicit drug money enter the financial system along with the already enormous amounts of Oil Money. These funds were of course very methodically deposited with large Western banks because they were simply the best at banking, people didn't know any better and also because there were some Faustian bargains made. These banks then turned around and lent this money to poor third world countries where many politicians' pockets and grandiose, no-use pet projects suddenly found 'cheap' funding. These self-same borrowers then, became subject to interest-rate policies of the US Fed and became unable to service their debt once Paul Volcker raised interest rates in 1986 (?) in order to combat the inflation resulting from the higher Oil prices we already mentioned. This debt and the unconscionable interest payments involved then put spending cramps on poor foreign governments and resulted in poor quality of life in debtor countries. These poor countries could not then spend money on health and infrastructure and this in turn increased immigration to the West, creating both a brain drain and other social problems in the West. It also resulted in many musical concerts and campaigns for Debt-forgiveness (such as Bono's Jubilee 2000), which break out and then peter out from time to time because forgiving astronomical amounts of debt really sets bad precedents in International Finance.
This now, is where the plot thickens, so follow closely. In the 1980s' then, we are on the cusp of having a truly global, technologically interlinked financial system; and even though this is a historic achievement for humanity (questionable, but let us concede this point for now), it just seems that this system is quite prone to unforeseen crises that begin from far-flung areas of the world. In Imperial terms, if the capital of world finance is New York, then the many far-flung provinces such as Tokyo, Moscow, London and Buenos Aires have been quite twitchy and problematic over the years. After 1986, there has been the crash in the Japanese Nikkei (1989), the USSR + Ruble Collapse (1991), the British Pound and ERM crisis (1992-3) the Mexican Peso crisis (1994), the Asian Financial Crisis (1997), the LTCM scandal (which was the loudest crash you never heard - 1998), then the Tech crash (2000-1) which was within the US but dismissed as a sectoral failing and the Argentine Collapse in 2002-3. Now, you have the crowning achievement of this financial era in the SubPrime debacle, which has only somewhat inexplicably, not yet turned into a crash.
Yet what we have now is somewhat different in another way as well. In the long history and story of financial episodes, you have many localized crashes in one market or another. In the short history of this kind of a technical, globalized financial system, you have never had a viral attack that started at the heart of the system. We have only had stress and blow-ups at its extremities, never the pervasive crunch at the absolute Center. Each time something like this has happened before, technocrats even more knowledgeable about such things than yours truly (hard to believe but there you have it) are dispatched from the corridors of Washington's own World Bank and IMF to solve the latest problem that those pesky foreign countries have gotten us into this time around. This time, there is no 'foreign' country at fault. The system rots from within its core. Wall Street has nobody else to blame, no sector, no country, no war, no crisis and not even Main Street (which continues to rack up both spending and debt). This time, it is the very business practice of selling off people's loans to others at the back end (technically called securitization) and the explosive addition of leverage to the mix (primarily in the form of derivatives) that are to blame. It is the very thing that has made Wall Street so successful in the past that is causing it such exacting problems today. Who can they send to fix those? Where will they get the required expertise when the expertise itself is questionable? More importantly, what will be the effect on the periphery or economic provinces that we now console ourselves by calling countries, if the capital itself is found to be on shaky ground? The acute crisis in food supply (see Blog) is one effect perhaps, but what will the others be?
At the moment of course, these are somewhat rhetorical questions. There is really nobody that can say how this will turn out in the end with any degree of planned accuracy. What I have tried to do is situate this particular episode historically, not be tastelessly triumphal in the face of peoples' hardship. I think that there is this difference this time around of rottenness even at the core; whether this small difference becomes amplified as further mistakes are made through the blunt instrument of interest rate policy is for the future to reveal. For us, while much of this is out of our hands and over our heads personally, it nevertheless bears some careful collective thought. I won't be trite and ask you to be careful out there, I am sure you are thinking the same thing if you haven't found a chink in this theory already (and no, the Tech bust does not count). As our friend Ms. Schneider would say, 'Sane Finance' anyone?
--------------
The Crescent Entrepreneurial Association (CEA) is hosting a business plan competition that I think many of you will enjoy attending. This is a volunteer organization that is helping the community get a better handle on its economic future. The exposure and insights gained at the competition will be quite priceless IA so if you have daughters, sons, younger nieces and nephews, cousins etc., try and bring them out to this event on the 31st of May. We at Ittihad are both fans and supporters of CEA and would like to see a large turnout. This wonderful organization will help the community build a critical mass of good, ethical businesses that will contribute to society IA. Please register here.
There is also a conference in NY that our Senior Management will be attending. Our CEO's topic of discussion will be 'Ethical Dimensions of Islamic Finance' and how Islamic Finance and Socially Responsible investing are two pieces of a beautiful solution to many of our financial ailments. It is time for the two movements to learn from each other and collaborate. For those who can make it to NY, it may be an excellent working holiday and an educational experience. Please register Here for your 15% discount.
We have been invited by TARIC mosque (near the 400/401) to present our views on Islamic Finance. This seminar will be held on the 21st of June at 7:00 pm. I encourage both brothers and sisters to attend. The interactive discussion will focus on the place that Islam does / does not and perhaps should have in both 'Islamic' Finance and also in our personal financial choices. This is a discussion that will IA take place outside the logic of a sales presentation so you can leave your cheque-book at home. Come with friends and come with difficult questions - hopefully, we will trade in good ideas that will profit our minds. I will be sending out a flyer shortly with directions and the program - I apologize in advance to all the readers outside Toronto who will no doubt be upset about receiving an invitation to an event halfway across the country or the world.
Finance News:
1. Is this the next crisis? Trouble in foreign exchange markets? ... read more here
2. Why is the TSX breaking record highs? Are you confident about this economy? Think about this question a bit ... read more here
3. Trading in Carbon credits takes off in a big way as US companies join the movement ... read more here
4. This is why mining stocks are so risky ... their hold over their mining claims is so tenuous (and borderline illegal pending judgement) that investing in them sometimes approaches pure speculation ... read more here
Economic News:
1. A Harvard Business School article on the future of state-led capitalism ... read more here
2. An FT report on the Economics of Food ... excellent follow-up to the last commentary ... read more here
3. An Economist Special Report on International Banking ... too funny sometimes ... read more here
Islamic / Middle East / Emerging Markets:
1. If you are new to financial economics and want to know in 5 minutes why 'interest' is considered wrong by so many people from so many different faiths and political views (Hat-tip to Siddiq Mohamed) ... read more here
2. This is what happens when Sovereign Wealth Funds invest on the way down. Yes, a whole lot of nothing. Nobody is disciplined, nobody is fired, it all taxpayer money after all and there is plenty more where that came from, except nobody in the ME pays tax and all this is Oil money ... read more here
3. Even China has it's own indigenous cars while we drive Gas-Guzzling Gizzards to and fro from work. Interview with Cherry's CEO ... read more here
4. How did Islamic Finance become a human interest story as opposed to a finance story? (Hat-tip to Imtiaz Ahmed) ... read more here
5. The race is on for investment in Africa. I do not know if you have ever travelled over the grasslands of the Rift Valley, but you better go soon. Before yet more plunder of a beautiful continent ... read more here
Interesting but not all Finance:
1. This article from MIT seeks to answer whether it pays for Companies to be ethical. Of course, I take severe issue with the way this question is framed. Ethics are hardly meant to be a cost to take into account when designing a product, but who in their right mind listens to me? ... Also, this article shows how it really is the fault of the consumer that companies are able to get away with so much ... read more here
2. Startling stats on which countries have the highest cultures of private philanthropy ... read more here
3. Who's to blame for the food crisis? ... read more here or here
Friday, May 23, 2008
Friday, May 9, 2008
Letters Edition #3 - Letter from Law Student interested in 'Sane Finance'
Quote of the week:
‘Now that China is such an engine of global growth, it urgently needs to improve its economic data. Only a madman would drive a juggernaut at full speed with a faulty speedometer, a cracked rear-view mirror and a misty windscreen.’ – The Economist
Of course, The Economist is never really wrong, just not totally right this time. Just add USA after China in the above quote and voila - you have the Global Economy encapsulated in a short, pithy quote that you can use at your next dinner party to impress your future spouse with your intimate knowledge of high finance. I say add the US because the Fed stopped reporting some money supply data some time ago that was too embarrassing. China, on the other hand, is never embarrassed; and there you have two sides of the same coin.
Also, the Ittihad Weekly is now also available as a Blog at: http://www.ittihadsecurities.blogspot.com/ . You can add your comments directly onto the website, but I would be most pleased if you continue to write directly to me as well. We must not allow technology make me obsolete just yet.
Letter of the Week (Commentary will be back next week for sure IA):
Letter No. 1:
Mr. Jawad:
I hope I am not wasting your time, but I would like to reply to the individual who sent you the letter.
I am not a Muslim, nor am I a Canadian; I am an American, with a Bachelor's degree in Accounting, working on a JD. The reason I point that out is that my professors in undergraduate studies constantly tried to tell us all, "Change your thinking. Debt is not bad. Debt is good; debt is necessary."
As a rational person, I found this reasoning uncomfortable, after all, what is debt but selling tomorrow to indulge today? But with a grain of salt, I accepted that this was the way my world worked.
I started talking to one of your employees, Siddiq, many years ago, and he patiently explained the concept of Islamic Finance, something completely alien to the financial education I had been indoctrinated into. I still don't understand everything, but I do know one thing: My professors lied to me, debt IS bad.
I can illustrate that with frightening certainty. I'm in an American law school as we speak and I watch the evils of debt there every day. The average American law student graduates with more than $50,000 in student loans on top of the debt Americans find necessary to survive. This debt changes the very pattern of the lawyer's reasoning. Many can't afford to work helping low income families, or work for the government prosecuting criminals or defending the innocent. Instead, they flock to giant corporate law firms or start businesses trying to bleed money out of the innocent through personal injury lawsuits. Lawyers have a terrible reputation for being immoral, social parasites. But the irony of it is, it's not the nature of the people in the profession causing this-- IT'S THE DEBT!
Thanks to my exposure to your company and its ideas, I'm completely atypical for a law student. I have no student loans at all, and I just finished paying off and cancelling my last credit card. I still have a mortgage, but it will be the next to go, as quickly as I can get out from under it. That gives me the freedom to pursue the law in a moral way, defending the innocent and standing up for what is right. To me, that is a far greater luxury than a bigger house or steak on the table.
I love your newsletter, and reading it is the high point of my week. You really shouldn't call it "Islamic Finance," you should call it "Sane Finance," because the way we do business in the western world really is insane. It's not about religious ideas, it's about logic. A good idea is a good idea no matter its source.
I love your witty, intelligent cynicism. To me it is a sign that you truly care about Islamic Finance because you care more about its future than its present reputation. I also love having something to read that challenges my mind, something that I find quite rare.
Keep up the good work, I'll be waiting for the next issue, and I'll put down everything to read it, even though I'm studying for finals.
J Schneider
---
Response to Letter No. 1:
Dear Ms. Schneider,
Hope you are well. I am beyond merely thankful for your exceedingly generous and insightful email. One hardly knows where to begin, so I guess the beginning will have to do. Your letter is not a waste of my time - it actually speaks to the very reason for why we are given time in this life at all. I found your letter both inspiring and humbling - your idea and expression of how the freedom to pursue a moral end in life is a luxury beyond mere wealth, is intensely powerful. I pray that we will be able to learn from your example and apply this philosophy in our own lives.
While I am humbled and turn to water with embarrassment that you find both enjoyment and value in the ideas that we try and discuss, I am consoled by the fact that I am quite undeserving of this praise. I truly think that most of the ideas I regurgitate in my admittedly cute fashion are actually timeless truths that have survived the onslaught of both religion (in the narrow sense of the word) and Logic (even at its most expansive). In this sense, my contribution is miniscule compared to my responsibilities as a ‘financial-type’. I think it is much more accurate to say that it is the inherent elegance of the subject matter we call Islamic Finance that forces itself upon our minds and hearts with such clarity. This is despite, not because of, my feeble attempts at being convincing. Since we are on the subject of praise however, it is much better to recognize the contributions of Siddiq, who introduced (re-introduced?) you to the subject, and the rest of the team here that actually tries to develop solutions while I provide comic relief. Above all though, credit is due to our shareholders, who had the foresight to put their hard-earned savings into our company when we were just an idea that carried no guarantee of monetary success. It is truly their vision and their ‘walking the walk’ that allows us the luxury to speak about these issues today. Their original investment of time and money allows us to strive for a moral life even while working in Finance, which is a gift for which no amount of thanks or credit is adequate repayment.
Nevertheless, since I am unable to leave things well enough alone, I would like to expand on your letter and nitpick just a wee bit. Your example of how debt works its way into the lives of young lawyers and thus affects the development of Law is indeed a frightening and eye-opening example of how debt take us away from what we really want to be doing with our lives. Indeed, if we were only to ask ourselves whether we go to work in order to fulfill our human potential or to pay the mortgage, the results would probably be shameful.
