What are the US banks up to?

A QUESTION OF BUSINESS BY P.GUNASEGARAM

Fighting greed is not going to be easy even with new laws

IF anyone had apprehensions over the Finance Reform Bill that US President Barack Obama has pushed through to become law, they should look at what US banks continue to do.

It should be obvious from that, why the bill was so necessary in the first place. In fact, there is an increasing body of opinion that feels that the bill has not gone far enough to ensure that key financial institutions stayed on the straight and narrow and did not endanger all its stakeholders.

The reforms were signed into law last month and were heavily criticised by some sectors who felt that it permits too much interference by the state into the running of financial institutions, some of the largest of which had to be rescued through hundreds of billions of dollars of US government funding.

The eventual cost to the system and the fall-out caused by the collapse of major financial players on to all sectors of the US economy and the collateral damage to the world may easily raise the total cost of the collapse into tens of trillions of US dollars.

The underlying cause of this sorry episode was greed. The bankers were permitted to come up with increasingly complex and dubious financial instruments, which they packaged in all manner of wrapping, marketing it to all and sundry.

All that mattered under such a scenario was profit to the banks and enormous bonuses to staff.
Some traders earned more than US$100mil in a year.

The most profitable investment bank Goldman Sachs, even after its bailout by the US, paid out nearly 50% of its revenue – yes revenue – as bonuses in the second quarter of last year.

Goldman Sachs, which, as an investment bank, was not entitled to a bailout, had to change its charter to become eligible for US government assistance. Post bailout it also came to pass that it had profited enormously from a deal with the AIG group which posted massive losses as a result of underwriting sub-prime bonds.

The Finance Reform Bill was aimed at stopping some of these abuses and make it unnecessary for the US government to bail out the so-called “too big to fail” financial institutions by selling off their assets and having disincentives to let them grow too big in the first place.

It also aims to stop banks from using customer deposits to fund extremely speculative, hedge-fund-like activities although it is not clear how it proposes to do this.

Already this year, some of the major investment banks reported losses on some days from trading operations. Here are the reports from Bloomberg:

“Goldman Sachs, the bank that makes the most revenue trading stocks and bonds, lost money in that business on 10 days in the second quarter of this year, ending a three-month streak of loss-free days at the start of the year.

“Losses on Goldman Sachs’ trading desks exceeded US$100mil on three days during the period that ended June 30, according to a filing by the New York-based company with the Securities and Exchange Commission. The firm also disclosed that trading losses surpassed its value-at-risk estimate, a measure of potential losses, on two days.

“Morgan Stanley lost money on 11 days during the second quarter. The losses never exceeded US$75mil daily, and never surpassed the firm’s value-at-risk estimate. Morgan Stanley’s traders made more than US$175mil on one day, the firm said in an SEC filing.

“JP Morgan Chase & Co traders also broke their three-month winning streak, losing money on eight days in the second quarter, according to an Aug 6 securities filing. JP Morgan’s average daily trading revenue fell to about US$72.4mil during the second quarter from US$118mil during the prior three months.

“The firm made more than US$200mil on ten days in the first six months of the year.”

What do all these mean? How can a bank make US$200mil on one day and then lose US$100mil on another day? The answer has to be sheer speculation. High returns come with high risks – that should have been the lesson of the international financial crisis. But obviously that lesson has not been learnt. If banks, which have so recently been bailed out, speculate like that, we can expect that there will be every chance that there will be another crisis.

Obama is trying to prevent that through legislation but already he is being heavily castigated and criticised, especially by Wall Street, for his efforts.

One can only hope he has the guts to go through with it and that most people in the US do not fall for that emotional appeal by Wall Street profiteers to preserve free market and enterprise.

Wall Street needs to be regulated – now. If it is not, there is danger not just to the US but to the world at large.

> Managing editor P Gunasegaram says there is no such thing as a free market although there may be such a thing as a free lunch – sometimes.

