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Europe Opens $80 Trillion Shadow Banking Pandora’s Box: Will Seek To Collapse Repo “Collateral Chains”; Banks and brokers face a clampdown on using assets they hold for clients as collateral for their own trades

Europe Opens $80 Trillion Shadow Banking Pandora’s Box: Will Seek To Collapse Repo “Collateral Chains”

Tyler Durden on 05/24/2013 10:51 -0400

In what may be the most important story of the day, or maybe year, for a world in which there already is an $11 trillion shortfall in high-quality collateral (and declining every day courtesy of Ben’s monetization of Treasury paper) so needed to support the deposit-free liability structures of the shadow banking system (as most recently explained here), Bloomberg has just reported that Europe may begin a crackdown on that most important credit money conduit: the $80 trillion+ global shadow banking system, by effectively collapsing collateral chains, and by making wanton asset rehypothecation a thing of the past, permitted only with express prior permission, which obviously will never come: who in their right mind would allow a bank to repledge an asset which may be lost as part of the counterparty carnage should said bank pull a Lehman. The result of this, should it be taken to completion, would be pervasive liquidations as countless collateral chain margin calls spread, counterparty risk soars all over again, and as the scramble to obtain the true underlying assets finally begins.

From Bloomberg:

Banks and brokers face a clampdown on using assets they hold for clients as collateral for their own trades as part of European Union moves to bolster market stability and rein in shadow banking. The European Commission is weighing whether firms should have to obtain formal consent from their clients before being allowed to reuse assets to back other trades, according to a document obtained by Bloomberg News. The consent would be enshrined in a “contractual agreement” between the parties. The handing over of collateral is an integral part of repurchase agreements, or repos — one of the activities under review by global regulators as part of their efforts to regulate shadow banking. The reuse of clients’ assets poses a potential threat to financial stability should one of a chain of firms that handled the securities go bankrupt, according to the document prepared by commission officials and dated May 15. Uncertainty about who holds an asset can fuel panic in times of market stress, according to the paper. “Complex” chains of collateral can make it difficult for investors to “identify who owns what, where risk is concentrated and who is exposed to whom,” according to the document. “This has consequences for transparency and financial stability.” Under the plans being weighed by the commission, banks and brokers holding securities for clients wouldn’t be allowed to reuse the assets for trading on their own account — speculation on the markets aimed solely at boosting their own revenues, according to the document. The Financial Stability Board has estimated that the global shadow-banking system was worth $67 trillion in 2011, with EU-based activities accounting for about $31 trillion.

Here’s the kicker: collateral chains collapse on their own when confidence and faith in the financial system is evapoarting. This is usually manifested in soaring variation margin, and demand for delivery of collateral (which having been pledged at 10 or more different places just doesn’t actually exist). In other words, the last thing Europe needs is to force the aftereffect of a plunge in systemic confidence to be imposed upon the market participants! And yet, it is doing just that.

Personality, social media and marketing: A plan to assess people’s personal characteristics from their Twitter-streams

Personality, social media and marketing: A plan to assess people’s personal characteristics from their Twitter-streams

May 25th 2013 |From the print edition

IN AMERICA alone, people spent $170 billion on “direct marketing”—junk mail of both the physical and electronic varieties—last year. Yet of those who received unsolicited adverts through the post, only 3% bought anything as a result. If the bumf arrived electronically, the take-up rate was 0.1%. And for online adverts the “conversion” into sales was a minuscule 0.01%. That means about $165 billion was spent not on drumming up business, but on annoying people, creating landfill and cluttering spam filters.