Also, your tongue-in-cheek suggestion that we should start calling this ‘Sane Finance’ (a term that I think you should copyright ASAP) is gratifying, but ultimately a bit problematic. One problem is that my sanity is in such obvious short supply that my calling this type of finance ‘Sane’ will undermine its credibility, not add to it. The second and main reason I insist on not allowing the concept of sanity to take over from Islam though, is that in my opinion, there is something deeper at work here than either logic or sanity. The idea that usury is not a healthy use of money is contentious depending on which system of logic is being used so this is an argument that is somewhat unwinnable with an appeal to pure logic. At the end of the day, it really is about values such as economic justice and I do not think that the removal of the term ‘Islam’ from the conversation would be fair on that score. The fact of the matter is that even though as Muslims we have been no better than our brothers and sisters from other faiths (for whom usury was also forbidden) in our involvement with conventional finance, ‘Islam’ as a body of knowledge or as a source of inspiration still has not compromised on the issue of usury. This point bears careful repeating: ‘Islam’, as one of the bodies of knowledge and law in the world still has not compromised on the unacceptability of usury and is therefore one of the last conceptual / religious or faith-based challenges to its widespread institutionalization. Many Muslims (and many value-less institutions) are sadly trying to get around the rules, but the rules are still there, plain for all to see. Removing the word ‘Islam’ from the discussion would be a disservice to a Faith that has brought us to this point. It would also do harm to our ability to connect with groups such as the Christian Council for Monetary Justice on the basis of Faith. Also, even though Islam is an Abrahamic faith that is sort of taking a stand on this crucial issue, the fact is that this stand is somewhat tenuous these days. This should encourage us to keep both sanity and Islam within Islamic Finance, not disavow Islam as one of the most proximate sources of our moral logic. Finally, please rest assured that I do not say any of this with a sense of superiority or self-congratulation, but rather with a sense of tragedy. The road is long and in the grand scheme of things, we have only just begun to understand how our present debt-based system sells out all our tomorrows. I only wish that we were better at fulfilling the potential of economic justice that is plainly there in our faiths, not in a narrow, exclusionary sense, but as good people, for all people; regardless of source, as you say.
I thank you once again for your thoughtful, insightful and exceedingly generous letter and wish you the very best in a long, meaningful career that God-willing will remain unsullied by the ravages of both debt and compromise. I also wish you the best of success in your finals. Your letter and success with your debt situation inspires me personally and I know will resonate with and inspire other readers as well. Perhaps through such dialogue, we can all learn to make the connection between our astronomically high levels of debt and our equally unforgivable failure at fulfilling our responsibilities to one another and the Divine.
--------------
MAP Canada is hosting an event for young businesses on the 10th of May (tomorrow). Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that many of you will attend. My contribution to the festivities are supposed to address the question of ‘How to Raise Capital for Your Business’, so you know there will be some fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served. Please register here
There is also a conference in NY that our Senior Management will be attending. Our CEO’s topic of discussion will be on the ‘Ethical Dimensions of Islamic Finance’ and how the one cannot and should not be divorced from the other with ease. The One being Ethics and the other being Islamic Finance, which in better times were explicitly known to be irrevocably connected. For those who can make it to NY, it may be an excellent working holiday and an educational experience. Please Register Here for your 15% discount.
Finance News:
1. The ROB collects some of the best financial blogs in one convenient place ... read more here
2. UBS declares yet another $10+B loss and cuts 5,500 jobs ... I wonder if all the Aunties that proudly tell me ‘My son is a banker!’ and ask me ‘why don’t you work for a bank?’ are quivering in their sandals at the thought of banking becoming less than fashionable ... read more here
3. The Economist makes a case for caution when thinking of investing green ... a very interesting (and short) read ... read more here
4. Best argument yet for letting women run the family finances ... research shows that is much more difficult to defraud women than it is to defraud men. Men, it seems, always getting caught up in the heat of the moment and investing / losing money based on emotions ... read more here
Economic News:
1. Rob Carrick wakes up and sees inflation ahead ... the timing of his columns would be comical if it wasn’t so tragic ... read more here
2. The Chairman of the FED has a plain-speaking style, but he seems to be making a career out of stating the obvious ... he thinks home foreclosures would hurt the economy, you think? ... read more here
3. It is not usual for the Ittihad Weekly Briefing to be ahead of The Economist but I think we managed it by two weeks this time on the subject of commodity prices and the falling dollar. Nevertheless, this is yet another excellent article from the good folks at my favourite source of economic analysis. It is just too bad that their political leanings are so totally messed up ... read more here
Islamic / Middle East / Emerging Markets:
1. This hardly made the news, but that is because in North America, we are fascinated by North America. A Bahraini fund investing in Eastern Europe? Does that mean Eastern Europe has peaked? ... read more here
Interesting but not all Finance:
1. What! Such a strong link between Finance and Warfare?! ... Including juicy news about the US political system? - and here we thought financial decisions were all politically-neutral, or was it that all political decisions were financially neutral? ... read more here
2. Albertan Oil Sand companies on trial for environmental damage ; a case that has riled up the public after the recent death of over 500 ducks as they landed on an open toxic pond. Perhaps one of you can find some meaning in the fact that China is having a similar problem at what was once one of its most beautiful lakes .
3. Wondering what our best and brightest political minds think about on Parliament Hill? No, not the economy. No, not the various wars we are involved in. No, not the First Nations colonial situation. No, not even the lack of a coherent trade policy with the BRIC countries. Think of something to do with toilets and plumbing .
4. One of the best short articles on communication I have ever read ... lays out core principles of communication (defined as the delivery and the receipt of the intended message) for those in business, but can be adapted for other circumstances ... read more here
‘Now that China is such an engine of global growth, it urgently needs to improve its economic data. Only a madman would drive a juggernaut at full speed with a faulty speedometer, a cracked rear-view mirror and a misty windscreen.’ – The Economist
Of course, The Economist is never really wrong, just not totally right this time. Just add USA after China in the above quote and voila - you have the Global Economy encapsulated in a short, pithy quote that you can use at your next dinner party to impress your future spouse with your intimate knowledge of high finance. I say add the US because the Fed stopped reporting some money supply data some time ago that was too embarrassing. China, on the other hand, is never embarrassed; and there you have two sides of the same coin.
Also, the Ittihad Weekly is now also available as a Blog at: http://www.ittihadsecurities.blogspot.com/ . You can add your comments directly onto the website, but I would be most pleased if you continue to write directly to me as well. We must not allow technology make me obsolete just yet.
Letter of the Week (Commentary will be back next week for sure IA):
Letter No. 1:
Mr. Jawad:
I hope I am not wasting your time, but I would like to reply to the individual who sent you the letter.
I am not a Muslim, nor am I a Canadian; I am an American, with a Bachelor's degree in Accounting, working on a JD. The reason I point that out is that my professors in undergraduate studies constantly tried to tell us all, "Change your thinking. Debt is not bad. Debt is good; debt is necessary."
As a rational person, I found this reasoning uncomfortable, after all, what is debt but selling tomorrow to indulge today? But with a grain of salt, I accepted that this was the way my world worked.
I started talking to one of your employees, Siddiq, many years ago, and he patiently explained the concept of Islamic Finance, something completely alien to the financial education I had been indoctrinated into. I still don't understand everything, but I do know one thing: My professors lied to me, debt IS bad.
I can illustrate that with frightening certainty. I'm in an American law school as we speak and I watch the evils of debt there every day. The average American law student graduates with more than $50,000 in student loans on top of the debt Americans find necessary to survive. This debt changes the very pattern of the lawyer's reasoning. Many can't afford to work helping low income families, or work for the government prosecuting criminals or defending the innocent. Instead, they flock to giant corporate law firms or start businesses trying to bleed money out of the innocent through personal injury lawsuits. Lawyers have a terrible reputation for being immoral, social parasites. But the irony of it is, it's not the nature of the people in the profession causing this-- IT'S THE DEBT!
Thanks to my exposure to your company and its ideas, I'm completely atypical for a law student. I have no student loans at all, and I just finished paying off and cancelling my last credit card. I still have a mortgage, but it will be the next to go, as quickly as I can get out from under it. That gives me the freedom to pursue the law in a moral way, defending the innocent and standing up for what is right. To me, that is a far greater luxury than a bigger house or steak on the table.
I love your newsletter, and reading it is the high point of my week. You really shouldn't call it "Islamic Finance," you should call it "Sane Finance," because the way we do business in the western world really is insane. It's not about religious ideas, it's about logic. A good idea is a good idea no matter its source.
I love your witty, intelligent cynicism. To me it is a sign that you truly care about Islamic Finance because you care more about its future than its present reputation. I also love having something to read that challenges my mind, something that I find quite rare.
Keep up the good work, I'll be waiting for the next issue, and I'll put down everything to read it, even though I'm studying for finals.
J Schneider
---
Response to Letter No. 1:
Dear Ms. Schneider,
Hope you are well. I am beyond merely thankful for your exceedingly generous and insightful email. One hardly knows where to begin, so I guess the beginning will have to do. Your letter is not a waste of my time - it actually speaks to the very reason for why we are given time in this life at all. I found your letter both inspiring and humbling - your idea and expression of how the freedom to pursue a moral end in life is a luxury beyond mere wealth, is intensely powerful. I pray that we will be able to learn from your example and apply this philosophy in our own lives.
While I am humbled and turn to water with embarrassment that you find both enjoyment and value in the ideas that we try and discuss, I am consoled by the fact that I am quite undeserving of this praise. I truly think that most of the ideas I regurgitate in my admittedly cute fashion are actually timeless truths that have survived the onslaught of both religion (in the narrow sense of the word) and Logic (even at its most expansive). In this sense, my contribution is miniscule compared to my responsibilities as a ‘financial-type’. I think it is much more accurate to say that it is the inherent elegance of the subject matter we call Islamic Finance that forces itself upon our minds and hearts with such clarity. This is despite, not because of, my feeble attempts at being convincing. Since we are on the subject of praise however, it is much better to recognize the contributions of Siddiq, who introduced (re-introduced?) you to the subject, and the rest of the team here that actually tries to develop solutions while I provide comic relief. Above all though, credit is due to our shareholders, who had the foresight to put their hard-earned savings into our company when we were just an idea that carried no guarantee of monetary success. It is truly their vision and their ‘walking the walk’ that allows us the luxury to speak about these issues today. Their original investment of time and money allows us to strive for a moral life even while working in Finance, which is a gift for which no amount of thanks or credit is adequate repayment.
Nevertheless, since I am unable to leave things well enough alone, I would like to expand on your letter and nitpick just a wee bit. Your example of how debt works its way into the lives of young lawyers and thus affects the development of Law is indeed a frightening and eye-opening example of how debt take us away from what we really want to be doing with our lives. Indeed, if we were only to ask ourselves whether we go to work in order to fulfill our human potential or to pay the mortgage, the results would probably be shameful.
Also, your tongue-in-cheek suggestion that we should start calling this ‘Sane Finance’ (a term that I think you should copyright ASAP) is gratifying, but ultimately a bit problematic. One problem is that my sanity is in such obvious short supply that my calling this type of finance ‘Sane’ will undermine its credibility, not add to it. The second and main reason I insist on not allowing the concept of sanity to take over from Islam though, is that in my opinion, there is something deeper at work here than either logic or sanity. The idea that usury is not a healthy use of money is contentious depending on which system of logic is being used so this is an argument that is somewhat unwinnable with an appeal to pure logic. At the end of the day, it really is about values such as economic justice and I do not think that the removal of the term ‘Islam’ from the conversation would be fair on that score. The fact of the matter is that even though as Muslims we have been no better than our brothers and sisters from other faiths (for whom usury was also forbidden) in our involvement with conventional finance, ‘Islam’ as a body of knowledge or as a source of inspiration still has not compromised on the issue of usury. This point bears careful repeating: ‘Islam’, as one of the bodies of knowledge and law in the world still has not compromised on the unacceptability of usury and is therefore one of the last conceptual / religious or faith-based challenges to its widespread institutionalization. Many Muslims (and many value-less institutions) are sadly trying to get around the rules, but the rules are still there, plain for all to see. Removing the word ‘Islam’ from the discussion would be a disservice to a Faith that has brought us to this point. It would also do harm to our ability to connect with groups such as the Christian Council for Monetary Justice on the basis of Faith. Also, even though Islam is an Abrahamic faith that is sort of taking a stand on this crucial issue, the fact is that this stand is somewhat tenuous these days. This should encourage us to keep both sanity and Islam within Islamic Finance, not disavow Islam as one of the most proximate sources of our moral logic. Finally, please rest assured that I do not say any of this with a sense of superiority or self-congratulation, but rather with a sense of tragedy. The road is long and in the grand scheme of things, we have only just begun to understand how our present debt-based system sells out all our tomorrows. I only wish that we were better at fulfilling the potential of economic justice that is plainly there in our faiths, not in a narrow, exclusionary sense, but as good people, for all people; regardless of source, as you say.
I thank you once again for your thoughtful, insightful and exceedingly generous letter and wish you the very best in a long, meaningful career that God-willing will remain unsullied by the ravages of both debt and compromise. I also wish you the best of success in your finals. Your letter and success with your debt situation inspires me personally and I know will resonate with and inspire other readers as well. Perhaps through such dialogue, we can all learn to make the connection between our astronomically high levels of debt and our equally unforgivable failure at fulfilling our responsibilities to one another and the Divine.
--------------
MAP Canada is hosting an event for young businesses on the 10th of May (tomorrow). Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that many of you will attend. My contribution to the festivities are supposed to address the question of ‘How to Raise Capital for Your Business’, so you know there will be some fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served. Please register here
There is also a conference in NY that our Senior Management will be attending. Our CEO’s topic of discussion will be on the ‘Ethical Dimensions of Islamic Finance’ and how the one cannot and should not be divorced from the other with ease. The One being Ethics and the other being Islamic Finance, which in better times were explicitly known to be irrevocably connected. For those who can make it to NY, it may be an excellent working holiday and an educational experience. Please Register Here for your 15% discount.