Creativity - the key to NEM’s success

WHAT ARE WE TO DO BY TAN SRI LIN SEE-YAN

It is not good enough to have policies to attract and retain talent. Weaknesses have to be dissected and addressed

THE New Economic Model (NEM) was unveiled in March and the 10th Malaysia Plan (2011-15) in June. These aim to transform Malaysian life and fortunes. At the heart is innovation.

The Prime Minister takes every opportunity to drive this home – to succeed, innovation must be pushed harder and harder until it becomes an integral part of the nation’s culture.

As a concept, innovation simply means the nurturing of talent for creativity. Here, creativity can be likened to producing something original and useful.

Viewed differently, to be creative means to deal with the classic creativity challenge of getting divergent thinking (producing unique ideas) and convergent thinking (putting ideas together to improve life) to work in tandem.

According to Prof Paul Torrance (who created the gold standard in creativity assessment), a creative person has an “unusual visual perspective”, matched with an “ability to synthesise diverse elements into meaningful products.”

It’s essentially about getting the left and right brains to operate as one. A recent IBM CEOs poll identified creativity as the No. 1 “leadership competency” of the future. Unfortunately, we don’t have such a culture.

A culture thing

Since Tun Mahathir Mohamad’s Look East policy, we have yet to succeed in emulating Japan’s innovation culture. Three main elements of this culture remain alien to us: its mentor system of management; acceptance of starting at the bottom to understand a firm’s workings at every level; and the Japanese function in unison as a workforce and the future of the firm. Whatever we have since achieved is still very much work in progress.

As a matter of public policy, we did try to create a Malaysian way of developing our own brand of creativity culture by: making Malaysia an attractive place to live, with security, good infrastructure and communications, within a unique and relaxed way of life that is multi-racial, multi-religious and multi-cultural, which foreigners can easily adapt to; and trying to position the nation as a base for foreign direct investments (FDIs) to come, expand and prosper, with widespread use of English.

We tried these to make up for what is special to the Japanese, but there was only limited success. We just don’t have the culture, and we can’t (and won’t) change readily enough to develop such a culture.

Earlier this year, in a column titled “On productivity and talent management”, I wrote: “Human capital lies at the core of innovation. Raising productivity requires a labour force of high calibre – committed, motivated and skilled enough to drive transformational change based on excellence over the long term. It’s about trapping potential through acquisition of new skill sets in designing new products and services, and devising new processes and systems to do things smarter and more efficiently. This requires ready access to a talent pool of critical skills and expertise.”

Frankly, we don’t as yet have such a pool. Therefore, we need to go back to basics. This means transforming our education system to emphasise meritocracy and lay the foundation for creative thinking and analysis from day one.

For a start, teaching curriculum, pedagogy and management of education have to be reformed. US President Barack Obama is right: “If we want success for our country, we can’t accept failure in our schools.”

Fortunately, as evident from a recent supplement in The Economist magazine, creativity can be taught.
It starts with recognising the new view that creativity is part of normal brain function. The trick is to get the classic divergent-convergent creativity challenge working as a matter of habit.

First, we need to discard the emphasis on IQ in favour of CQ (creativity quotient). It is already proven that Torrance’s creativity index is a good predictor of kids’ creative accomplishments as adults.

According to Prof J. Plunker of Indiana University, the correlation to lifetime creative accomplishment was more than three times stronger for childhood CQ than childhood IQ. However, unlike IQ scores (which rise 10 points every generation because presumably, enriched environments produce smarter kids), CQ scores in the US and many other rich nations have fallen, of late.

This no doubt reflects that kids now spend more and more time in front of TVs and playing video games, rather than engaging in creative activities. Also, there’s the growing lack of creativity development in schools and at home.

The same decline is happening in Malaysia. Reform must adopt a problem-based learning approach – where education is revamped to emphasise ideas generation, curricula is driven by real-world enquiry, and pedagogy acquaints teachers with neuroscience of creativity.

Critics argue our kids already have too much to learn. This is a false trade-off. Creativity thrives on fact-finding and deep research.