Which might, in the modern, privacy-free world of sliced and diced web-browsing analysis, come as something of a surprise. Marketing departments gather terabytes of data on potential customers, spend fortunes on software to analyse their spending habits and painstakingly “segment” the data to calibrate their campaigns to appeal to specific groups. And still they get it almost completely wrong. Read more of this post

Eavesdropping on secret communications is about to get harder, thanks to quantum mechanics

Eavesdropping on secret communications is about to get harder

May 25th 2013 |From the print edition


CRYPTOGRAPHY is an arms race between Alice and Bob, and Eve. These are the names cryptographers give to two people who are trying to communicate privily, and to a third who is trying to intercept and decrypt their conversation. Currently, Alice and Bob are ahead—just. But Eve is catching up. Alice and Bob are therefore looking for a whole new way of keeping things secret. And they may soon have one, courtesy of quantum mechanics. Read more of this post

The mismanagement of Indian cricket reveals India’s wider failings

The mismanagement of Indian cricket reveals India’s wider failings

May 25th 2013 |From the print edition


CRICKET is like a religion in India, it is said—especially by Indians, who take almost as much delight in their love of the sport as in the contest between bat and ball. Nothing, they suggest, unites their vast and varied country so much as its devotion to what was once an English summer game. That is one reason why the epic mismanagement of Indian cricket matters. The other is that it gets to the heart of the cronyism and high-level abuse that plague India more widely.

Every cricket season brings news of a fresh scam or intrigue including, on May 16th, the arrest of three cricketers and a dozen bookmakers for alleged match-fixing in the country’s most popular domestic tournament, the Indian Premier League (IPL). Investigators in Delhi hint that the players were paid indirectly to underperform by the Mumbai gangsters who control much of India’s enormous illegal gambling industry (betting on cricket is against the law in India). If they are right, the nexus between racketeers, bookmakers and greedy cricketers, exposed in 2000 in one of the biggest scandals in modern sport, remains in place. This would not be surprising: India’s government and the men who run cricket there have done almost nothing to dismantle it. Read more of this post

Zhang Yong, creator of the wildly popular Chinese hot-pot chain Hai Di Lao, may not have the global cult following Steve Jobs, but in China’s food and beverage industry, he isn’t far behind

May 24, 2013, 12:00 PM

Star Entrepreneur’s Business Advice: Don’t Listen to Me


Zhang Yong, the creator of the wildly popular Chinese hot-pot chain Hai Di Lao, may not have the global cult following of Apple founder Steve Jobs, but in China’s food and beverage industry, he isn’t far behind. In 2011, bookstores stocked the shelves with “Learn from Hai Di Lao.” Media outlets are clawing for an opportunity to interview him, a spokeswoman said.

The question for the entrepreneur—who has built a growing empire of 75 restaurants that serve sliced lamb, beef and vegetables to be boiled in spicy broth—is always, What’s next? And how did he come up with the idea to distinguish his chain with service perks like manicures, board games and noodle performances?

Mr. Zhang, who confesses that after 20 years of eating hot pot he doesn’t particularly like it, said he plans to take Hai Di Lao public, but isn’t sure in which market. The timing isn’t optimal right now, he adds, noting that other Chinese companies have listed and flopped almost instantaneously. Read more of this post

The Unintended Consequences of High Expectations and Pressure on New CEOs

The Unintended Consequences of High Expectations and Pressure on New CEOs

Kevin Krieger University of West Florida

James S. Ang Florida State University

April/May 2013
Journal of Business Finance & Accounting, Vol. 40, Issue 3-4, pp. 501-526, 2013

We provide empirical tests of a general version of targeting theory that greater scrutiny could lead to executive abuses. Our results show that new CEOs under higher expectations or pressure are more likely to report meeting analyst forecasts; however, this apparent superior performance dissipates after excluding firms having characteristics synonymous with earnings manipulation. We find evidence that new CEOs under greater pressure are considerably more likely to engage in manipulation while the link between expectations and manipulation is much weaker. The results are strongest for new CEOs whose firms report meeting forecasts and do not “walk down” earnings estimates.

I hate to say it, but what this country needs is another financial crisis

I hate to say it, but what this country needs is another financial crisis

By Allan Sloan, Friday, May 24, 10:38 AM

Almost a century ago, Thomas Marshall, Woodrow Wilson’s vice president, got tired of listening to senators blather on about the nation’s needs and uttered the words that made him immortal: “What this country needs is a good five-cent cigar.” Today, with 24/7 blathering as our national political pastime, let me adapt Marshall’s 1917 remark: What this country needs to get its act together is a good five-alarm financial crisis.