Finance News:
1. The ROB collects some of the best financial blogs in one convenient place ... read more here
2. UBS declares yet another $10+B loss and cuts 5,500 jobs ... I wonder if all the Aunties that proudly tell me ‘My son is a banker!’ and ask me ‘why don’t you work for a bank?’ are quivering in their sandals at the thought of banking becoming less than fashionable ... read more here
3. The Economist makes a case for caution when thinking of investing green ... a very interesting (and short) read ... read more here
4. Best argument yet for letting women run the family finances ... research shows that is much more difficult to defraud women than it is to defraud men. Men, it seems, always getting caught up in the heat of the moment and investing / losing money based on emotions ... read more here
Economic News:
1. Rob Carrick wakes up and sees inflation ahead ... the timing of his columns would be comical if it wasn’t so tragic ... read more here
2. The Chairman of the FED has a plain-speaking style, but he seems to be making a career out of stating the obvious ... he thinks home foreclosures would hurt the economy, you think? ... read more here
3. It is not usual for the Ittihad Weekly Briefing to be ahead of The Economist but I think we managed it by two weeks this time on the subject of commodity prices and the falling dollar. Nevertheless, this is yet another excellent article from the good folks at my favourite source of economic analysis. It is just too bad that their political leanings are so totally messed up ... read more here
Islamic / Middle East / Emerging Markets:
1. This hardly made the news, but that is because in North America, we are fascinated by North America. A Bahraini fund investing in Eastern Europe? Does that mean Eastern Europe has peaked? ... read more here
Interesting but not all Finance:
1. What! Such a strong link between Finance and Warfare?! ... Including juicy news about the US political system? - and here we thought financial decisions were all politically-neutral, or was it that all political decisions were financially neutral? ... read more here
2. Albertan Oil Sand companies on trial for environmental damage ; a case that has riled up the public after the recent death of over 500 ducks as they landed on an open toxic pond. Perhaps one of you can find some meaning in the fact that China is having a similar problem at what was once one of its most beautiful lakes .
3. Wondering what our best and brightest political minds think about on Parliament Hill? No, not the economy. No, not the various wars we are involved in. No, not the First Nations colonial situation. No, not even the lack of a coherent trade policy with the BRIC countries. Think of something to do with toilets and plumbing .
4. One of the best short articles on communication I have ever read ... lays out core principles of communication (defined as the delivery and the receipt of the intended message) for those in business, but can be adapted for other circumstances ... read more here
Tuesday, May 6, 2008
Letters Edition #2
Quote of the week:
'The critic has to educate the public. The artist has to educate the critic.' - Oscar Wilde
Alas, I have been accused below of being a mere critic. I received a letter from someone at a company that that has an Islamic Finance 'window' in addition to their regular business. The person takes exception to the irreverent way in which I seem to be discussing 'Islamic Finance' and the companies that are trying to inhabit this space in Canada. Although our two companies are not competitors (who could possibly compete with us, or them for that matter?), we cohabit this contentious space. I have included both the letter in question and my inevitable response below. Don't worry, it has passed our PG-13 screen.
Letters Edition (Commentary will be back next week):
Letter No. 1:
Brothers salams... I am very saddened to see your firms on-going critical and cynical outlook on the current state of Islamic Finance. It would be prudent for you to tone it down a bit and perhaps highlight articles like the one below that does not make a mockery of our deen. With idots (sic) like the MCC criticizing Islamic Finance we don't need Ittihad being perceived as joining such ranks... Please forgive me if I have hurt your feelings but I am getting very very fed up with this on-going unnecessary distribution of e-mails and rumors in the community. Especially given the fact that I heard first hand from a Bay Street broker of a large Institution that your staff is concerned about some details on our prospectus. We need to work together as a Ummaah and NOT be perceived as divided especially amongst the non-Muslims professionals. This is very sad indeed and makes us look really really foolish as a Umaah that was suppose to be together as a brotherhood and not be indulging in such blatent Back-biting. IF we have issues with our respective businessess we should make a first effort to content each other before disseminating information to 3rd parties.p.s. Article: 'Islamic finance could have prevented subprime crisis' by Amy Glass on Thursday, 24 April 2008 read more here
---
Response to Letter No. 1:
Thank you for your email. Your letter was the best I have received in many months and I look forward to much more of such praise couched within the facade of criticism. Our super-genius readership will no doubt read between the lines and see your all-too-apparent awe of our policy to be transparent and open about things that many others would rather gloss over or sweep under the rug. In order that no professional harm comes to your career, I have removed your name and that of your company. I trust that this will be acceptable to you.
Your letter, article link and 'need' to be happy raises several existential issues for us, which I will discuss below. I must, however, clarify that the newsletter (inasmuch as it is the source of your beef) is my personal production. I am of course, blessed to be at a firm that allows me to engage readers in this way, but you should know that Ittihad Policy may or may not be the same as mine, depending on the issue and circumstances. There is actually a very cute disclaimer at the end of all IWB issues that says this in the required legalese.
Although I am honoured at all your underlying praise of our company, I will take you up on your offer to respond to some surface criticisms first.
Just a few points for you to consider:
1. As Ittihad exists as a local firm without ties to established multinationals or foreign parties, it is in our nature to cause both sadness and happiness to people. There are people we are committed to making happy and then some people about whose happiness we are unfortunately not mandated to worry as much. I know this might come as a bit of a surprise since you are in the financial industry yourself, but Ittihad actually exists to make it's shareholders / directors / clients / investors & regulators happy, not the 'Islamic Finance' industry. It would be difficult at this point for us to re-jig the structure of the firm and our mandate to include your happiness as our goal, but I will do the needful and try and get this onto the Board's agenda. As we Muslims say - InshAllah (God-willing).
2. I assure you that Ittihad is neither cynical nor critical of Islamic Finance. We are blessed to be able to work in the field on our own terms and are fully seized of the great responsibility on our shoulders when we use the words Islam and Finance in the same phrase. Personally, I am at a loss to understand why you would think me 'cynical' and 'critical' - I will stubbornly console myself with the thought that you perhaps meant to say 'thoughtful' and 'astute'. Reading between the lines of your letter confirms my view.
3. With regard to your reference to being 'prudent', I do not understand how can it be 'prudent' to accept wholesale and unthinkingly what the conventional system labels as Islamic? In my opinion, that is called 'Foolishness' at best and 'Hypocrisy' at its worst. Also, it is not a small, humble newsletter that few Muslims read that makes a mockery of our religion but rather the injudicious and gratuitous use of Islam as a marketing gimmick and advertising tool. Just calling ourselves 'Islamic' does not remove the onus from us to actually be Islamic, it is meant to be the other way around. Let us agree then, to disagree on who does more damage to Islamic Finance.
4. I did not know that the MCC (Melbourne Cricket Club??) had uncharitable views on Islamic Finance, but I assure you that ours are our own. Canada is Alhamdullillah (Praise be to God), a free country and we both love and celebrate the free exchange of debate and ideas.
5. As you no doubt know already, a prospectus is a public document mandated by the Ontario Securities Commission. If yours is embarrassing or was meant to be secret, perhaps it should be renamed or withdrawn from the public record. I see no reason why two people should not be able to discuss a public document candidly, especially as our concerns have been brought up in person with members of your Shariah Board and yourself already.
6. The article that you have sent us is insipidly named but does indeed merit a read. It ends by saying '... (Islamic) banks only look to maximize their profits. They know that there is no real difference between conventional banks and Islamic Finance'. I did not get a clear picture of your views on this, but is this practice not making a mockery of Islam? Furthermore, it is not at all true and quite besides the point that what passes for 'Islamic' Finance these days 'could have prevented SubPrime'. The whole point of Islamic Finance is that subprime issues would not even arise. I am sure that this crucial distinction will not escape you as you read more of the Ittihad Weekly with an open mind.
I hope that I have not hurt your feelings, but like you, I am also getting fed-up with businesses whose purpose seems to be getting as much Muslim money under their belts as possible, using any and all means necessary. Furthermore, I am beyond fed-up with this tiptoe-ing around the problematic issues within Islamic Finance in the interests of a false consensus that large companies want to dictate. If this is what Islamic Finance is, then I want no part of it. Please feel free to use your position in the industry to have me excommunicated.
Finally, I wish you great success in uniting the 'Ummah' and keeping it from looking foolish. I am sure that the various tricks 'Islamic' Finance professionals devise to profit from 'interest' makes Muslims look like geniuses instead. Thank you for writing.
--------------
MAP Canada is hosting an event for young businesses on the 10th of May. Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that many of you will attend. My contribution to the festivities are supposed to address the question of 'How to Raise Capital for Your Business', so you know there will be some fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served. Please register here
There is also a conference in NY that our Senior Management will be attending. Our CEO's topic of discussion will be on the 'Ethical Dimensions of Islamic Finance' and how the one cannot and should not be divorced from the other with ease. The One being Ethics and the other being Islamic Finance, which in better times were explicitly known to be irrevocably connected. For those who can make it to NY, it may be an excellent working holiday and an educational experience. Please Register Here for your 15% discount.
Finance News:
1. Good article (too short though) on what young people starting out in life absolutely must know about their finances ... read more here
2. Who says that the financial sector learns from its mistakes? These are the same hedge fund people that caused the Multi-Billion loss when they were at Long Term Capital Management in the late 1990's ... read more here
Economic News:
1. Following up last week's commentary ... the environmental impact of food transportation ... read more here
2. North American Food Processing companies are having a field day. High profits, high share prices, lots of hungry people, what more can we ask for? ... read more here
3. Is Canada Recession-Proof? ... read more here
4. I can't believe at the sheer gall of this plan. The new BOC Governor wants taxpayers to allow him to buy all sorts of non-performing investments on their behalf in order to relieve pain for the private sector ... read about it, think about it, call your MP and 'Just Say No' ... read more here
5. This is how recessions start ... with the closing of retail stores ... read more here
Islamic / Middle East / Emerging Markets:
1. A primarily Canadian (but not exclusively so) company on how to make it big in Islamic Finance ... read more here
Interesting but not Finance:
1. Issues with wind energy? Say it ain't so ... read more here
2. The price of Oil is $120 a barrel, but what is the price of water? ... read more here
'The critic has to educate the public. The artist has to educate the critic.' - Oscar Wilde
Alas, I have been accused below of being a mere critic. I received a letter from someone at a company that that has an Islamic Finance 'window' in addition to their regular business. The person takes exception to the irreverent way in which I seem to be discussing 'Islamic Finance' and the companies that are trying to inhabit this space in Canada. Although our two companies are not competitors (who could possibly compete with us, or them for that matter?), we cohabit this contentious space. I have included both the letter in question and my inevitable response below. Don't worry, it has passed our PG-13 screen.
Letters Edition (Commentary will be back next week):
Letter No. 1:
Brothers salams... I am very saddened to see your firms on-going critical and cynical outlook on the current state of Islamic Finance. It would be prudent for you to tone it down a bit and perhaps highlight articles like the one below that does not make a mockery of our deen. With idots (sic) like the MCC criticizing Islamic Finance we don't need Ittihad being perceived as joining such ranks... Please forgive me if I have hurt your feelings but I am getting very very fed up with this on-going unnecessary distribution of e-mails and rumors in the community. Especially given the fact that I heard first hand from a Bay Street broker of a large Institution that your staff is concerned about some details on our prospectus. We need to work together as a Ummaah and NOT be perceived as divided especially amongst the non-Muslims professionals. This is very sad indeed and makes us look really really foolish as a Umaah that was suppose to be together as a brotherhood and not be indulging in such blatent Back-biting. IF we have issues with our respective businessess we should make a first effort to content each other before disseminating information to 3rd parties.p.s. Article: 'Islamic finance could have prevented subprime crisis' by Amy Glass on Thursday, 24 April 2008 read more here
---
Response to Letter No. 1:
Thank you for your email. Your letter was the best I have received in many months and I look forward to much more of such praise couched within the facade of criticism. Our super-genius readership will no doubt read between the lines and see your all-too-apparent awe of our policy to be transparent and open about things that many others would rather gloss over or sweep under the rug. In order that no professional harm comes to your career, I have removed your name and that of your company. I trust that this will be acceptable to you.
Your letter, article link and 'need' to be happy raises several existential issues for us, which I will discuss below. I must, however, clarify that the newsletter (inasmuch as it is the source of your beef) is my personal production. I am of course, blessed to be at a firm that allows me to engage readers in this way, but you should know that Ittihad Policy may or may not be the same as mine, depending on the issue and circumstances. There is actually a very cute disclaimer at the end of all IWB issues that says this in the required legalese.
Although I am honoured at all your underlying praise of our company, I will take you up on your offer to respond to some surface criticisms first.
Just a few points for you to consider:
1. As Ittihad exists as a local firm without ties to established multinationals or foreign parties, it is in our nature to cause both sadness and happiness to people. There are people we are committed to making happy and then some people about whose happiness we are unfortunately not mandated to worry as much. I know this might come as a bit of a surprise since you are in the financial industry yourself, but Ittihad actually exists to make it's shareholders / directors / clients / investors & regulators happy, not the 'Islamic Finance' industry. It would be difficult at this point for us to re-jig the structure of the firm and our mandate to include your happiness as our goal, but I will do the needful and try and get this onto the Board's agenda. As we Muslims say - InshAllah (God-willing).
