Friday, September 26, 2008

The Splurge

I've been asked by one or two what my thoughts are on the current state of banking, and the pending attempt at a bail out of the financial system. Frankly, my views are still developing, so as an attempt to work through some of this, here is how my opinion is forming and how I've come to understand the situation:

Cash for Trash in the NYT does a good job of laying out how we ended up here:

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.” 
The Times correctly points out that the current plan intervenes at phase 4. This is, in a sense, trying to put a band-aid on a gushing wound. It is the wrong place in the chain to effect a change. So, lets step back to phase 1: how do you stave off the surge of housing foreclosures? One route would be to help individuals with their mortgages - this would result in lower defaults, trickling through to less distressed investments held by banks, resulting in healthier balance sheets. $700bn in available funding divided by ~300 million people in the US equates to roughly $2,325 per person. Unfortunately, I don't think that this would do much to dent most individual mortgages, and you quickly encounter a problem of distribution. So there does not seem to be a way to stop the problem at phase 1, easily.

Before diving into details, it's important to consider history: in this case there is Sweden from about 10 years ago. While the similarities are certainly there, there is the small problem that there are more than 5 banks in the US, meaning that a government take over of all of them is not possible. But, there are important lessons to learn - the taxpayer should get part of the upside and decisive action can have meaningful results.

Fast forward to last week. As the banking industry is in the midst of change, Goldman is out raising capital. For the premium brand in banking, only a splashy deal will do, enter Warren Buffett and a $5bn investment. The interesting thing here is that the cost of this capital to Goldman is as high as 17%, meaning that this is a very expensive infusion.

This then lays out what return could be possible if the intervention is executed in a manner acknowledging the history of taxpayer upside in government lead banking bailouts and the potential financial upside in a market in crisis. Which leads me to my first conclusion, the plan needs to provide for taxpayer upside.

Taking another look at the phase 1 question is also worth a moment of thought. By buying these securities, individuals' mortgages are actually owned by the government. The government is then in the position to decide whether to foreclose on those homeowners who fail to make their payments, or to aggressively work with these borrowers to find a way for them to keep their homes. By the way, did I mention the government could make 17% on $700bn ($120bn), which could be used to help these homeowners? Some will say "why do the negligent homeowners get the upside?" To which I can only respond that by keeping them in their homes, the slide in property values is likely to stop, and thereby help all homeowners, (and make mortgages refinancable, meaning that the toxicity of assets is further reduced).

This leads to the second conclusion; a bailout could actually be "good for main street." I wont get in to the politicking that is now in full swing in Washington, or go into the merits of alternative proposals, with one exception: what happens if we do nothing?

Overnight, WaMu was seized and partially sold to JP Morgan, making it the largest US banking failure, ever. In this case, the seizure was, apparently, done to prevent the FDIC from taking a sizable hit from stepping in to support the bank. If the FDIC runs out of money, it turns around and borrows from tax payers. Accepting that WaMu wont be the last bank to fail, and acknowledging that the FDIC might run out of money, this takes us back to square one. Additionally, considering that JP Morgan will be raising additional capital to finance the partial acquisition, there aren't too many healthy banks left willing and able to step in, making it all the more likely the FDIC will have to borrow from the taxpayers.

Bringing me to my final conclusion: By splurging now, and doing so in an organized way, which can be structured to provide the tax payer with potential upsides, we are retaking control. Waiting will only cause us to end up in a similar position, but without the benefits of being on the front foot.

Other reading
  • I haven't touched on the consequences caused by the short selling ban, as I have not formed a final opinion
  • Here are a few other source for background reading

Sunday, September 21, 2008

Tian Tan Buddha

I played tourist today (
pictures), and took the Ngong Ping Cable Car up to see the Tian Tan Buddha. The cable car ride is 5.7km, and takes about 20 min. It connects Tung Chung to Ngong Ping Village, and the views on the ride are amazing. Most striking was clearing the last ridge and seeing the Tian Tan Buddha sitting on top of a hill in the distance.

Upon arriving in Ngong Ping Village I didn't particularly know what to expect, but was slightly disappointed upon realizing that it was a tourist village. This means a bunch of shops (including a Starbucks) in a row that was made to look "authentic" through some clever scene building.

A short stroll away is the Po Lin Monastery, which is at the base of the hill leading up to the seated buddha. The statue is the largest seated buddha in the world, and requires you to climb 260+ steps to reach its base.

While definitely worth the effort to go see, this has been the most touristy sight I have been to in Hong Kong. I am amazed at the throngs of people pushing up the stairs to the statue, and am slightly humored by the "take 1 photo for every 5 steps" mentality. On a more serious note, in the monastery everyone was taking pictures, which I found slightly odd as there were also quite a few people there worshiping.