I mean, look around. Except for the Federal Reserve, which has consistently tried to help the economy, misguided though some of its actions may be, about the only real changes our government has made since the onset of the financial crisis were induced by fear. The Troubled Assets Relief Program, which played a vital role in restoring confidence and stability to the financial system, was passed only because the House’s rejection of it on Sept. 28, 2008, set off a 778-point plummet in the Dow. That scared the House into reversing itself. Read more of this post

Keeping the Faith: The Mathematician Who Could Be a Movie Star; Yitang Zhang, a onetime accountant and part-time lecturer at the University of New Hampshire who used to make sandwiches in a Subway shop, solves one of the great math puzzles

The Mathematician Who Could Be a Movie Star

In the distraction of the scandal-fever swirling through Washington and the news media, you might have missed the announcement the other day that one of the great puzzles of number theory had been solved.

What makes the news most fascinating is that the solver isn’t on the faculty of a top university and wasn’t known until this month to others who work in the field. He is a Chinese immigrant in his 50s named Yitang Zhang, a onetime accountant and part-time lecturer at the University of New Hampshire who used to make sandwiches in a Subway shop. Said one leading number theorist: “Basically, no one knows him.”

Cue the agents and film producers.

Because the story gets better. Zhang’s accomplishment tracks our romantic vision of the dedicated genius working alone in his garage. The truth is even more unlikely.

Zhang hit upon the crucial idea not in his garage but at a friend’s house in Colorado, where he had gone to clear his head. He was sitting in the backyard, waiting to leave for a concert. (Imagine it cinematically: Zhang skips the concert, ignoring the entreaties of his skeptical hosts, and refuses to budge from the yard, where he sits all through the frigid Rocky Mountain night, feverishly scratching equations into tree bark.) Read more of this post

The Savior Generals: How Five Great Commanders Saved Wars That Were Lost; Instead of punishing them, the Byzantine general Belisarius recruited conquered peoples as allies to help defeat Germanic barbarians

May 23, 2013, 6:11 p.m. ET

The Tough Who Got Going

Instead of punishing them, the Byzantine general Belisarius recruited conquered peoples as allies to help defeat Germanic barbarians.



For a police chief, keeping the streets of Beverly Hills safe will probably never qualify as an act of great leadership, if only because the task itself lacks a certain degree of difficulty. The value of leadership is much clearer when circumstances are unfavorable—especially when failure seems imminent and is then somehow converted into success. For this reason, Victor Davis Hanson’s “The Savior Generals” focuses on five figures who faced an outsize challenge and rose to meet it with resolution and skill. “In some sense, winning against impossible odds—when most others cannot or would not try—is the only mark of a great general,” Mr. Hanson writes.

Mr. Hanson’s fluency with a broad range of historical epochs, which has made him one of his generation’s most notable historians, is on full display in “The Savior Generals.” Although his portraits come from the military realm—ranging from the classical period to the current day—they illustrate eternal verities that arise in all types of endeavor, and they capture attributes associated with master strategists in all walks of life, such as a disregard for conventional wisdom and an intuitive grasp of the big picture. Read more of this post

Lessons from an old master: As an art crimes investigator, former policeman Richard Ellis takes a traditional approach

May 23, 2013 3:45 pm

Lessons from an old master

By Emma Jacobs

Dick Ellis 12 and Bald

The art of the investigation: Richard Ellis is hired by collectors and insurers to retrieve stolen works

Criminals are both nemeses and friends to Richard “Dick” Ellis. After he leaves the Wallace Collection, the gallery in central London displaying paintings by Fragonard and Canaletto, the 63-year-old is going for a drink with one. Or, as he nonchalantly puts it, “someone who was classified as a former terrorist”.

The reason? “That is how you learn to do stuff.”

