Two Speed World, by Gerald Ashley and Terry Lloyd. My friends and ex-Dow Jones colleagues have written a fantastic book about change, how fast it happens (or doesn't) and its impact on the world.
We live in a bewildering world of change, which splits naturally into steady progress punctuated by sudden disruptions - the two speed world. Disruptive change occurs at high speed, according to the new book Two Speed World, while incremental change happens more slowly.
Two years ago, a world that was mainlining credit like cocaine was stunned when its habit was abruptly curtailed. A few economists and bankers had been predicting that the credit binge could not last, that it was dangerous, that credit derivatives were out of control - but no one was listening. So when the credit crisis exploded it set the world on its ear and forced change; far-reaching, disruptive change with concomitant, painful withdrawal symptoms.
Incremental change, or life in the comfort zone, is a "dull advance over a long period of time that can add up to a great deal of progress," according to Gerald Ashley, co-author of Two Speed World. Disruptive change comes from exceptional events such as wars, new inventions or financial markets meltdowns.
Ashley noted that disruptive change is not to be considered as an extreme example of incremental change. "Many decision makers tend to see most issues in incremental terms and on occasion, for example a financial crisis, they fail to understand that it is disruptive change underway that demands different analyses and approaches to those that they employ in normal times."
Disruptive change is the most feared and the least understood type of change and "may receive more attention than their importance warrants relative to the incremental changes of everyday life," said Ashley.
The financial crisis, given its severity and danger to the world economy, probably deserved the attention which has led to draconian changes in regulation and processes in many countries. Though not always welcomed, new regulations are necessary to rebuild the health of financial markets and to prevent another such disruptive change.
"Disruptive change should be treated with respect, not feared, because it is disruptive change that drives progress," said Ashley, who once worked for Baring Brothers in London and Hong Kong and the Bank of International Settlements in Basel, Switzerland.
Incremental change arises from routine, doing what you have done on many occasions before. Many people may strive for more excitement and variety in their lives but in practice most of their lives and experiences tend to be within a narrow compass, said the book. In the case of financial markets, too many firms relied on mathematical models that used historical data and scenarios that were based upon short windows of time and the incremental changes that took place therein.
"Mathematical models were based on economic events in a very narrow window of time, as short as ten years. Bankers did not incorporate cross-correlations where the effect of adverse events in, say, the mortgage market, might trigger a move in others," said Ashley.
Most people live from day to day in a world of incremental change and do not expect to be much affected by disruptive changes. The financial crisis and resultant global recession proved that disruptive change can be right around the corner. "Every person and business should regularly review their situation and not assume that the future will continue as a simple extension of the present state. Even disruptions that eventually are a benefit to all, produce some short-term pain."
The book explores the development of the classical techniques for handling change that were developed in the second half of the twentieth century. Ashley and co-author Terry Lloyd worked together in the 1990s in the financial information industry, but came from different backgrounds. Llloyd, with an engineering and financial software background, has worked for Rolls Royce Aero Engines and Digital Equipment Corporation (DEC) among others. Ashley's background was international finance. The combination of technology and wholesale banking expertise gives the co-authors unique insight into changes in modern financial markets, as well as the world in general.
Monday, December 13, 2010
Wednesday, December 8, 2010
API Finds it's Not Easy Being Green
I am working on an article about the Dodd-Frank Act and stumbled on a great piece in the LA Times about armies of lobbyists marching into Washington to try and water it down. One paragraph caught my eye and made me laugh: "The American Petroleum Institute met with Securities and Exchange Commission officials Sept. 27 to argue that new rules forcing oil and mining firms to report payments made to foreign governments "raises significant practicality and cost-benefit concerns by vastly increasing the amount of data that must be reported.""
LOL. Is that the best they could come up with? Too much paperwork? Is the API suddenly going green? Doubtful.The reason it is using the weak excuse of 'practicality and cost-benefit concerns' is because it cannot say to the SEC: "Gee whiz, how do you expect us to get drilling or supply contracts in dodgy countries without greasing a few palms?"