High global curriculum standards can still be met – but it needs to be taught differently. Creativity is prized in Malaysia, but, we don’t seem to be committed politically to unlock it.

Continuing denial

We have not produced (and are unlikely to produce) talent in sufficient numbers to take us to the next level of becoming a high-income nation. For sure, what got us to where we are today will not get us to where we want to go. To begin with, we have to broaden the human capital base. For this, we need to transform our education system to secure at least a quality supply flow in the next generation.

In the end, it’s not just about sustaining economic growth. We are surrounded with matters of national and international importance crying for creative solutions – from striving for excellence to raising productivity to delivering quality healthcare.

Such solutions emerge from an open marketplace of ideas. These can be sustained by a workforce constantly contributing original ideas and being receptive to ideas of others. What is required is real leadership to effectively harness the vast energies engendered.

The Prime Minister is right in highlighting government as a key component of the creative ecosystem, in what he calls “bringing innovation into government and government into innovation.”

This is to enable the formulation of framework, regulation and policies that support and not hinder innovation. It’s a great policy move but in reality, the Government at large has yet to buy into this transformational change.

If you ask around – as far as talent development and retention goes – much of the Government remains in denial. President Ronald Reagan once said jokingly the nine most feared words in the English language are “I am from government and I am here to help.” This rings all too true!

Come on, get real

Studies by an old friend Prof Rajah Rasiah identified three underlying causes for Malaysia’s poor showing in last year’s FDI inflows, according to the 2010 World Investment Report – its narrow human capital base, absence of synergy between research and development labs and industry, and inadequate technological absorption, in the face of intensifying competition in Asia especially for talent.

Like it or not, the talent game is dynamic as it is intense. It is not good enough to have a set of policy responses to attract and retain talent. Weaknesses have to be dissected and addressed, and practical solutions neatly designed for effective implementation in a well coordinated fashion.

Most policy pronouncements reflect incentives offered by the Government which it considers attractive. Nobody bothers to ask the targeted talent what they want and what it takes to make them want to move.

The tendency is to assume that, given the right incentives, Malaysian talent overseas would move back and foreign talent is readily attracted to come to Malaysia. Hence, the dismal failure of the “brain-gain”
programme. The approach is all wrong. Get real!

The bar on talent has since been raised. Fuelling the war for talent, enterprises in Asia are providing higher salaries and perks.

A sea change is taking place in the way businesses organise themselves, create wealth and market their brands and wares worldwide.

The rise of the Web and tech-based professions in logistics, biotech, life sciences and information technology put a premium on scientists, engineers, financial analysts and computer geeks.

In Asia, soft skills which were previously sidelined (such as adaptability, English and Chinese skills, ease in fitting into other cultures, negotiation and political savvy), are now in demand.

It’s no longer enough to be talented in Oracle and Java. Global experience, an ability to lead multicultural teams, and diplomatic know-how to move seamlessly across borders, are among the skills in short supply.
The globalised economy has changed everything. Indeed, businesses will ultimately have to rethink the way they recruit and steward talent.

Today, China and India are becoming sources of innovation. Already, these nations are benefiting from “brain-circulation”, with capital and talent returning after value-adding in skills and experience abroad.
This is occurring without government incentives. National ecosystems are evolving nicely for them. It’s happening simply because it makes good business sense. There is much Malaysia can learn from the new reality.

As wealth and power change hands, talent is no longer a buyer’s market for the traditional rich. By 2015, the International Monetary Fund projects that Asia-Pacific will make-up 45% of global gross domectic product as against 20% by the US and 17% by Euro-zone.

The talent drain can only get more intense. We now have a world where talent can be found anywhere. The problem is particularly acute in Asia and Latin America, where breakneck growth is pushing management to the limit.

The talent crunch is real. Throwing money and incentives at talent won’t necessarily solve the problem. We need to think long-term and re-think old ways.