I am now nearing the end of my second month here. While I can't claim to have seen everything, I do get the sense that I've hit most of the big sights now. If anyone has any recommendations, do let me know. Also, I'm going to Beijing in two weeks, and would enjoy any insights...

A few observations:
- whoever decided to market umbrellas as sun block to Asians - great move. I, however, hate you - they are always on my eye level and not a day goes by where I don't get hit in the face by one.

- posing for pictures; ok, I get it makes them more interesting, but how many peace signs do you want to see when you get home?

Monday, September 15, 2008

Pictures: Macau

I spent the weekend in Macau. My picture are up, and hopefully I'll get around to posting how we were kicked out of the Casino...

Wednesday, September 10, 2008


This past weekend I had a visitor waiting for me in the shower:

I also came across the biggest waste of an air conditioner I have ever seen:

Tuesday, September 09, 2008

Caving In - sort of

Since being here, I find myself walking around a lot, and while at times I enjoy the sights and sounds, other times I was craving music. My shuffle is great for the gym, but leaves a bit to be desired for anything more. So I decided it was time for a new iPod. This being Hong Kong and all, I went on an adventure to Mong Kok and came away with a 2G iPhone for slightly more than a new iPod, and for $10/month get data service.

That now means that I have caved - I suppose. After a few days with it, there is no way I'm giving up my blackberry, so caving might not be the right phrase... Nonetheless, I'm using it for music and a bit of surfing as I wander around.

While I will leave other to debate the quality and superiority of one phone or another, I have a much simpler observation I wanted to share. With the release of the app store, everyone knew that this was going to be a global product. All the developers were aware that it would be sold all other the world. However, numerous apps I have downloaded are for use in the US only - whether expressly or implicitly. Some just wont start up, others can "find" me in their program but didn't load in a map of the area, meaning I have an empty screen. 

This, in a world which is flat, simply should not happen. Build your product so it doesn't rely on text messages, and load in a world map instead of a US map. It isn't that hard, is it?

Saturday, September 06, 2008

Real World

Offline is the new Online, or so I've read, and quite frankly I'm not surprised by this "trend." In the last month, I have spent both more time online and more time offline than I can remember in the recent past. That is to say, while in NYC I usually had a browser open while sitting on the couch and was consuming the internet passively (facebook updates, blogs, 15x a day). Since moving, I've jumped online for specific things to go do offline (information about sights, travel planning, finding people to watch football with etc).

This step from passive to active has also caught my attention in a few other areas. Much like the trend mentioned, MeetUp has released an ad that is encouraging people to get out and do stuff (well "MeetUp" specifically - which by the way they charge for the postings). I've also seen repeated pleas in the past few weeks for people to comment on blogs - the feedback loop is nice for the authors, but again the emphasis on being an active participant rather than a passive consumer.

For a while I've been of the opinion that the next big thing (if I can use an overused phrase) will be bridging the gap from On to Off. Companies that manage to do that, will become more robust enterprises than the web services we see at the moment. When someone has something tangible (or a way to share something tangible) they derive more value from it and therefore are willing to pay for it - hence why MeetUp is one of the few services able to charge a fee.

But more important than what trend comes next, is the realization by my generation that there is more to do than sit back and passively observe what goes on around you. We have been criticized as not caring, or too self-involved to notice, but it seems we may be at the point where we are ready to engage. So, most of you will be reading this on a Saturday morning, go do something with you day and with those around you.

Friday, September 05, 2008

pop culture

For a long time, I've been reffered to as pop-culturally ignorant. While this was mainly in jest, and due to the fact that I missed out on all the 80s movies durring my childhood, it is now truely the case. I was walking down the street and and there was a gagle of girls posing for pictures with what I can only assume is some Chinese pop star. It did make me realize just how out of place I am here at times.

Wednesday, September 03, 2008


This one is for Tom and David:

Everyday at lunch, I get frustrated. I stand in a well organized M/M/3 or 4 queue and within moments it deteriorates into multiple M/M/1 queues and inevitably I end up at the back of the longest. I stand there and can only throw my hands up as a wave of people push past me on every side in the firm belief that they'll be better off - and this from a culture that prides itself on efficiency.

While I doubt Americans have the upper hand in this, and are capable to puzzle together the right way to queue, I am thankful for the operational engineers who slap up some good old fashion barriers and force people to stand in line the most efficient way possible.

Tuesday, September 02, 2008

... and dreaming

This weekend I found out that many domestic helpers sleep under the dining room tables of the employers. In this city where 1 in 4 living in Central are supposedly millionaires, this gap between rich and poor is astonishing. It makes me understand the Sunday crowds sitting out in the public spaces - but I still can't quite wrap my head around hiring someone and having them sleep under my table.