Mr Ellis traces stolen paintings and artefacts on behalf of collectors and insurers. Keeping up with criminal contacts helped him do his job as an investigator at New Scotland Yard, heading the art and antiques squad, and now it helps him to retrieve stolen property for private clients. Read more of this post

Ask a Billionaire: GoPro CEO Nick Woodman; A lot of people would ask me, “Are you really doing this?” So I put a Post-it note by the side of my bed that said, “I am doing this.” Every morning when I woke up, the first thing I’d look at was that Post-it note

Ask a Billionaire: GoPro CEO Nick Woodman

By Emma Rosenblum on May 23, 2013


Nick Woodman
Chief executive officer, GoPro
Net worth: $1.73 billion

How much of your success would you chalk up to luck?

I was very lucky that I had my idea when I was young. I had very low overhead. I could go live out of my Volkswagen bus while I got my company going. But I had no idea how to bring this physical product from idea to reality and then sell it in the marketplace. A lot of people would ask me, “Are you really doing this?” So I put a Post-it note by the side of my bed that said, “I am doing this.” Every morning when I woke up, the first thing I’d look at was that Post-it note. And after three months of looking at it and getting myself pumped up to go to work, which was, you know, 5 feet across the room at my desk, I realized: I am doing this. Four months turned into four years turned into now 11 years. Dedicating myself to actually following through was my single biggest achievement.

John Doerr on the great entrepreneurs of the last half-century

John Doerr on the great entrepreneurs of the last half-century

ON MAY 23, 2013

In his nearly 40 years in Silicon Valley, John Doerr has worked alongside many of the greatest entrepreneurs and leaders in history. The first: Former Intel CEO Andy Grove, with whom Doerr worked closely in roles ranging from intern to a leading sales person at the microchip company. Over the next four decades Doerr invested in, mentored, sat on boards of directors with, and otherwise observed Jeff Bezos, Larry Page (and Sergey Brin and Eric Schmidt), Reed Hastings, Steve Jobs and many other luminaries. Speaking to a packed house at tonight’s PandoMonthly fireside chat in San Francisco, Doerr shared his impressions of each of these men, as well as a few personal bits of wisdom.

Read more of this post

Spend time wisely: How to focus on the things that matter

Spend time wisely: How to focus on the things that matter

by Eric Barker

How can you spend time wisely?

We all wonder where the hours go. There’s a good reason for that — we’re absolutely terrible at remembering how we really spend our time.

Via What the Most Successful People Do at Work: A Short Guide to Making Over Your Career:

Hunting through data from the American Time Use Survey, conducted annually by the Bureau of Labor Statistics, and other time diary projects, I came to the inescapable conclusion that how we think we spend our time has little to do with reality. We wildly overestimate time devoted to housework. We underestimate time devoted to sleep. We write whole treatises glorifying a golden age that never was; American women, for instance, spend more time with their children now than their grandmothers did in the 1950s and 60s. Read more of this post

Fresh Water ‘More Precious Than Gold’ in Bangladesh

Fresh Water ‘More Precious Than Gold’ in Bangladesh

By Naimul Haq on 11:40 am May 23, 2013.
Chapainawabganj, Bangladesh. Fahima Begum rises each morning at dawn and walks two kilometers to a small pond, the nearest source of fresh water.

On her way she passes the rusty old hand-pumped tube well that used to supply water to her village in Bangladesh’s arid Barind region until the water table here dropped out of reach.Using a ragtag array of pots, she carries back as much as her frail body will allow, knowing that it will have to last her family all day.

Susma Sen, also a resident of the Hamidpur village, located in the Chapainawabganj district, about 330 kilometers from the capital, Dhaka, echoed her neighbor’s lamentation, adding that she rations out her family’s water use for a few days to avoid making the grueling trek again the next morning. Read more of this post

How Beetle Overcame Nazi Past to Become Americans’ Car

How Beetle Overcame Nazi Past to Become Americans’ Car

“Owning a VW is Like Being in Love,” Popular Mechanics announced after polling its readers in 1956. “These owners have actually fallen in love with a car.”

Popular Mechanics wasn’t alone in marveling at the U.S. reception of the small “made in Germany” car. The New York Times Magazine, Fortune, Business Week, Road and Track and the Nation added to a buzz that was vastly disproportionate to the vehicle’s market share at the time. Of the 7.9 million new automobiles sold in the U.S. in 1955, Volkswagen AG (VOW) had accounted for just 28,907.