The practice of bribery is ingrained in the oil business. Officials in Russia, Middle East, Africa, and Latin America have been supplementing their income with bribes since oil was discovered under their feet. Oil firms have always been creative in disguising the payments, but now - in the US at least - they will have to report them. It won't matter, they can open an office somewhere else and send some poor schmuck out with a brown bag (it used to be schmucks in London, but the UK is cracking down too). As long as there is no paperwork to file.
LOL. Is that the best they could come up with? Too much paperwork? Is the API suddenly going green? Doubtful.The reason it is using the weak excuse of 'practicality and cost-benefit concerns' is because it cannot say to the SEC: "Gee whiz, how do you expect us to get drilling or supply contracts in dodgy countries without greasing a few palms?"
The practice of bribery is ingrained in the oil business. Officials in Russia, Middle East, Africa, and Latin America have been supplementing their income with bribes since oil was discovered under their feet. Oil firms have always been creative in disguising the payments, but now - in the US at least - they will have to report them. It won't matter, they can open an office somewhere else and send some poor schmuck out with a brown bag (it used to be schmucks in London, but the UK is cracking down too). As long as there is no paperwork to file.
Tuesday, November 16, 2010
The Fading of Old Glory
As I write predictions for 2011 in the capital markets for various clients, I am seeing a picture that I don't particularly care for. The United States' star is losing its ascendancy as hungrier, less regulated nations begin to encroach on our traditional territories. In just the past two weeks I have seen my kids - educated and trained graphic artists - lose freelance work to equally educated young (or old, who knows?) people in India, China and Korea - for a tenth of the going U.S. rate. I have seen a relative's MRI results read by a doctor in India. I read that many hospitals in the U.S. are outsourcing basic medical services, such as reading CT scans, to doctors in India and China who are doing remote diagnosis. I have heard of lawyers in India training to be able to help companies deal with new U.S. financial regulation. Indian tax accountants are taking away jobs here in the U.S. as domestic consultants outsource the production of tax returns.
The United States is all about commerce and profits. The constant emigration of jobs, manufacturing, innovation and trade to emerging countries where the talent is plentiful and cheap saves U.S. corporations billions. But what does it leave for this country? Manufacturing is all but dead apart from cars. Financial services firms propped up the economy for a while - albeit with smoke and mirrors - and are now heading for the exit as fast as possible, fearing new financial regulation will harm profit margins. Brazil, Australia, and other countries are embracing high speed and algorithmic trading and will soon not need our bulge bracket banks to help them out with it. The health care industry is top-heavy and inefficient with health insurance companies a complete rip-off which will someday be exposed. What is left? The generation that is attending and/or just graduated from university is going to pay dearly for American excesses. It is said half-jokingly that graduates today are most likely to land jobs where they will say "would you like fries with that?" It may be years before they can get into solid, growth area companies where they can make a career.
But what companies will they be? Technology? We have Apple and Microsoft and IBM and Intel, true. But they are on the downward edge of the razor blade that is the technology innovation curve. Innovation can also be outsourced, but it has been the exclusive domain of America for about 150 years. It has to remain so, otherwise what do we have left? A bit of oil, some corn and a lot of people.
New products need to be invented and fast-tracked to production before the Chinese can copy them. I remember in the 1960's when "Made in Japan" was a standard joke for crappy quality, a snide reference to how much better things made in America were. Now Japanese cars are the ones U.S. car makers have to beat in terms of quality and service.
I think this country is in more trouble than we can foresee. If there is not a dedicated effort to increase innovation and support the opening and growth of new companies we could one day see our kids moving to India or Brazil to find work.