2. I assure you that Ittihad is neither cynical nor critical of Islamic Finance. We are blessed to be able to work in the field on our own terms and are fully seized of the great responsibility on our shoulders when we use the words Islam and Finance in the same phrase. Personally, I am at a loss to understand why you would think me 'cynical' and 'critical' - I will stubbornly console myself with the thought that you perhaps meant to say 'thoughtful' and 'astute'. Reading between the lines of your letter confirms my view.
3. With regard to your reference to being 'prudent', I do not understand how can it be 'prudent' to accept wholesale and unthinkingly what the conventional system labels as Islamic? In my opinion, that is called 'Foolishness' at best and 'Hypocrisy' at its worst. Also, it is not a small, humble newsletter that few Muslims read that makes a mockery of our religion but rather the injudicious and gratuitous use of Islam as a marketing gimmick and advertising tool. Just calling ourselves 'Islamic' does not remove the onus from us to actually be Islamic, it is meant to be the other way around. Let us agree then, to disagree on who does more damage to Islamic Finance.
4. I did not know that the MCC (Melbourne Cricket Club??) had uncharitable views on Islamic Finance, but I assure you that ours are our own. Canada is Alhamdullillah (Praise be to God), a free country and we both love and celebrate the free exchange of debate and ideas.
5. As you no doubt know already, a prospectus is a public document mandated by the Ontario Securities Commission. If yours is embarrassing or was meant to be secret, perhaps it should be renamed or withdrawn from the public record. I see no reason why two people should not be able to discuss a public document candidly, especially as our concerns have been brought up in person with members of your Shariah Board and yourself already.
6. The article that you have sent us is insipidly named but does indeed merit a read. It ends by saying '... (Islamic) banks only look to maximize their profits. They know that there is no real difference between conventional banks and Islamic Finance'. I did not get a clear picture of your views on this, but is this practice not making a mockery of Islam? Furthermore, it is not at all true and quite besides the point that what passes for 'Islamic' Finance these days 'could have prevented SubPrime'. The whole point of Islamic Finance is that subprime issues would not even arise. I am sure that this crucial distinction will not escape you as you read more of the Ittihad Weekly with an open mind.
I hope that I have not hurt your feelings, but like you, I am also getting fed-up with businesses whose purpose seems to be getting as much Muslim money under their belts as possible, using any and all means necessary. Furthermore, I am beyond fed-up with this tiptoe-ing around the problematic issues within Islamic Finance in the interests of a false consensus that large companies want to dictate. If this is what Islamic Finance is, then I want no part of it. Please feel free to use your position in the industry to have me excommunicated.
Finally, I wish you great success in uniting the 'Ummah' and keeping it from looking foolish. I am sure that the various tricks 'Islamic' Finance professionals devise to profit from 'interest' makes Muslims look like geniuses instead. Thank you for writing.
--------------
MAP Canada is hosting an event for young businesses on the 10th of May. Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that many of you will attend. My contribution to the festivities are supposed to address the question of 'How to Raise Capital for Your Business', so you know there will be some fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served. Please register here
There is also a conference in NY that our Senior Management will be attending. Our CEO's topic of discussion will be on the 'Ethical Dimensions of Islamic Finance' and how the one cannot and should not be divorced from the other with ease. The One being Ethics and the other being Islamic Finance, which in better times were explicitly known to be irrevocably connected. For those who can make it to NY, it may be an excellent working holiday and an educational experience. Please Register Here for your 15% discount.
Finance News:
1. Good article (too short though) on what young people starting out in life absolutely must know about their finances ... read more here
2. Who says that the financial sector learns from its mistakes? These are the same hedge fund people that caused the Multi-Billion loss when they were at Long Term Capital Management in the late 1990's ... read more here
Economic News:
1. Following up last week's commentary ... the environmental impact of food transportation ... read more here
2. North American Food Processing companies are having a field day. High profits, high share prices, lots of hungry people, what more can we ask for? ... read more here
3. Is Canada Recession-Proof? ... read more here
4. I can't believe at the sheer gall of this plan. The new BOC Governor wants taxpayers to allow him to buy all sorts of non-performing investments on their behalf in order to relieve pain for the private sector ... read about it, think about it, call your MP and 'Just Say No' ... read more here
5. This is how recessions start ... with the closing of retail stores ... read more here
Islamic / Middle East / Emerging Markets:
1. A primarily Canadian (but not exclusively so) company on how to make it big in Islamic Finance ... read more here
Interesting but not Finance:
1. Issues with wind energy? Say it ain't so ... read more here
2. The price of Oil is $120 a barrel, but what is the price of water? ... read more here
Economic Complexity and the Price of Food
Quotes of the week:
"The biggest question is whether the sovereign-wealth funds, some of which rushed prematurely into the distress market last year and are now treading more carefully, will now stay out, when arguably they should be returning to it. Some of their investments last year in private-equity firms, such as Blackstone and Wall Street banks, have since plunged in value." -
The Economist opines on the timing of Middle Eastern investments in the US.
To what would you ascribe such faulty Middle Eastern decision-making? Bad luck or consistently bad advice? You decide ...
Commentary for the Week:
Economic Complexity and the Price of Food:
Today's commentary is going to be a bit more ambitious than usual. While there is a profusion of many crises in the financial sector on the one hand and nascent trouble in the real economy of foodstuffs and commodities etc. on the other, it is really the connections between the two that should be of interest to us at the moment. If you read some of last week's links, you would have noticed that there seems to be a food shortage in many places of the world. This is reflected in both the quantity of food such as rice available and the price that is being charged (Economists among us will want to collapse these two measures into one, but allow me the latitude to separate the two for a minute - I will reconcile the two below). Similarly, on the financial sector side, lenders and investment banks are in some serious trouble and Central Banks are slashing interest rates and encouraging cheaper loans on their respective populations. So, are these two phenomena connected? If they are, how are they connected and what does all this mean for us? Is this really one problem masquerading as many?
One way to make sense of this is to look at the financial sector first. There is a severe overhang of non-performing investments and confidence has been severely shaken with the failure (or dressed up buyout for the technically minded) of Bear Stearns, the loss provisions of Countrywide, the failure and subsequent nationalization of Northern Rock in Britain, the severe multi-ten Billion losses at Citibank, SocGen, UBS and now RBS. Add to this the fact that the largest insurers in the world such as AIG have declared (too quietly for my liking) historic losses even though Insurance is supposed to be and was always a cash-cow business and you begin to see what is happening. The absolute last thing that the authorities want is for people to begin to worry about their investments (Retirement Savings, 401k's etc.) and begin to call their broker's and advisors to start pulling some cash out. The cascade effects of such actions are too terrible to contemplate. That is why Central Banks have been feverishly providing credit to any bank that asks and new rules are being put in place to provide credit to investment banks as well (Canada is a bit 'ahead' of the game here because here the banks are everything rolled into one and such pedestrian distinctions are unnecessary). This printing of money and provision of loans is having some of its intended effects. The investing public's confidence has not been shaken, stirred perhaps, but not shaken. The fund managers / hedge funds and private equity firms have an open line of credit at easy rates so they are continuing to buy stocks. In this sense, the declining stock market trend is being managed quite well, with no spectacular collapses on a daily / weekly basis.
Nevertheless, the law of unintended consequences must have its pound of flesh as well. While the stock markets are staying afloat in a way that does not display much of the bad news, the bad news is showing up at the grocery store. The problem is that the places where these financial crises are taking place are printing money like there's no tomorrow (primarily the US). The places where these financial crises are not present (primarily Brazil, China, India etc. ) hold lots of US$'s already. As they try and exchange those dollars for actual resources that their growing middle classes now demand, both the value of the dollar and the price of real stuff is affected. There is excess paper money and there is a shortage of real stuff such as metals / foods and energy. Both trends reinforce each other, creating an inflationary cycle the likes of which most people only read about in history books but never pause to witness personally.
Of course, this is not the whole picture at all. Even within the economy of real assets and products such as food, there is an internal dynamic that we have to keep in mind. The sheer technical complexity of our economies and economic growth strategies is such that we are voracious consumers of energy. We use it not only to power our homes and washing machines but also to grow the food that we eat. If farming were fashion, mechanized and high-input, high fertilizer methods would be the new black. We have simply stopped using natural seeds and native species of foods. Over 90% of the world now grows maybe 7-8 different staple foods that absolutely require high energy inputs. With the collapse of the US$ against the price of energy (Oil barrels), food production has not only suffered in absolute quantity terms (why produce food when you can produce biodiesel?), but also in monetary measures such as food affordability (Economists - please notice the reconciliation). Fertilizer prices and food transportation charges have simply overwhelmed many small producers in many parts of the world where they remain unable to receive the kinds of agricultural subsidies as farmers and food companies find available in the G-8. Many have simply been driven out of not just the business, but also the process of producing food.
So getting back to the question about the connections between the food and financial crises then - do you remember that our grandmothers would explain to us how their previous generations had no real cash but that good food was abundant. Look how far we have come as a species, we are rich beyond our wildest dreams, but have substituted paper for food, and Oil for water. We are unable to feed the planet unless the financial system works and the oil rigs keep pumping. Sometimes one must pause and think deeply about this my friends, isn't there a real cost to our many mortgages, credit cards and leveraged investments that cannot be captured or explained away by conventional cost measures such as the 'Prime Rate'?
____
MAP Canada is hosting an event for young businesses on the 10th of May. Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that many of you will attend. My contribution to the festivities are supposed to address the question of 'How to Raise Capital for Your Business', so you know there will be some fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served. Please register here
Finance News:
1. RBS - (Isn't this the bank that just bought ABN AMRO for $100B last year?) wants to raise $24B through a share offering. As Citibank comes out with bad news each quarter, RBS realizes that this is another arena in which to compete and comes out with really bad news ... read more here
Economic News:
1. After the credit crunch, comes the 'cereal crunch' (not my phrase, but genius nevertheless) ... read more here
2. Solar Power is coming to Ontario in a big (well, not too big) way ... read more here
3. Home sales in the US fall 2% in March ... read more here
4. The property market in Spain falters as well ... read more here
Islamic / Middle East / Emerging Markets:
1. Do you know if you are invested in a company that has helped create this problem in Afghanistan? ... If you don't know, isn't it time to ask yourself why not? ... read more here
2. Islamic Finance sector in 'danger'? ... Personally, I think we are beyond danger. The traffic on the highway with which IF is merging will swallow us whole ... read more here
3. How the Gulf States are spending their wealth this time around (the last time they were this wealthy was in the oil embargo days of the seventies) ... read more here
Interesting but not Finance:
1. I won't say much about this story except that it has to do with the key to the Kaaba ... read more here
2. The economics of the federal government's despicable policy on the seal hunt ... read more here
"The biggest question is whether the sovereign-wealth funds, some of which rushed prematurely into the distress market last year and are now treading more carefully, will now stay out, when arguably they should be returning to it. Some of their investments last year in private-equity firms, such as Blackstone and Wall Street banks, have since plunged in value." -
The Economist opines on the timing of Middle Eastern investments in the US.
To what would you ascribe such faulty Middle Eastern decision-making? Bad luck or consistently bad advice? You decide ...
Commentary for the Week:
Economic Complexity and the Price of Food:
Today's commentary is going to be a bit more ambitious than usual. While there is a profusion of many crises in the financial sector on the one hand and nascent trouble in the real economy of foodstuffs and commodities etc. on the other, it is really the connections between the two that should be of interest to us at the moment. If you read some of last week's links, you would have noticed that there seems to be a food shortage in many places of the world. This is reflected in both the quantity of food such as rice available and the price that is being charged (Economists among us will want to collapse these two measures into one, but allow me the latitude to separate the two for a minute - I will reconcile the two below). Similarly, on the financial sector side, lenders and investment banks are in some serious trouble and Central Banks are slashing interest rates and encouraging cheaper loans on their respective populations. So, are these two phenomena connected? If they are, how are they connected and what does all this mean for us? Is this really one problem masquerading as many?
One way to make sense of this is to look at the financial sector first. There is a severe overhang of non-performing investments and confidence has been severely shaken with the failure (or dressed up buyout for the technically minded) of Bear Stearns, the loss provisions of Countrywide, the failure and subsequent nationalization of Northern Rock in Britain, the severe multi-ten Billion losses at Citibank, SocGen, UBS and now RBS. Add to this the fact that the largest insurers in the world such as AIG have declared (too quietly for my liking) historic losses even though Insurance is supposed to be and was always a cash-cow business and you begin to see what is happening. The absolute last thing that the authorities want is for people to begin to worry about their investments (Retirement Savings, 401k's etc.) and begin to call their broker's and advisors to start pulling some cash out. The cascade effects of such actions are too terrible to contemplate. That is why Central Banks have been feverishly providing credit to any bank that asks and new rules are being put in place to provide credit to investment banks as well (Canada is a bit 'ahead' of the game here because here the banks are everything rolled into one and such pedestrian distinctions are unnecessary). This printing of money and provision of loans is having some of its intended effects. The investing public's confidence has not been shaken, stirred perhaps, but not shaken. The fund managers / hedge funds and private equity firms have an open line of credit at easy rates so they are continuing to buy stocks. In this sense, the declining stock market trend is being managed quite well, with no spectacular collapses on a daily / weekly basis.
Nevertheless, the law of unintended consequences must have its pound of flesh as well. While the stock markets are staying afloat in a way that does not display much of the bad news, the bad news is showing up at the grocery store. The problem is that the places where these financial crises are taking place are printing money like there's no tomorrow (primarily the US). The places where these financial crises are not present (primarily Brazil, China, India etc. ) hold lots of US$'s already. As they try and exchange those dollars for actual resources that their growing middle classes now demand, both the value of the dollar and the price of real stuff is affected. There is excess paper money and there is a shortage of real stuff such as metals / foods and energy. Both trends reinforce each other, creating an inflationary cycle the likes of which most people only read about in history books but never pause to witness personally.