Nonetheless, the excitement elicited by the “Volks” in the mid-1950s foreshadowed the car’s subsequent success. Annual U.S. sales rose to 120,422 in 1959 and peaked at 563,522 in 1968. The affectionately nicknamed “Beetle” or “Bug” became a lasting fixture of the cultural landscape.

For a product that started out as an initiative of Adolf Hitler’s National Socialist dictatorship, this is a surprising trajectory. Commissioned in 1934 as the Nazi “people’s car,” the vehicle owed its rounded shape and defining engineering traits — most notably its robust air-cooled rear engine — to Ferdinand Porsche, who oversaw its development. Even so, the car’s historical lineage did little to dampen its budding reputation in the U.S. during the 1950s, partly because the Nazis never mass produced it. Read more of this post

The Steve Jobs Emails That Show How To Win A Hard-Nosed Negotiation

The Steve Jobs Emails That Show How To Win A Hard-Nosed Negotiation

Zachary M. SewardQuartz | May 22, 2013, 1:15 PM | 31,749 | 20

The U.S. government’s price-fixing lawsuit against Apple goes to trial next month in New York. Ahead of its court date, the U.S. released emails that purport to show Apple was the “ringleader” in a scheme to set artificially high e-book prices with some of the largest American publishers, which have already settled the case.

The emails have mostly been viewed in the context of the lawsuit, but they also provide an extraordinary view of high-stakes negotiations between the leaders of two powerful firms, Apple and News Corp. They start far apart, but over the course of five days, Apple’s then-CEO Steve Jobs successfully pulls the son of News Corp. CEO Rupert Murdoch over to his side.

Jobs was a famously hard-nosed negotiator who won these kinds of battles all the time. Before book publishers, there was the movie industry. And before that, music record labels. But most of those negotiations were hidden from view. What follows are the emails released last week along with some context; spelling and grammar have been preserved from the originals.  Read more of this post

Wily Mutant Cockroaches Learn to Avoid Sugar to Outsmart Traps

Mutant Cockroaches Learn to Avoid Sugar to Outsmart Traps

Roaches that have been hard to exterminate may be a variety that have decided sugar doesn’t taste quite so sweet as bait anymore, researchers found.

Most cockroach baits cover poison in a layer of glucose, a sugar. Some mutant German roaches, the most common species of pest found in houses, apartments, restaurants and hotels, now taste glucose as bitter, researchers said in a study released in the journal Science. This change in palate enables them to avoid traps.

The scientists collected 19 roach populations, mostly from the U.S. and Puerto Rico, to look at how common the glucose-spurning had become. They found seven populations that had the taste trait, said Coby Schal, a study author and a professor of entomology at North Carolina State University in Raleigh. He expects the numbers would have been higher had his group asked exterminators to send sample roaches from infestations that had been difficult to control by ordinary means. Read more of this post

Prime Numbers Are The Secret To The Cicada’s Success

Prime Numbers Are The Secret To The Cicada’s Success

John MatsonScientific American | May 23, 2013, 5:24 PM | 1,746 | 

“Periodical cicadas have the longest life cycles known for insects. They are called ‘periodical’ because in any one population all but a trivially small fraction are exactly the same age. The nymphs suck juices from the roots of forest trees and finally emerge from the ground, become adults, mate, lay their eggs, and die, all within the same few weeks of every 17th (or in the South, every 13th) year. Not one species does this, but three, and they always do it together.” —Monte Lloyd and Henry S. Dybas, 1966

There is safety in numbers or, at least, there is survival in numbers. That is the maxim that periodical cicadas live by.