To do that, corporations are already investing to create the talent they lack, going so far as to establish their own universities to shape raw recruits into corporate leaders. In the end, nations need to have a workable process to recognise talent, fast-track careers, and provide fresh opportunities; essentially, to understand what makes them tick.

It needs high-potential programmes to attract and retain key talent within an ecosystem that provides for high living standards, where security and rule of law are taken for granted.

But, risks remain in the global economy. Concerns of citizens must be addressed by developing and investing in them. The quality of tertiary and vocational education has to be raised as a matter of priority. Imported talent will reinforce local talent; only bring in people who can contribute. Striking the right balance is vital.

>Former banker Dr Lin is a Harvard-educated economist and a British Chartered Scientist who now spends time writing, teaching and promoting the public interest. Feedback is most welcome at
starbiz@thestar.com.my.

There’s a price to pay for convenience, Real concerns ahead?

There’s a price to pay for convenience

THE REAL ESTATE BY ANGIE NG

RISING house prices show that residential properties have become the “hottest” pick for investors who are flushed with cash and believe investing in a tangible asset is a good investment choice.

Although it may seem that the property market is on a “wholesale revaluation exercise” with prices climbing across-the-board, it is actually not so.

A check in the newspapers’ classified pages under the “houses for sale” column show that the price hikes are location centric. There is always a price to pay for convenience and living close to mature neighbourhoods with good basic amenities and infrastructure.

If one cares to check around, there are still many affordably priced (RM300,000 to RM400,000) new or second-hand houses out there, but one must be prepared to stay further away from the “conveniences”.

I believe there are various reasons why people invest in property over other investment instruments. The property market’s tenacity in withstanding the global financial crisis must have converted many sceptics to build up their investment portfolio with property assets.

Malaysians’ penchant to save has translated into lots of liquidity available for investment. Savvy investors will invest their money in instruments that will offer good returns over cost and risk.

The prevailing low savings interest rate and the under performing equity market are some of the “push” factors that are promoting property investment.

While these financial instruments are still affected by the external uncertainties in the US and Europe, property investments are very much locally-driven and has proven to be a reliable asset class.

The value of Malaysian properties, both houses and shop lots in good locations, have sustained very well so far and there have been more upsides than downsides.

The quick rebound of the property market in Singapore and Hong Kong may also have contributed to a resurgence in property buying here.

There is also pent-up demand for properties as some people who have procrastinated on signing on the dotted line previously have decided to do so now after seeing the market’s ability to withstand the tough times.

Supply has been slow to catch up after widespread project deferments by developers in 2008. New project launches have just resumed towards the later part of last year.

The high demand over supply has naturally resulted in housing prices escalating in various parts of Kuala Lumpur and the Klang Valley. Penang is also another hot property market where prices have come close to Kuala Lumpur levels and still climbing.

This is a good opportunity for less well known developers with reasonably sized land bank to build affordably priced homes to woo buyers.

One way developers can do this is to come up with products that allow buyers the flexibility to decide their own house built-up and layout plan, just like in the “Sims” computer game.

Instead of the “one-size-fits-all” model that is the norm now, it will be a value added service to buyers if there are various sizes and layout plans to choose from.

Some families have elderly folks and it would be more practical to have at least one or two bedrooms downstairs for a double-storey house.

I have heard mothers of teenage children staying in 2½-storey to three-storey houses complaining that they are “cut off” from what their children are up to these days. They yearn for “the closeness” of their single-storey or double-storey houses.

Large central parks would be another huge selling point as residents would like to unwind and relax in the open environment.

At the end of the day, all stakeholders must do their part to ensure the property market continues to be sustainable.

Developers should be more pro-active and ensure they take the necessary steps to “tune in” to their customers’ needs and ensure more timely launches to meet rising demand.

Buyers also have the responsibility to be prudent and not to over-commit themselves or default on their loans.
 
>Deputy news editor Angie Ng thinks it is a good idea for relatives or friends, who want to stay close to each other, to pool their resources to buy a nice piece of land and turn it into a nice housing enclave.