Of course, this is not the whole picture at all. Even within the economy of real assets and products such as food, there is an internal dynamic that we have to keep in mind. The sheer technical complexity of our economies and economic growth strategies is such that we are voracious consumers of energy. We use it not only to power our homes and washing machines but also to grow the food that we eat. If farming were fashion, mechanized and high-input, high fertilizer methods would be the new black. We have simply stopped using natural seeds and native species of foods. Over 90% of the world now grows maybe 7-8 different staple foods that absolutely require high energy inputs. With the collapse of the US$ against the price of energy (Oil barrels), food production has not only suffered in absolute quantity terms (why produce food when you can produce biodiesel?), but also in monetary measures such as food affordability (Economists - please notice the reconciliation). Fertilizer prices and food transportation charges have simply overwhelmed many small producers in many parts of the world where they remain unable to receive the kinds of agricultural subsidies as farmers and food companies find available in the G-8. Many have simply been driven out of not just the business, but also the process of producing food.
So getting back to the question about the connections between the food and financial crises then - do you remember that our grandmothers would explain to us how their previous generations had no real cash but that good food was abundant. Look how far we have come as a species, we are rich beyond our wildest dreams, but have substituted paper for food, and Oil for water. We are unable to feed the planet unless the financial system works and the oil rigs keep pumping. Sometimes one must pause and think deeply about this my friends, isn't there a real cost to our many mortgages, credit cards and leveraged investments that cannot be captured or explained away by conventional cost measures such as the 'Prime Rate'?
____
MAP Canada is hosting an event for young businesses on the 10th of May. Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that many of you will attend. My contribution to the festivities are supposed to address the question of 'How to Raise Capital for Your Business', so you know there will be some fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served. Please register here
Finance News:
1. RBS - (Isn't this the bank that just bought ABN AMRO for $100B last year?) wants to raise $24B through a share offering. As Citibank comes out with bad news each quarter, RBS realizes that this is another arena in which to compete and comes out with really bad news ... read more here
Economic News:
1. After the credit crunch, comes the 'cereal crunch' (not my phrase, but genius nevertheless) ... read more here
2. Solar Power is coming to Ontario in a big (well, not too big) way ... read more here
3. Home sales in the US fall 2% in March ... read more here
4. The property market in Spain falters as well ... read more here
Islamic / Middle East / Emerging Markets:
1. Do you know if you are invested in a company that has helped create this problem in Afghanistan? ... If you don't know, isn't it time to ask yourself why not? ... read more here
2. Islamic Finance sector in 'danger'? ... Personally, I think we are beyond danger. The traffic on the highway with which IF is merging will swallow us whole ... read more here
3. How the Gulf States are spending their wealth this time around (the last time they were this wealthy was in the oil embargo days of the seventies) ... read more here
Interesting but not Finance:
1. I won't say much about this story except that it has to do with the key to the Kaaba ... read more here
2. The economics of the federal government's despicable policy on the seal hunt ... read more here
Economics of Stealing Cutlery
Quotes of the week:
"To some degree it's a very gigantic version of Las Vegas" - Gary Burtless, an economist at the Brookings Institution, speaking about either Wall Street or Hedge Funds (Is there much difference these days?).
Commentary for the Week:
The Economics of Stealing Cutlery
Recently I attended yet another seminar on yet another obscure topic in Finance. True to form, it confirmed my worst suspicions and most uncharitable of analyses about the field. The food though, was excellent and I consoled myself with a healthy helping of Zaafrani Rice topped with some exquisite chicken. Once I had had more than my fair fill, I looked up to see fellow geniuses in the audience also using the same strategy to tune out the proceedings.
As the lectures droned on however, and I began to fear becoming even more corrupted by listening to speeches about zero-coupon bonds and 16% interest, I began to focus on the more mundane aspects of my surroundings. In order to shut my not-so-pious ears, I began to fidget (as curious people often do) with the cutlery on my table, becoming lost in the intricate patterns and designs on my fork. Noticing this fascination, the distinguished gentleman sitting beside me leaned over indulgently and conspiratorially observed: 'Relax, it's stainless steel. I checked already ...'.
Initially, I was shocked at being mistaken for a cutlery pilferer masquerading as a finance genius and began to think of stabbing the chicken on the man's plate using the fork in question with such force as to send a timeless message about the limits of my tolerance for inconvenient questions about my character. As I weighed the impact of such an action on my only $1000/suit however, my calmer self prevailed and I realized the humour and novelty present in the situation, letting the unfounded comment pass with a haughty smile. I also realized that the man was flat wrong about the value of the cutlery.
While it is true that silver is more expensive than steel to buy, steel is a more valuable or sought after commodity at the moment; and as you and I are arguing about knives and forks, there is a $150 Billion buyout offer from BHP Billiton on the table for Rio Tinto. The No. 2 company for iron ore production (an input for steel) is proposing to buy No. 3. for $150Billion. This is of interest to us for three reasons. First, we have to bury the news about how I was almost caught stealing a fork in more meaningful commentary. Second, cheap steel is an essential input for a growing consumer and industrial economy such as China, which is doing everything possible to guarantee predictable supplies. Third, and this the key for me, is that this buyout may be a signal for the turning of the tide as far as the boundaries between the financial economy and real economy are concerned. The first two are beyond our scope for today, but let me explain the last one a bit more.
For at least a couple of decades now, the real economy has been overshadowed by the financial sector. It has been 'cooler' to speak about stocks, bonds, derivatives (although very few speak on this one without looking foolish) and interest rates than it has been to speak about grains, gold, rice and other real commodities. This has been a departure from most of human history, where it has not been the price of IBM stock that has been a topic of discussion at the dinner table, but the price of food. In essence, the financial superstructure that we have built over and above that of the real economy of trading in goods has skewed our attentions, priorities and expertise. As a sector, finance sits in an octopus-like repose atop the real, with its tentacles at each node of the economy, always present and always growing. It used to be that the role of finance was to intermediate capital between real sectors. More recently, it has become an economy in and of itself, with little or no connection to reality. What is worse is that people had begun to believe the hype and feel that way as well.
In my opinion, this is changing now in spectacular fashion. Governments, corporations and financial types are realizing something they should have known all along - that reality takes no prisoners and however much you believe that paper (cash / stocks / bonds) is worth something, it is actually the something in question that is worth more than paper. In the case that we are discussing here, Rio Tinto shareholders have flatly refused to accept $150Billion in cash and stock, for a company that hammers and processes rocks for a living. Around this transaction, governments and sovereign wealth funds are circling with untold amount of funds to support one side over the other. Gone are platitudes about the 'free-market' and the open economy. It is now about ensuring ownership of iron ore supplies; cordial relations and corporate commercial law be damned.
Even though one case does not a trend make, I encourage you to think of things using this framework of the real vs. the mere financial for a few months. I think that you will notice that human concerns such as food, gas, heating, cooling and even cutlery will be on people's minds a bit more. You will also notice that while powers-that-be are going to be speaking much about how they are bringing stability back into the financial system, you will notice that we are actually in the hunt to carve up the real world and it's treasures in obvious manner once again.
Once the pretence and confusion over what is truly at stake is gone, all sorts of magical things can happen. To make sense of these, you will have to keep an open mind and reinvigorate your curiosity. Most important of all, the next time you see cutlery, ask yourself whether you knew that hammering away at a steely rock could lead to so much fun.
MAP Canada is hosting an event for young businesses and people looking to take their businesses to next level on the 10th of May. Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that most of you will attend, I promise you both insight and even a few fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served, sans any silver forks. Please Register Here
Finance News:
1. This story is too good (and quintessentially Canadian). Around 300 grannies are forcing the bankers / brokers / lawyers involved in the credit crunch 'fix-up' to be more responsive to small investor needs ... read more here
2. Some things to consider if you are thinking of moving to a fee-based personal financial advisory model ... (this is not a condemnation, it is something to know) ... read more here
3. Even more high payouts for hedge fund managers ... Such are the wonders of leverage, it can make geniuses out of normal people that bet the 'right' way ... read more here
4. Where most global banking decisions are made ... read more here
Economic News:
1. Our old friend, Chief Economist at the CIBC, comes up with another 'analysis' on the strength of the Canadian Economy. It is not so much that his conclusion is wrong, but the sheer chutzpah of consistently shoddy reasoning is very endearing. Keep up the ... ummm ... the work! ... read more here
2. At the end of the day, all talk, economics and politics is about gas ... (and not the Pepto-Bismol kind) ... read more here
3. A dissenting view on the US$ ... Is this denial or the turning of the tide? ... read more here
4. The Economist (which strangely remains my favourite source of news) discovers that there is a food allocation problem in the world ... read more here
Islamic / Middle East / Emerging Markets:
1. Asian Policy-makers having a tough time with inflation. What's funny is that this time, they are importing inflation in the form of US$'s that simply don't buy what they used to anymore ... read more here
2. Recasting futures and commodity trading role as a price-signalling mechanism ... problem is that this trading also in fact interferes with the price. It is not just a signal ... read more here
3. Is there a role for gender in finance? A normative question and a descriptive (yet quite probing) article ... read more here
4. Middle-East money moving to Asia instead of the West ... read more here
Miscellaneous:
1. N/A
"To some degree it's a very gigantic version of Las Vegas" - Gary Burtless, an economist at the Brookings Institution, speaking about either Wall Street or Hedge Funds (Is there much difference these days?).
Commentary for the Week:
The Economics of Stealing Cutlery
Recently I attended yet another seminar on yet another obscure topic in Finance. True to form, it confirmed my worst suspicions and most uncharitable of analyses about the field. The food though, was excellent and I consoled myself with a healthy helping of Zaafrani Rice topped with some exquisite chicken. Once I had had more than my fair fill, I looked up to see fellow geniuses in the audience also using the same strategy to tune out the proceedings.
As the lectures droned on however, and I began to fear becoming even more corrupted by listening to speeches about zero-coupon bonds and 16% interest, I began to focus on the more mundane aspects of my surroundings. In order to shut my not-so-pious ears, I began to fidget (as curious people often do) with the cutlery on my table, becoming lost in the intricate patterns and designs on my fork. Noticing this fascination, the distinguished gentleman sitting beside me leaned over indulgently and conspiratorially observed: 'Relax, it's stainless steel. I checked already ...'.
Initially, I was shocked at being mistaken for a cutlery pilferer masquerading as a finance genius and began to think of stabbing the chicken on the man's plate using the fork in question with such force as to send a timeless message about the limits of my tolerance for inconvenient questions about my character. As I weighed the impact of such an action on my only $1000/suit however, my calmer self prevailed and I realized the humour and novelty present in the situation, letting the unfounded comment pass with a haughty smile. I also realized that the man was flat wrong about the value of the cutlery.
While it is true that silver is more expensive than steel to buy, steel is a more valuable or sought after commodity at the moment; and as you and I are arguing about knives and forks, there is a $150 Billion buyout offer from BHP Billiton on the table for Rio Tinto. The No. 2 company for iron ore production (an input for steel) is proposing to buy No. 3. for $150Billion. This is of interest to us for three reasons. First, we have to bury the news about how I was almost caught stealing a fork in more meaningful commentary. Second, cheap steel is an essential input for a growing consumer and industrial economy such as China, which is doing everything possible to guarantee predictable supplies. Third, and this the key for me, is that this buyout may be a signal for the turning of the tide as far as the boundaries between the financial economy and real economy are concerned. The first two are beyond our scope for today, but let me explain the last one a bit more.
For at least a couple of decades now, the real economy has been overshadowed by the financial sector. It has been 'cooler' to speak about stocks, bonds, derivatives (although very few speak on this one without looking foolish) and interest rates than it has been to speak about grains, gold, rice and other real commodities. This has been a departure from most of human history, where it has not been the price of IBM stock that has been a topic of discussion at the dinner table, but the price of food. In essence, the financial superstructure that we have built over and above that of the real economy of trading in goods has skewed our attentions, priorities and expertise. As a sector, finance sits in an octopus-like repose atop the real, with its tentacles at each node of the economy, always present and always growing. It used to be that the role of finance was to intermediate capital between real sectors. More recently, it has become an economy in and of itself, with little or no connection to reality. What is worse is that people had begun to believe the hype and feel that way as well.
In my opinion, this is changing now in spectacular fashion. Governments, corporations and financial types are realizing something they should have known all along - that reality takes no prisoners and however much you believe that paper (cash / stocks / bonds) is worth something, it is actually the something in question that is worth more than paper. In the case that we are discussing here, Rio Tinto shareholders have flatly refused to accept $150Billion in cash and stock, for a company that hammers and processes rocks for a living. Around this transaction, governments and sovereign wealth funds are circling with untold amount of funds to support one side over the other. Gone are platitudes about the 'free-market' and the open economy. It is now about ensuring ownership of iron ore supplies; cordial relations and corporate commercial law be damned.
Even though one case does not a trend make, I encourage you to think of things using this framework of the real vs. the mere financial for a few months. I think that you will notice that human concerns such as food, gas, heating, cooling and even cutlery will be on people's minds a bit more. You will also notice that while powers-that-be are going to be speaking much about how they are bringing stability back into the financial system, you will notice that we are actually in the hunt to carve up the real world and it's treasures in obvious manner once again.