Periodical cicadas — insects of the genus Magicicada — are remarkable creatures. They develop extremely slowly, underground, before surfacing en masse at either 13- or 17-year intervals, when the ground temperature reaches 64 degrees Fahrenheit. As described in the epigraph above, they quickly mate, lay eggs and die, disappearing from view until their offspring crawl out of the ground more than a dozen years later. Read more of this post

Three Stories About Steve Jobs, Einstein, And Ben Franklin Prove That Creative Beats Smart

Three Stories About Steve Jobs, Einstein, And Ben Franklin Prove That Creative Beats Smart

Max Nisen | May 23, 2013, 1:55 PM | 2,948 | 6

There are few commencement speeches that last beyond the day they’re given. One is Steve Jobs’ 2005 address to Stanford’s graduating class, where he famously used three stories to memorably define his life.  Jobs’ biographer Walter Isaacson used the same format in his Sunday commencement speech at Pomona College. He spoke about Jobs and his other most recent biography subjects, Benjamin Franklin and Albert Einstein, to drive home an incredibly important lesson. “You are officially credentialed as smart,” Isaacson told graduates. “That’s the good news. The bad news, as you’ll learn, is that smart people are a dime a dozen, and they usually don’t amount to much.” Using one of the phrases most associated with Jobs, Isaacson argued that it’s something other than smarts that defines the most successful people.

“What really matters is those who are creative, those who are imaginative, those like Steve Jobs, who can think different,” he said. Read more of this post

The Plateau Effect: Getting from Stuck to Success; Down-to-earth advice for getting out of a rut

May 22, 2013 4:18 pm

Down-to-earth advice for getting out of a rut

By Trisha Andres

The Plateau Effect: Getting from Stuck to Success

Bob Sullivan and Hugh Thompson

Dutton Books, $27.95

You could call it being stuck in a rut. Or, as the authors of this new book put it, you could say that effort follows the law of diminishing returns, eventually causing both people and companies to reach a point of stagnation where marginal returns disappear.

In The Plateau Effect , Bob Sullivan, an NBC News columnist, and Hugh Thompson, a maths professor and IT security expert, argue they have found a cure for this condition. They call it “constant recalibration”, or always rethinking your approach to problems. Read more of this post

The terrifying rise of the political entrepreneur who “do play the political game, and do not necessarily build a successful business.”

The terrifying rise of the political entrepreneur

By Francisco Dao, Updated: May 23, 2013

In 1999, I decided to leave the headaches of entrepreneurship behind and get a regular Silicon Valley job in an attempt to ride the dot-com wave. My timing was terrible, and by 2001 I had started another company. In that time, however, I learned that the corporate world is comprised of two groups. In one group, there are the entrepreneurs, individuals judged by actual results and forced to live by Yoda’s famous line, “Do or do not, there is no try.” Then there are the corporate stooges, for lack of a better term, who are usually judged by their ability to play corporate politics, making nice to their various bosses.

How a corporate stooge actually performed, or whether or not they produced value, was of little importance. They only had to be good at crafting an appealing image. This is what made entrepreneurs a different breed from the people who made their bones climbing the corporate ladder. Entrepreneurs were judged strictly by their bottom line results. Read more of this post

Abruptly, P.&G. Chief Robert McDonald, 59, Ends Career of 33 Years and was being replaced by his predecessor, Alan G. Lafley, 65.

May 23, 2013

Abruptly, P.&G. Chief Ends Career of 33 Years


In a surprise move, Procter & Gamble, the world’s biggest consumer products company, said on Thursday that its chief executive had resigned and was being replaced by his predecessor, Alan G. Lafley. Robert A. McDonald, 59, the company’s chief executive and president since 2009, notified the board a few days ago of his decision to retire, said a P.& G. spokesman, Paul Fox. Procter & Gamble had been under pressure from the prominent hedge fund manager William A. Ackman, who has criticized Mr. McDonald for the company’s poor stock performance. Mr. Ackman is known for publicly challenging management teams, having agitated for change at the likes of J. C. Penney and Fortune Brands. Mr. Fox said he was unaware of any health or personal reasons behind the abrupt decision by Mr. McDonald, who had worked at the company for 33 years. He also said that Mr. McDonald’s decision was not spurred by pressure from company directors. Read more of this post