Real concerns ahead?

By JAGDEV SINGH SIDHU
jagdev@thestar.com.my

Large percentage of property loans may be a problem if recession hits

THE surge in property prices has created a fresh avenue for investors wanting to make big bucks, but it is also creating a huge future problem that if left unchecked, can spell trouble for households, banks and the overall economy.

The robust property market has seen the percentage of property loans to total loans in the banking system rising well beyond the levels seen during the 1997/98 Asian financial crisis.

The growth in house purchases is said to be among the largest contributors to the tremendous build-up in household debt over the past 10 years.

Those concerns, for now, are being overlooked as the sector has not yet showed signs of strain.
For those investing in property as a means of investments, it has yielded huge gains.

“I have made more money from property than from stocks,’’ says one retired analyst, who has been investing his nest egg over the past few years.

It’s not hard to see why that has been the case. Stock markets have been volatile over the past few years.
Although a bet on the right stock can lead to generous returns, the effort and thought that goes into picking a winning stock is far more tedious than buying a house.

In property, the general rule is that you cannot go wrong if you buy a house at the right location. And there are always a few hot areas where huge returns can be made.

However, the pressure for overall prices in the country to appreciate is growing beyond those so-called hot locations.

The Real Estate and Housing Developers’ Association Malaysia earlier in the week said prices of residential properties, notwithstanding the earlier big gains, was expected to rise 10% to 20% over the next six months.
Another boost to property investment is that money is plentiful right now.

Look at the banks’ advertisements and you can see how innovative loan schemes have become.
Housing loan repayment periods have gone from 30 years to up to 40 years, and home buyers can now take loans up to the age of 70, way past their retirement age.

This works on the premise that their retirement benefits, prior investments or their children’s incomes should be sufficient to pay the mortgages taken out on their homes.

Also, the innovative loan schemes that require smaller downpayments – 5% or even zero payment – has allowed buyers to make huge returns.

A 20% appreciation in property values between the time the house is bought on, say, a 5% downpayment, to the time the house is completed (which is normally a couple of years or so), would see speculators raking in a four-bagger from their small downpayment, even after paying real property gain tax.

The extension of loan periods, the low interest rate environment and the smaller margins banks are willing to take just to grow their market share of property loans, have also helped fuel demand for properties.

“The fate of the banking sector is tied to the property sector,’’ says ECM Libra head of research Bernard Ching.

With half of the loans growth for the banking sector to June (which is 13.3% on an annualised basis) coming from properties, the portion of residential loans on the banks’ books is estimated to be 27%.

The percentage just prior to the Asian Financial Crisis was said to be around 17%.

The low interest rate environment really began after that crisis and it has been maintained by the subsequent recessions that have hit the country.

This has contributed greatly to a rise in total household debt as a percentage of the economy.
Household debt as a percentage of GDP was 40% in 2000 and today, that figure is around 64%.

“It’s rising and that has been the trend,’’ says Maybank Investment Bank analyst Wong Chew Hann.

Although property loans form a big part of the financial system, analysts say such loans are not in danger of default as the non-performing loan (NPL) ratio is low, particularly for higher-end properties.

But the danger will come should Malaysia suffer a severe recession. Analysts say transport and consumption loans would be the first to signal a default, rather than property loans.

However, with the nature of each new recession different from the ones before, and with recessions becoming more frequent, some analysts point out that if left unchecked, the current situation may become a problem.

To address this, maybe Bank Negara, taking a cue from what China has done, will need to look at instituting more stringent requirements for housing loans.

One suggestion is to impose higher downpayments, based on percentages on a rising scale, for people buying second, third or more houses.

That way, the profit from their initial investments on the homes will shrink after paying off the real property gains tax, thus making it less attractive to punt on house values.

Maybe prudent limits on banks should to be considered, given the banks’ exposure to residential properties.
Whatever the case, its better to err on the side of caution.

A property market collapse always spells trouble for the economy.