Once the pretence and confusion over what is truly at stake is gone, all sorts of magical things can happen. To make sense of these, you will have to keep an open mind and reinvigorate your curiosity. Most important of all, the next time you see cutlery, ask yourself whether you knew that hammering away at a steely rock could lead to so much fun.
MAP Canada is hosting an event for young businesses and people looking to take their businesses to next level on the 10th of May. Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that most of you will attend, I promise you both insight and even a few fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served, sans any silver forks. Please Register Here
Finance News:
1. This story is too good (and quintessentially Canadian). Around 300 grannies are forcing the bankers / brokers / lawyers involved in the credit crunch 'fix-up' to be more responsive to small investor needs ... read more here
2. Some things to consider if you are thinking of moving to a fee-based personal financial advisory model ... (this is not a condemnation, it is something to know) ... read more here
3. Even more high payouts for hedge fund managers ... Such are the wonders of leverage, it can make geniuses out of normal people that bet the 'right' way ... read more here
4. Where most global banking decisions are made ... read more here
Economic News:
1. Our old friend, Chief Economist at the CIBC, comes up with another 'analysis' on the strength of the Canadian Economy. It is not so much that his conclusion is wrong, but the sheer chutzpah of consistently shoddy reasoning is very endearing. Keep up the ... ummm ... the work! ... read more here
2. At the end of the day, all talk, economics and politics is about gas ... (and not the Pepto-Bismol kind) ... read more here
3. A dissenting view on the US$ ... Is this denial or the turning of the tide? ... read more here
4. The Economist (which strangely remains my favourite source of news) discovers that there is a food allocation problem in the world ... read more here
Islamic / Middle East / Emerging Markets:
1. Asian Policy-makers having a tough time with inflation. What's funny is that this time, they are importing inflation in the form of US$'s that simply don't buy what they used to anymore ... read more here
2. Recasting futures and commodity trading role as a price-signalling mechanism ... problem is that this trading also in fact interferes with the price. It is not just a signal ... read more here
3. Is there a role for gender in finance? A normative question and a descriptive (yet quite probing) article ... read more here
4. Middle-East money moving to Asia instead of the West ... read more here
Miscellaneous:
1. N/A
Why care about Islamic Finance?
Quotes of the week:
"EVERYBODY wants it. Nobody understands it. Money is the great taboo. People just won't talk about it. And that is what leads you to subprime. Take the greed and the financial misrepresentation out of it, and the root of this crisis is massive levels of financial illiteracy." - John Bryant of Operation HOPE, an evangelist for financial literacy.
This why we have announced our first Educational Seminar on Islamic Finance in Toronto for 2:30 pm tomorrow April 12th at the Radisson East Hotel (55 HallCrown Place, Toronto). The seminar is designed to explore the place Islam occupies in our financial lives. We will not be selling anything other than ideas and you will get the unusual and unprecedented chance to meet your humble correspondent in person ...
P.S. The column below does speak of God, but not in an exclusionary or exclusively Islamic sense and I think that people of all faiths, no faiths and no interest in faith whatsoever on this list will still find something there to appreciate. I do apologize for any offense - I assure you that none was intended. I do look forward to seeing some of you at the seminar tomorrow (Free but no real Food - sorry).
Commentary for the Week:
Why should I care about Islamic Finance?
Many people are of the opinion that Islam and Finance should not really mix. It is said that Islam is about values, morals and duties whereas finance is about making money. As money is a great 'evil', necessary but ultimately impure, never the twain shall meet. If we add to this the argument that our fellow Muslims (and perhaps us - God only knows), have not really done much in service to humanity while professing to be Islamic Finance professionals, we begin to understand the argument. Indeed, our contributions pale in comparison to even mining magnates in just Canada - whose companies use up and destroy large tracts of land in the search for jewellery and telephone wires. Even though their companies use chemical leaching and other destructive extraction processes, many are themselves the greatest personal donors and benefactors of hospitals / universities / charities and the like. In comparison to that, what has Islamic Finance really done, and why should you really care? After all, your mortgage is well on its way to being paid off, you have a good job, family and bills to be worried about. Why should you take Islamic Finance seriously? Why should you care?
Well, this is a difficult question, and ultimately it will of course be a personal choice. Let me share with you though, some of my humble thoughts and maybe you can share with me some of yours. First, the question as we have framed it above, is a bit misleading. The question is not really whether we should start to care about Islamic Finance, it is about how we came to stop caring about God in the realm of our financial choices. In essence, we are asking ourselves when and why we lost sight of God as we saw money. Does our sinking into materiality have something to do with that connection to God such that our absorption in one, leads to loss of the other? Is there a balance then, that we should be hoping to achieve?
Personally, I myself am totally off kilter. I wouldn't know Piety even if it hit me in the face while I was supersonic. But learned minds have explained to me that there is something of a balance that people can sometime find. Instead of either chasing money or either chasing God, perhaps it is possible to use money as a powerful means to do Good. How is this Islamic you ask, and what about money being 'evil', and what about never the twain shall mix? Well, without harping on the details, it is unthinkable to me that our faith would address so many mundane aspects of our daily lives and yet leave the profundity of wealth management unaddressed beyond charity. There must be then, something about how we spend our wealth and conceive of finance that we have not paid any real attention to.
In my limited and imperfect research, there are two major themes that come to mind. First, one feels that at its core, Islamic Finance should be about Social Improvement. It should be about leaving the world a better place than we found it. There is so much that there is to do and improve and fix, that we really have no lack of opportunity. We also have no lack of resources. We have been entrusted by God with land, intellect, muscle, capital, technology and of course, thanks to NAFTA (cannot blame God for that) - cheap Mexican labour. So the second theme really is whether we have been good Stewards of all the amazing things, including our hard working and underpaid Mexican brothers, that we have been entrusted with. Between the concept of a moral use of our money and the concept of a careful stewardship for all the wealth that we coexist with which is not money, is perhaps the place that we have been searching for. It is perhaps the place that we will find another connection to God. It is also perhaps the place we really want to mean when we speak of Islamic Finance.
Going back to the question of why we should care then - let me ask you a question to counter yours. I know that we usually share a few not-so-funny jokes that still make you laugh, but today is perhaps a day to be a bit reflective. Let me then overstep my bounds and ask you a personal question. What then, is the purpose of your life? Is it not to be at the same place that we have just discovered? Let me get even closer then, to the heart of the matter and to you. Close your eyes my friend, and ask yourself this question: Do you really need a reason to care, or can you feel that we are past reasons now?
Finance News:
1. Mortgage foreclosures start in the richer neighbourhoods and areas of US as well ... read more here
2. As was humbly predicted here a couple of weeks ago, some hedge fund payouts are truly amazing ... read more here
3. Some strategies and insight into how debt affects your financial plans ... read more here
4. Video interview of George Soros discussing this crisis. He is the man that 'broke the Bank of England' in the 90's (?) ... read more here
Economic News:
1. For a long time now, the US has been importing deflation from abroad in the form of cheaper goods. That tide seems to be turning with the precipitous fall in the US$ ... read more here
2. The IMF reports that losses from the credit crunch will top $945B ... read more here
3. In case you were wondering some of the real decisions of the world are made (hint: It's not the UN) ... read more here
4. The gambling industry says they generate almost 300,000 jobs and create lots of value to the economy. Hmm ... all those lives, time, energy and resources spent robbing Peter to pay very little to Paul? ... Value indeed ... what is unconscionable is that the Government is actually in on the act ... read more here
5. House Prices in Britain are now falling ... read more here
Islamic & Middle East Finance:
1. N/A
Miscellaneous:
1. Excellent column and advice for job-seekers ... the idea is to create the opportunity rather than waiting for one to fall in your lap ... read more here
2. A physicist disputes the naming of the 'God Particle' that is supposed to explain a bit about how mass was created early in the universe ... read more here
"EVERYBODY wants it. Nobody understands it. Money is the great taboo. People just won't talk about it. And that is what leads you to subprime. Take the greed and the financial misrepresentation out of it, and the root of this crisis is massive levels of financial illiteracy." - John Bryant of Operation HOPE, an evangelist for financial literacy.
This why we have announced our first Educational Seminar on Islamic Finance in Toronto for 2:30 pm tomorrow April 12th at the Radisson East Hotel (55 HallCrown Place, Toronto). The seminar is designed to explore the place Islam occupies in our financial lives. We will not be selling anything other than ideas and you will get the unusual and unprecedented chance to meet your humble correspondent in person ...
P.S. The column below does speak of God, but not in an exclusionary or exclusively Islamic sense and I think that people of all faiths, no faiths and no interest in faith whatsoever on this list will still find something there to appreciate. I do apologize for any offense - I assure you that none was intended. I do look forward to seeing some of you at the seminar tomorrow (Free but no real Food - sorry).
Commentary for the Week:
Why should I care about Islamic Finance?
Many people are of the opinion that Islam and Finance should not really mix. It is said that Islam is about values, morals and duties whereas finance is about making money. As money is a great 'evil', necessary but ultimately impure, never the twain shall meet. If we add to this the argument that our fellow Muslims (and perhaps us - God only knows), have not really done much in service to humanity while professing to be Islamic Finance professionals, we begin to understand the argument. Indeed, our contributions pale in comparison to even mining magnates in just Canada - whose companies use up and destroy large tracts of land in the search for jewellery and telephone wires. Even though their companies use chemical leaching and other destructive extraction processes, many are themselves the greatest personal donors and benefactors of hospitals / universities / charities and the like. In comparison to that, what has Islamic Finance really done, and why should you really care? After all, your mortgage is well on its way to being paid off, you have a good job, family and bills to be worried about. Why should you take Islamic Finance seriously? Why should you care?
Well, this is a difficult question, and ultimately it will of course be a personal choice. Let me share with you though, some of my humble thoughts and maybe you can share with me some of yours. First, the question as we have framed it above, is a bit misleading. The question is not really whether we should start to care about Islamic Finance, it is about how we came to stop caring about God in the realm of our financial choices. In essence, we are asking ourselves when and why we lost sight of God as we saw money. Does our sinking into materiality have something to do with that connection to God such that our absorption in one, leads to loss of the other? Is there a balance then, that we should be hoping to achieve?
Personally, I myself am totally off kilter. I wouldn't know Piety even if it hit me in the face while I was supersonic. But learned minds have explained to me that there is something of a balance that people can sometime find. Instead of either chasing money or either chasing God, perhaps it is possible to use money as a powerful means to do Good. How is this Islamic you ask, and what about money being 'evil', and what about never the twain shall mix? Well, without harping on the details, it is unthinkable to me that our faith would address so many mundane aspects of our daily lives and yet leave the profundity of wealth management unaddressed beyond charity. There must be then, something about how we spend our wealth and conceive of finance that we have not paid any real attention to.
In my limited and imperfect research, there are two major themes that come to mind. First, one feels that at its core, Islamic Finance should be about Social Improvement. It should be about leaving the world a better place than we found it. There is so much that there is to do and improve and fix, that we really have no lack of opportunity. We also have no lack of resources. We have been entrusted by God with land, intellect, muscle, capital, technology and of course, thanks to NAFTA (cannot blame God for that) - cheap Mexican labour. So the second theme really is whether we have been good Stewards of all the amazing things, including our hard working and underpaid Mexican brothers, that we have been entrusted with. Between the concept of a moral use of our money and the concept of a careful stewardship for all the wealth that we coexist with which is not money, is perhaps the place that we have been searching for. It is perhaps the place that we will find another connection to God. It is also perhaps the place we really want to mean when we speak of Islamic Finance.
Going back to the question of why we should care then - let me ask you a question to counter yours. I know that we usually share a few not-so-funny jokes that still make you laugh, but today is perhaps a day to be a bit reflective. Let me then overstep my bounds and ask you a personal question. What then, is the purpose of your life? Is it not to be at the same place that we have just discovered? Let me get even closer then, to the heart of the matter and to you. Close your eyes my friend, and ask yourself this question: Do you really need a reason to care, or can you feel that we are past reasons now?
Finance News:
1. Mortgage foreclosures start in the richer neighbourhoods and areas of US as well ... read more here
2. As was humbly predicted here a couple of weeks ago, some hedge fund payouts are truly amazing ... read more here
3. Some strategies and insight into how debt affects your financial plans ... read more here
4. Video interview of George Soros discussing this crisis. He is the man that 'broke the Bank of England' in the 90's (?) ... read more here
Economic News:
1. For a long time now, the US has been importing deflation from abroad in the form of cheaper goods. That tide seems to be turning with the precipitous fall in the US$ ... read more here
2. The IMF reports that losses from the credit crunch will top $945B ... read more here
3. In case you were wondering some of the real decisions of the world are made (hint: It's not the UN) ... read more here
4. The gambling industry says they generate almost 300,000 jobs and create lots of value to the economy. Hmm ... all those lives, time, energy and resources spent robbing Peter to pay very little to Paul? ... Value indeed ... what is unconscionable is that the Government is actually in on the act ... read more here
5. House Prices in Britain are now falling ... read more here
Islamic & Middle East Finance:
1. N/A
Miscellaneous:
1. Excellent column and advice for job-seekers ... the idea is to create the opportunity rather than waiting for one to fall in your lap ... read more here
2. A physicist disputes the naming of the 'God Particle' that is supposed to explain a bit about how mass was created early in the universe ... read more here
The Nature of Risk
Quotes of the week:
"The first of April is the day we remember what we are the other 364 days of the year." - Mark Twain.