Southeast Asia’s booming bond market has sparked fears of a bubble

May 22, 2013 6:57 pm

Asian debt: Beware of bubbles

By Paul J Davies in Hong Kong

Southeast Asia’s booming bond market has sparked fears of a bubble


Gresik is a small industrial town of fewer than 100,000 people, just to the north of Indonesia’s second-largest city, Surabaya in East Java. But its position is critical. It sits near the Lombok Strait, the second most important shipping gateway between the Indian Ocean and the South China Sea and the vital trade route for fuel and resources between China and Australia. That is why AKR Corporindo has picked Gresik for what it hopes will become one of East Java’s biggest seaports and the only one tied directly to an industrial estate. The Indonesian logistics group has a 2,500-hectare site and has invested Rp675bn ($70m) of a projected Rp7tn-Rp8tn in the first phase of the development of both facilities. One of the most notable things about this investment is where AKR got the money: Asia’s local currency bond markets. These markets have their roots in the Asian financial crisis of 1997-98 but they have bloomed since the global financial collapse of 2008 unleashed easy money. However, the hot money flooding out of the west in search of higher returns in growing markets has stoked fears about the biggest credit boom in Asia since the spectacular implosion of the late 1990s. Read more of this post

Asia Goes on a Debt Binge as Much of World Sobers Up

May 23, 2013, 11:02 p.m. ET

Asia Goes on a Debt Binge as Much of World Sobers Up

By ALEX FRANGOS in Kuala Lumpur, Malaysia, and BOB DAVIS in Beijing


A debt-fueled building boom is under way in Kuala Lumpur, Malaysia, above. The country says investing in industry will result in faster economic growth.

In the heart of Kuala Lumpur lies the abandoned foundation of Plaza Rakyat, a never-built skyscraper and shopping mall. Rusty rebar jutting from concrete pilings and fetid green pools of rainwater serve as an unintended monument to the debt crisis that ravaged Asia in the late 1990s.

Today, less than a half mile from the abandoned project, the next boom is under way in the Malaysian metropolis. Construction has begun on a new subway line, and next to one station plans call for a 118-story zigzagging skyscraper that would be the third-tallest building in the world. Cheap credit is fueling the building spree. Read more of this post

Stanford U: The Evolution of Partnerships in China: From the Perspective of Asset Partitioning

The Evolution of Partnerships in China: From the Perspective of Asset Partitioning

Lin Lin  National University of Singapore; Stanford Law School; Stanford University – Arthur & Toni Rembe Rock Center for Corporate Governance

Stanford Journal of Law, Business and Finance, Vol. 18, No. 2, pp. 212-246, 2013

Two of the world’s leading corporate law scholars, Henry Hansmann and Reinier Kraakman, recently shook the foundation of organizational law theory by suggesting that the genius behind modern business organizations was a concept that they have coined “asset partitioning”. Specifically, they argue that a critically important characteristic of almost all business organizations is the creation of rules which partitions separate pools of assets between creditors of the firm and creditors of the firm’s investors. Building on this theory, in a recent Harvard Law Review article, “Law and the Rise of the Firm”, Hansmann, Kraakman and Richard Squire further posit that historical and at present “entity shielding” (i.e., the rules that protect or partition the firm’s assets from the creditors of the firm’s investors) must be created by a countries organizational law for large business organizations to develop. In fact, they suggest that entity shielding has been even more important than limited liability in the development of modern business organizational forms.

While their research presents a comprehensive “western story” of the evolution of business entities, it does not mention China and other Asian jurisdictions. This Article attempts to fill this gap in the literature by examining Hansmann and Kraakman’s influential theory in the context of China. It accomplishes this by examining whether entity shielding existed in ancient China, which was one of the most advanced societies and economies in the ancient world. If this examination reveals that entity shielding did exist in ancient China then it will reinforce Hansmann and Kraakman’s prominent theory by demonstrating that it can make sense of the development of business organizations both in the East and the West. This finding would also reinforce their suggestion that entity shielding generally is a universal prerequisite for large business organizations to effectively function. On the contrary, if there was an absence of entity shielding in ancient China, it would force us to rethink this theory further and it would bring new insight to the divergence between the East and West on the matter of entity shielding.

This Article brings unique insights from the complex evolution of Chinese partnerships to the recent debate on asset partitioning. By illustrating how Chinese partnerships have evolved and how Chinese perception has influenced this process, this Article shows that ancient Chinese partnerships did not exhibit a feature comparable to entity shielding vis-à-vis their European counterparts, especially the partnerships during Ancient Rome and Italian Middle Ages.

It demonstrates that beneath the surface of great divergence in the institutionalization of business practices between China and the West is the great differences between both societies. These differences include different social and legal traditions, different social attitudes towards merchants and commerce and differing levels of development of commodity markets. In particular, Confucian distaste of profits and merchants, the emperors’ concern on maintaining centralized control over the state, the governments’ custom of utilizing merchants created huge obstacles to the development of partnerships as well as partnership law in ancient China. Also, there were alternative means for ordering behavior and protection of creditors, such as kinship obligations, lineage trust, local customs and social norms. All these factors shaped Chinese business practice and led to the lack of rule of entity shielding.

Buyer Beware: The Risk to Institutional Investors Financing China’s Local Government Debt

Buyer Beware: The Risk to Institutional Investors Financing China’s Local Government Debt

by Ryan Rutkowski | May 23rd, 2013 | 12:16 pm

Owners of the debt of local government special purpose vehicles (SPVs) should choose wisely and be cautious. At least this is the message central government officials are communicating to China’s financial markets. Two weeks ago, Premier Li Keqiang identified “controlling the risks of local government debt” as one of his administrations key reform initiatives. But who exactly should be worried about the risk of holding local government debt? The answer used to be banks but recently institutional investors have increased their role.

During the late 1990s up to 2008, China Development Bank (CDB) used to be behind most of local government debt in China. The policy bank pioneered the model of lending to local government SPVs. The bank was able to provide long term loans to localities which the localities paid off using revenues from local land sales to pay down interest and principal until project cash flows came online. This system seemed to work well until 2008 when the return-on-assets of CDB began to fall behind most commercial banks. CDB’s difficulties were not soon enough to discourage commercial banks from lending to local governments. Read more of this post

Exclusive: China $6.5 trillion urbanization plan hits roadblock over spending fears

Exclusive: China urbanization plan hits roadblock over spending fears – sources

9:44am EDT

By Kevin Yao

BEIJING (Reuters) – China’s plan to spend $6.5 trillion on urbanization to bolster the economy is running into snags, sources close to the government said, as top leaders fear another spending binge could push up local debt levels and inflate a property bubble. Premier Li Keqiang has rejected an urbanization proposal drafted by the National Development and Reform Commission (NDRC), seeking changes to put more emphasis on economic reform, according to the sources, who are familiar with the matter. Many local authorities have already lobbied to get funding for projects, ringing alarm bells among top leaders in Beijing. Read more of this post

CJ Group Chairman Lee Jay-hyun has been banned from leaving the country in a widening investigation into his massive slush fund, prosecutors said Thursday

2013-05-23 17:15

CJ chairman banned from leaving nation

By Kim Jae-won
CJ Group Chairman Lee Jay-hyun has been banned from leaving the country in a widening investigation into his massive slush fund, prosecutors said Thursday.
Besides the initially-cited 7 billion won, prosecutors suspect that the size of Lee’s slush funds is far larger and gave a significant portion of it to his children, they said.
Sources in the Seoul Central District Prosecutors’ Office say that in 2006 Lee allegedly transferred a combined 50 billion won to his two children — 25 billion won each — in cash without paying gift taxes, raising suspicions that it was part of the slush fund. The group also is suspected of helping CJ America and CJ Indonesia expand their businesses by buying their products at inflated prices. Read more of this post

There is probably money to be made in analyzing the foibles of money managers, to create new strategies by taking on the opposite of what they are doing.

The Rules, Part XXXVIII

23 May, Aleph Blog

There is probably money to be made in analyzing the foibles of money managers, to create new strategies by taking on the opposite of what they are doing.

What errors do most money managers make today?

  • Chasing performance
  • Over-diversification
  • Benchmarking / Hugging the index
  • Over-trading
  • Relying too heavily on earnings growth
  • Analyzing the income statement only
  • Refusing to analyze industries
  • Buy newsy companies
  • Relying on the sell-side
  • Trusting management too much Read more of this post
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