In Honour of April and the financial crisis. (I wouldn't take the quote personally. After all, Mark Twain was an American).
Commentary for the Week:
The Nature of Risk:
Risk is one of those phenomena that leap into any and all discussions on finance even before logic can intrude. When we ask of someone what the Risks vs. Rewards of certain actions are going to be, we are frequently clear on what we mean by rewards but are usually not so clear about what we mean by risk. We frequently confuse risk with uncertainty, volatility and general gut-feeling. These are all important factors on their own, but surely Risk means a bit more. It is not enough to say that things will go up and down, or that one kind of action is 'secure' whereas another is 'risky'. The Truth (and you know that your humble correspondent is all about the Truth) is that there is always risk. Risk is even more pervasive than body odour at my gym, or smelly socks at Juma (no thanks to me I might add - I do my bit for the environment).
Two weeks ago, I recommended to you all a simple (but hopefully not simplistic) model for judging investments. But how does one go about categorizing and defining the risk factor within that model? Usually, there is reference made to words and phrases such as 'secure', 'guaranteed', 'not likely', 'not guaranteed', 'past performance is no guarantee', 'phenomenal', 'spectacular' and my all-time favourite - 'risk-neutral'. But what does all this mean and how can we as investors make some sense out of this? After all, people are paid millions to manage risk at Insurance companies, Trust Companies, Investment Banks and even at our favourite Actual Banks (I know - InshAllah). What makes me think we can second-guess them when they say 'secure' or worse - when they say nothing at all?
Well, it's simple really, the money around which they manage all this Risk is ours, and although one would like to think that they know what they are doing better than us, that is not exactly 'guaranteed', so to speak. So how do we manage Risk for our own money, ourselves - even before we seek help from 'professionals'?
5 Simple questions come to mind:
1. Do I understand the investment, how it works, how my money is supposed to grow, what makes it grow? etc.
a. Failing at this question is called the Risk of Ignorance. It is usually very expensive. If not in this world, then definitely in the next. To guard against it, we must understand fully how something grows in value. If the investment is Real Estate, why that particular location will increase in value more than one 17 blocks away for example. If it is a stock, why that company as opposed to its competition. If it is a mutual fund, why that particular fund manager or strategy as opposed to the other 4000. If it is a portfolio, why each component fits with the others.
2. How many ways are there in which what is being said to me can turn out to be false, or if not false then at least not Totally True?
a. Failing at this question means you are at Risk for False Expectations. For those of us who are married, we are very familiar with this risk. In financial matters, however, this risk is frequently overlooked when discussions about Rewards begin (again, just like marriage). My advice would be to rewind a bit and go over whether you understand how many ways the rewards can be undermined by fairly common situations. Think of it as buying a cow - if it doesn't pass on into Bovine heaven immediately (which would be a catastrophe such as the one we discussed last week), it will still produce milk. But if someone is feeding the cow pop-corn instead of hay, it will not perform by producing Grade 'A' milk but by producing manure. Definitely not the reward we were hoping for.
3. How likely is it that any of these 'Reward-reducing' situations will arise?
a. This question begins to quantify the Risk of Loss and its probability. The loss can be of faith, of returns, of principal or of face - the key is to figure out the probability for each situation that can reduce rewards. Using our beloved cow once again, what is the probability that someone will sneak into the barn and substitute hay with pop-corn? On the other hand, what is the probability that the hay is genetically-modified and may induce madness? Once you have these probabilities figured out, you can determine what the most likely scenario for the cow really is - whether it is reasonable to expect that the cow will actually produce the Grade 'A' milk you desperately want.
4. How severe will the loss be if it is 'Reward-reducing'?
a. This question leads us to determining whether we are at Risk for Catastrophic Loss - which is perhaps the most important determination of all. This is when amounts at risk or issues at risk are of the kind that induce butterflies in our tummies even when we are already full of Biryani. Usually, these involve some form of leverage / loans / margin. They can also involve life-savings. For those who are some way along life like my balding, grey-haired self, this becomes more and more of an issue. Personally, I try and stay away from anything that exposes me to catastrophe, particularly cows. One must try and spread one's nest-egg into a few baskets that one understands fully. Personally, I do not always succeed, but at least I know that the responsibility, decisions and blame are mine alone.
5. What is my alternative?
a. Failing at this question puts us at Risk of Opportunity Loss. If we dither, over-analyze and over-complexify, we will lose the opportunity to act in a timely manner. Ideally we want to buy the cow when it is reaching milk-producing age, not when it is entering its pop-corn driven Madness. Similarly, if we are in the path of an oncoming train, whether we jump to the right or the left, or whether it is expected to reach the next station on time is quite besides the point.
Armed with this knowledge and framework, I am sure you will make if not Trillions, then at least better decisions. You can even take the last two questions and make a nifty 2x2 Risk-Matrix. Please don't get excited about Cows as the investment vehicle of choice - send me neither Milk, nor the other By-product, I am partial to Soya Milk myself.
Finance News:
1. Have no fear, new regulations are here. Too bad more power is being given to the people who got us into this mess in the first place ... Even though we protest to the contrary at every opportunity, I guess at heart, we really believe that the politicians know what they are doing ... Just like marriage, a triumph of 'Hope over Experience' ... read more here
2. Blanket immunity is about to be granted for the Canadian version of the Sub-Prime mess ... read more here
3. Lehmann Brothers, the investment bank that is just larger than Bear Stearns was, raises over $3B (I think it took Bear Stearns something like 80 years to become worth $3B) ... read more here
4. Useful advice to guard against identity theft ... a growing problem in North America ... read more here
Economic News:
1. Some evidence that food prices have been bid-up by small scale investors. An interesting but ultimately unsatisfying explanation ... read more here
2. An excellent article on how Alberta's Oil Sands are using up both Natural Gas and the Province's fresh water. Did you know that the largest dammed (as in water-dam) pool in the world right now is not the Three Gorges in China but rather Syncrude's pool of contaminated water? ... Shocking ... read more here
3. Are Student Loans going to be the new sub-prime? ... (hat-tip to Suhail Ahmad) ... read more here
4. Story about some homes in the US that are worth less than their copper pipes ... read more here
Islamic & Middle East Finance:
1. An insight into Saudi Arabia's economic debates ... the burning issue of the day is not the almost suicidal peg to the US$ but whether women should be allowed to drive ... come on people ... read more here
2. UAE Takaful Company IPO oversubscribed 43X ... irrational exuberance anyone? ... read more here
Miscellaneous:
1. How to start up your own country ... (recommended only for reading purposes, not for hatching actual plans) ... read more here
2. The best advice that the CEO of PIMCO - William Thompson ever received ... (this is particularly good for young readers starting out in life) ... read more here
"The first of April is the day we remember what we are the other 364 days of the year." - Mark Twain.
In Honour of April and the financial crisis. (I wouldn't take the quote personally. After all, Mark Twain was an American).
Commentary for the Week:
The Nature of Risk:
Risk is one of those phenomena that leap into any and all discussions on finance even before logic can intrude. When we ask of someone what the Risks vs. Rewards of certain actions are going to be, we are frequently clear on what we mean by rewards but are usually not so clear about what we mean by risk. We frequently confuse risk with uncertainty, volatility and general gut-feeling. These are all important factors on their own, but surely Risk means a bit more. It is not enough to say that things will go up and down, or that one kind of action is 'secure' whereas another is 'risky'. The Truth (and you know that your humble correspondent is all about the Truth) is that there is always risk. Risk is even more pervasive than body odour at my gym, or smelly socks at Juma (no thanks to me I might add - I do my bit for the environment).
Two weeks ago, I recommended to you all a simple (but hopefully not simplistic) model for judging investments. But how does one go about categorizing and defining the risk factor within that model? Usually, there is reference made to words and phrases such as 'secure', 'guaranteed', 'not likely', 'not guaranteed', 'past performance is no guarantee', 'phenomenal', 'spectacular' and my all-time favourite - 'risk-neutral'. But what does all this mean and how can we as investors make some sense out of this? After all, people are paid millions to manage risk at Insurance companies, Trust Companies, Investment Banks and even at our favourite Actual Banks (I know - InshAllah). What makes me think we can second-guess them when they say 'secure' or worse - when they say nothing at all?
Well, it's simple really, the money around which they manage all this Risk is ours, and although one would like to think that they know what they are doing better than us, that is not exactly 'guaranteed', so to speak. So how do we manage Risk for our own money, ourselves - even before we seek help from 'professionals'?
5 Simple questions come to mind:
1. Do I understand the investment, how it works, how my money is supposed to grow, what makes it grow? etc.
a. Failing at this question is called the Risk of Ignorance. It is usually very expensive. If not in this world, then definitely in the next. To guard against it, we must understand fully how something grows in value. If the investment is Real Estate, why that particular location will increase in value more than one 17 blocks away for example. If it is a stock, why that company as opposed to its competition. If it is a mutual fund, why that particular fund manager or strategy as opposed to the other 4000. If it is a portfolio, why each component fits with the others.
2. How many ways are there in which what is being said to me can turn out to be false, or if not false then at least not Totally True?
a. Failing at this question means you are at Risk for False Expectations. For those of us who are married, we are very familiar with this risk. In financial matters, however, this risk is frequently overlooked when discussions about Rewards begin (again, just like marriage). My advice would be to rewind a bit and go over whether you understand how many ways the rewards can be undermined by fairly common situations. Think of it as buying a cow - if it doesn't pass on into Bovine heaven immediately (which would be a catastrophe such as the one we discussed last week), it will still produce milk. But if someone is feeding the cow pop-corn instead of hay, it will not perform by producing Grade 'A' milk but by producing manure. Definitely not the reward we were hoping for.
3. How likely is it that any of these 'Reward-reducing' situations will arise?
a. This question begins to quantify the Risk of Loss and its probability. The loss can be of faith, of returns, of principal or of face - the key is to figure out the probability for each situation that can reduce rewards. Using our beloved cow once again, what is the probability that someone will sneak into the barn and substitute hay with pop-corn? On the other hand, what is the probability that the hay is genetically-modified and may induce madness? Once you have these probabilities figured out, you can determine what the most likely scenario for the cow really is - whether it is reasonable to expect that the cow will actually produce the Grade 'A' milk you desperately want.
4. How severe will the loss be if it is 'Reward-reducing'?
a. This question leads us to determining whether we are at Risk for Catastrophic Loss - which is perhaps the most important determination of all. This is when amounts at risk or issues at risk are of the kind that induce butterflies in our tummies even when we are already full of Biryani. Usually, these involve some form of leverage / loans / margin. They can also involve life-savings. For those who are some way along life like my balding, grey-haired self, this becomes more and more of an issue. Personally, I try and stay away from anything that exposes me to catastrophe, particularly cows. One must try and spread one's nest-egg into a few baskets that one understands fully. Personally, I do not always succeed, but at least I know that the responsibility, decisions and blame are mine alone.
5. What is my alternative?
a. Failing at this question puts us at Risk of Opportunity Loss. If we dither, over-analyze and over-complexify, we will lose the opportunity to act in a timely manner. Ideally we want to buy the cow when it is reaching milk-producing age, not when it is entering its pop-corn driven Madness. Similarly, if we are in the path of an oncoming train, whether we jump to the right or the left, or whether it is expected to reach the next station on time is quite besides the point.
Armed with this knowledge and framework, I am sure you will make if not Trillions, then at least better decisions. You can even take the last two questions and make a nifty 2x2 Risk-Matrix. Please don't get excited about Cows as the investment vehicle of choice - send me neither Milk, nor the other By-product, I am partial to Soya Milk myself.
Finance News:
1. Have no fear, new regulations are here. Too bad more power is being given to the people who got us into this mess in the first place ... Even though we protest to the contrary at every opportunity, I guess at heart, we really believe that the politicians know what they are doing ... Just like marriage, a triumph of 'Hope over Experience' ... read more here
2. Blanket immunity is about to be granted for the Canadian version of the Sub-Prime mess ... read more here
3. Lehmann Brothers, the investment bank that is just larger than Bear Stearns was, raises over $3B (I think it took Bear Stearns something like 80 years to become worth $3B) ... read more here
4. Useful advice to guard against identity theft ... a growing problem in North America ... read more here
Economic News:
1. Some evidence that food prices have been bid-up by small scale investors. An interesting but ultimately unsatisfying explanation ... read more here
2. An excellent article on how Alberta's Oil Sands are using up both Natural Gas and the Province's fresh water. Did you know that the largest dammed (as in water-dam) pool in the world right now is not the Three Gorges in China but rather Syncrude's pool of contaminated water? ... Shocking ... read more here
3. Are Student Loans going to be the new sub-prime? ... (hat-tip to Suhail Ahmad) ... read more here
4. Story about some homes in the US that are worth less than their copper pipes ... read more here
Islamic & Middle East Finance:
1. An insight into Saudi Arabia's economic debates ... the burning issue of the day is not the almost suicidal peg to the US$ but whether women should be allowed to drive ... come on people ... read more here
2. UAE Takaful Company IPO oversubscribed 43X ... irrational exuberance anyone? ... read more here
Miscellaneous:
1. How to start up your own country ... (recommended only for reading purposes, not for hatching actual plans) ... read more here
2. The best advice that the CEO of PIMCO - William Thompson ever received ... (this is particularly good for young readers starting out in life) ... read more here
The Miraculous Catastrophe of Bear Stearns
Quotes of the week:
1. "Notionally called hedges, in reality they were a series of free-standing bets that Bear executives dubbed The Chaos Trade"
2. "The Fed's role in the deal suggests federal officials fear a systemic collapse of the U.S. financial system were Bear Stearns to fail. The fear stems from Bear central role in a multitrillion-dollar web of interconnecting derivative contracts." - Roddy Boyd on CNN Money.
3. "Bear is a counterparty to some $10 trillion of over-the-counter swaps. With the broker's collapse, the fear that these and other contracts would no longer be honoured would have infected the world's derivatives markets." - The Economist
Quote 1 is how Bear Stearns was financing its cash flow once their losses became known internally. They were making trades betting against their other portfolios and betting (sorry, 'investing') on things to go really haywire. I think some hedge funds that bet against the financial sector are going to announce amazing results in the next few weeks.
Commentary for the Week:
The Miraculous Catastrophe:
Something so awesome happened over the last two weeks that quite possibly every human on Earth has been adversely affected. No, it was not Godzilla's escape from its wintery prison, nor was it yet another discovery of King Kong. It was something that sounds so innocuous that it probably escaped most people's work-a-day attention. Of course, if I had a life outside that of finance, it would have escaped mine as well, but I am chained to the desk here at Ittihad and am required to know such things. On the surface, what happened was quite simple. An investment bank in the US called Bear Stearns was bought out by a full-fledged bank called JP Morgan for a relatively small amount. This was reported in many places and some surface treatment was given to how there were several 'Risks' in the financial system which were brought to light by the whole episode. The exact nature of the risks, however, was generally left to our imaginations, so here I go.
Let me start by saying that the annual GDP (nominal basis 2008) of the entire world is around $57 Trillion. This means that all of our collective effort as humanity over the course of a year adds up (if one were to use money as a yardstick) to $57,000 Billion. Relative to that, the Bear Stearns buyout, at a mere $1.5B is of course peanuts and quite unremarkable.
But try and look at it from this perspective for a minute and see if you feel a sinking feeling in your gut. Had Bear Stearns not been bought out by JP Morgan and had JP Morgan not guaranteed Bear's obligations, there would have been a ... wait for it ... a bit more ... a $10 Trillion hole in the financial system. How can this be, you ask? Surely it cannot be, you say? How can a company that is worth $1.5B now (and was worth $3.5B before the crisis) create a $10 Trillion gap in the entire system of what passes for wealth, you ask yet again? Well, the official answer is that these are all unsophisticated questions and we shouldn't worry our pretty little heads about it too much. It is best to go back to refinancing the house so we can buy the Broccoli that now costs almost as much as a pound of Silver. The big men (such as Big Ben) are in charge and with their humungous brains, surely they can find a way out of this mess. So much for the official answer. The only-somewhat-varnished truth is quite different, and your earlier questions may not be so unintelligent after all.
A company with less than a few hundred million in actual assets (which were also quite faulty to begin with) is a counterparty to over $10Trillion of derivatives. If you suddenly remove this company from the system, all of humanity would have to work for two whole months to make up for the just the first order loss. As other, second-order losses would surely follow, this calculation does not even include any downstream and domino effects. To your earlier questions, I would add two more - How can be this be a sane way of handling humanity's finances? Isn't there something wrong with a system that allows one company (which was only the 5th largest Investment bank in the US) the ability to enter into performance contracts worth more than 75% of the US economy?
One reason this is difficult to wrap our heads around is that we have been conditioned into thinking that finance is complicated and best left to experts with many ill-fitting consonants behind their name. The other reason that this seems unreal is the fact that there are more zeroes in these figures than there are hairs on my head, which is confusing us needlessly. So let us un-complicate this Gordian Knot and get to the heart of the matter. Let us say I have $200 in my chequing account, which is all I have to pay for all sorts of bills such as the lights, heat, Broccoli etc. Let us then say that I calmly and coolly write people 'certificates' (an easier way to think about derivatives) in the amount of $10,000,000. Even though these 'certificates' are strange in the sense that only a limited amount of people actually submit them for actual payment back to me (think Canadian Tire Money or gift cards), the fact that I have promised $10 Million when I have only $200 to my name is boldness bordering on lunacy. In simpler times, it was called fraud.
In the modern economy, however, what happens if people suddenly wise up to my irresponsibility and stop accepting my 'certificates'? What if they actually ask me to pay up on some of the ones outstanding? Furthermore, what happens to all the people who have used my 'certificates' as assets upon which to write IOU's of their own? In theory of course, there should be a catastrophe of the 'Plagues of Egypt' proportion, but what we have is a miracle instead. This is because, if you are American, even if you make a $ 10,000,000 hole in the assets of the world with your $200, there are no severe ramifications. Instead, someone actually pays you $100 and then takes over the business of writing your 'certificates'. The fact that this someone has also been given a $30B 'loan' from public money makes for the Mother of all Financial Miracles.
Welcome to the even newer economy, where a private $10Trillion loss can be papered over with $30Billion of taxpayer money. This is the New World, where a crack that would bring down the World economy is papered over by empty promises. May God protect us from the crushing blow of Inevitability. But don't panic just yet, this is all probably just my imagination.
Finance News:
1. Bear Stearns was bought out by JP Morgan for less than 20% of the value (Price?) of its Head Office Building ... this is an intelligent discussion of why ... read more here
2. A beautiful and succinct explanation of why Hedge Fund collapses are always spectacular ... (hat-tip to Michael Gassner) ... read more here
3. What a juicy piece of news for those following the Bear Stearns buyout! ... It seems that JP Morgan will have to raise its bid to $10/share from $2/share because the CEO did not read the 'merger' agreement carefully before it was signed ... read more here
4. This came out just as I wrote #3 above ... Its official at $10 / share. The mechanics of the transaction are quite funny though ... It seems JP Morgan does not need the approval of a majority of today's shareholders for the deal to go through ... read more here
Economic News:
1. Prospects for the US$ ... The info on the amount of leverage used by Goldman Sachs and Merrill Lynch is astounding ... read more here
2. The US Treasury congratulates the Fed for putting $30Billion of public money on the line during the Bear Stearns buyout ... (if anyone needed more confirmation that the game is rigged) ... this is the 'Too Big to Fail' philosophy on steroids. Friends bailing out other friends using public money ... read more here
3. Excellent Column on the 'End of Capitalism on Wall Street' ... too funny ... read more here
4. The Economist suggests (a mere hint of a suggestion) that JP Morgan Chase has swallowed a whale / bitten off more than it can chew with the buyout of Bear Stearns ... read more here
Islamic & Middle East Finance:
1. 'Islamic' Bond listed on the London Stock Exchange ... read more here
Miscellaneous:
1. And you thought that we were a developed economy that was beyond worrying about food prices ... read more here
2. Does this mean the end is near? ... The US Defence Department may not know where all its Nukes are ... No less an authority than CNN folks ... read more here
1. "Notionally called hedges, in reality they were a series of free-standing bets that Bear executives dubbed The Chaos Trade"
2. "The Fed's role in the deal suggests federal officials fear a systemic collapse of the U.S. financial system were Bear Stearns to fail. The fear stems from Bear central role in a multitrillion-dollar web of interconnecting derivative contracts." - Roddy Boyd on CNN Money.
3. "Bear is a counterparty to some $10 trillion of over-the-counter swaps. With the broker's collapse, the fear that these and other contracts would no longer be honoured would have infected the world's derivatives markets." - The Economist
Quote 1 is how Bear Stearns was financing its cash flow once their losses became known internally. They were making trades betting against their other portfolios and betting (sorry, 'investing') on things to go really haywire. I think some hedge funds that bet against the financial sector are going to announce amazing results in the next few weeks.
Commentary for the Week:
The Miraculous Catastrophe:
Something so awesome happened over the last two weeks that quite possibly every human on Earth has been adversely affected. No, it was not Godzilla's escape from its wintery prison, nor was it yet another discovery of King Kong. It was something that sounds so innocuous that it probably escaped most people's work-a-day attention. Of course, if I had a life outside that of finance, it would have escaped mine as well, but I am chained to the desk here at Ittihad and am required to know such things. On the surface, what happened was quite simple. An investment bank in the US called Bear Stearns was bought out by a full-fledged bank called JP Morgan for a relatively small amount. This was reported in many places and some surface treatment was given to how there were several 'Risks' in the financial system which were brought to light by the whole episode. The exact nature of the risks, however, was generally left to our imaginations, so here I go.
Let me start by saying that the annual GDP (nominal basis 2008) of the entire world is around $57 Trillion. This means that all of our collective effort as humanity over the course of a year adds up (if one were to use money as a yardstick) to $57,000 Billion. Relative to that, the Bear Stearns buyout, at a mere $1.5B is of course peanuts and quite unremarkable.
But try and look at it from this perspective for a minute and see if you feel a sinking feeling in your gut. Had Bear Stearns not been bought out by JP Morgan and had JP Morgan not guaranteed Bear's obligations, there would have been a ... wait for it ... a bit more ... a $10 Trillion hole in the financial system. How can this be, you ask? Surely it cannot be, you say? How can a company that is worth $1.5B now (and was worth $3.5B before the crisis) create a $10 Trillion gap in the entire system of what passes for wealth, you ask yet again? Well, the official answer is that these are all unsophisticated questions and we shouldn't worry our pretty little heads about it too much. It is best to go back to refinancing the house so we can buy the Broccoli that now costs almost as much as a pound of Silver. The big men (such as Big Ben) are in charge and with their humungous brains, surely they can find a way out of this mess. So much for the official answer. The only-somewhat-varnished truth is quite different, and your earlier questions may not be so unintelligent after all.
A company with less than a few hundred million in actual assets (which were also quite faulty to begin with) is a counterparty to over $10Trillion of derivatives. If you suddenly remove this company from the system, all of humanity would have to work for two whole months to make up for the just the first order loss. As other, second-order losses would surely follow, this calculation does not even include any downstream and domino effects. To your earlier questions, I would add two more - How can be this be a sane way of handling humanity's finances? Isn't there something wrong with a system that allows one company (which was only the 5th largest Investment bank in the US) the ability to enter into performance contracts worth more than 75% of the US economy?
One reason this is difficult to wrap our heads around is that we have been conditioned into thinking that finance is complicated and best left to experts with many ill-fitting consonants behind their name. The other reason that this seems unreal is the fact that there are more zeroes in these figures than there are hairs on my head, which is confusing us needlessly. So let us un-complicate this Gordian Knot and get to the heart of the matter. Let us say I have $200 in my chequing account, which is all I have to pay for all sorts of bills such as the lights, heat, Broccoli etc. Let us then say that I calmly and coolly write people 'certificates' (an easier way to think about derivatives) in the amount of $10,000,000. Even though these 'certificates' are strange in the sense that only a limited amount of people actually submit them for actual payment back to me (think Canadian Tire Money or gift cards), the fact that I have promised $10 Million when I have only $200 to my name is boldness bordering on lunacy. In simpler times, it was called fraud.
In the modern economy, however, what happens if people suddenly wise up to my irresponsibility and stop accepting my 'certificates'? What if they actually ask me to pay up on some of the ones outstanding? Furthermore, what happens to all the people who have used my 'certificates' as assets upon which to write IOU's of their own? In theory of course, there should be a catastrophe of the 'Plagues of Egypt' proportion, but what we have is a miracle instead. This is because, if you are American, even if you make a $ 10,000,000 hole in the assets of the world with your $200, there are no severe ramifications. Instead, someone actually pays you $100 and then takes over the business of writing your 'certificates'. The fact that this someone has also been given a $30B 'loan' from public money makes for the Mother of all Financial Miracles.
Welcome to the even newer economy, where a private $10Trillion loss can be papered over with $30Billion of taxpayer money. This is the New World, where a crack that would bring down the World economy is papered over by empty promises. May God protect us from the crushing blow of Inevitability. But don't panic just yet, this is all probably just my imagination.
Finance News:
1. Bear Stearns was bought out by JP Morgan for less than 20% of the value (Price?) of its Head Office Building ... this is an intelligent discussion of why ... read more here
2. A beautiful and succinct explanation of why Hedge Fund collapses are always spectacular ... (hat-tip to Michael Gassner) ... read more here
3. What a juicy piece of news for those following the Bear Stearns buyout! ... It seems that JP Morgan will have to raise its bid to $10/share from $2/share because the CEO did not read the 'merger' agreement carefully before it was signed ... read more here
4. This came out just as I wrote #3 above ... Its official at $10 / share. The mechanics of the transaction are quite funny though ... It seems JP Morgan does not need the approval of a majority of today's shareholders for the deal to go through ... read more here
Economic News:
1. Prospects for the US$ ... The info on the amount of leverage used by Goldman Sachs and Merrill Lynch is astounding ... read more here
2. The US Treasury congratulates the Fed for putting $30Billion of public money on the line during the Bear Stearns buyout ... (if anyone needed more confirmation that the game is rigged) ... this is the 'Too Big to Fail' philosophy on steroids. Friends bailing out other friends using public money ... read more here
3. Excellent Column on the 'End of Capitalism on Wall Street' ... too funny ... read more here
4. The Economist suggests (a mere hint of a suggestion) that JP Morgan Chase has swallowed a whale / bitten off more than it can chew with the buyout of Bear Stearns ... read more here
Islamic & Middle East Finance:
1. 'Islamic' Bond listed on the London Stock Exchange ... read more here
Miscellaneous:
1. And you thought that we were a developed economy that was beyond worrying about food prices ... read more here
2. Does this mean the end is near? ... The US Defence Department may not know where all its Nukes are ... No less an authority than CNN folks ... read more here
Subscribe to:
Posts (Atom)