The United States is all about commerce and profits. The constant emigration of jobs, manufacturing, innovation and trade to emerging countries where the talent is plentiful and cheap saves U.S. corporations billions. But what does it leave for this country? Manufacturing is all but dead apart from cars. Financial services firms propped up the economy for a while - albeit with smoke and mirrors - and are now heading for the exit as fast as possible, fearing new financial regulation will harm profit margins. Brazil, Australia, and other countries are embracing high speed and algorithmic trading and will soon not need our bulge bracket banks to help them out with it. The health care industry is top-heavy and inefficient with health insurance companies a complete rip-off which will someday be exposed. What is left? The generation that is attending and/or just graduated from university is going to pay dearly for American excesses. It is said half-jokingly that graduates today are most likely to land jobs where they will say "would you like fries with that?" It may be years before they can get into solid, growth area companies where they can make a career.
But what companies will they be? Technology? We have Apple and Microsoft and IBM and Intel, true. But they are on the downward edge of the razor blade that is the technology innovation curve. Innovation can also be outsourced, but it has been the exclusive domain of America for about 150 years. It has to remain so, otherwise what do we have left? A bit of oil, some corn and a lot of people.
New products need to be invented and fast-tracked to production before the Chinese can copy them. I remember in the 1960's when "Made in Japan" was a standard joke for crappy quality, a snide reference to how much better things made in America were. Now Japanese cars are the ones U.S. car makers have to beat in terms of quality and service.
I think this country is in more trouble than we can foresee. If there is not a dedicated effort to increase innovation and support the opening and growth of new companies we could one day see our kids moving to India or Brazil to find work.
Thursday, October 7, 2010
Throwing Jerome Kerviel Under the Bus
I feel sorry for Jerome Kerviel. His face was a picture of devastation. His life is in tatters, and the next three years will be spent in prison. I realize that Kerviel is not an innocent man. He lied and hid his losses using his knowledge of risk management systems gained in previous jobs. What he did was stupid and financially damaging to SocGen - he came close to ruining the bank. There is no excuse for what he did.
There is also no excuse for SocGen to have let it happen.The most cursory of glances into trading accounts would have flagged up issues. The most elementary of audits would have caught Kerviel before his mistakes were monumental. The bank repeatedly ignored warnings and red flags concerning Kerviel's positions, preferring instead to focus on the profits he appeared to be making. SocGen is guilty of extreme moral hazard, and should also be punished.
If there is a lesson to be learned from the trial of Jerome Kerviel, it is that the big banks almost always win. A big bank can gamble its clients' money, let traders take on huge positions with no risk or leverage controls, and cut corners on technology and common sense and still win the day. Government, and that includes judges, will continue to support them because they are 'systemically' important. The only answer is to force banks to take steps to prevent a Jerome Kerviel from happening again. Regulation in the form of forcing banks to employ real-time risk management, trade monitoring and surveillance might ward off another $4bn loss. And prevent what actually appears to be abject stupidity in the name of profits.
There is also no excuse for SocGen to have let it happen.The most cursory of glances into trading accounts would have flagged up issues. The most elementary of audits would have caught Kerviel before his mistakes were monumental. The bank repeatedly ignored warnings and red flags concerning Kerviel's positions, preferring instead to focus on the profits he appeared to be making. SocGen is guilty of extreme moral hazard, and should also be punished.
If there is a lesson to be learned from the trial of Jerome Kerviel, it is that the big banks almost always win. A big bank can gamble its clients' money, let traders take on huge positions with no risk or leverage controls, and cut corners on technology and common sense and still win the day. Government, and that includes judges, will continue to support them because they are 'systemically' important. The only answer is to force banks to take steps to prevent a Jerome Kerviel from happening again. Regulation in the form of forcing banks to employ real-time risk management, trade monitoring and surveillance might ward off another $4bn loss. And prevent what actually appears to be abject stupidity in the name of profits.
Monday, October 4, 2010
Wall Street: Proof that Money DOES Sleep
All hyped up by the SEC's flash crash report, I trotted off to see Wall Street: Money Never Sleeps on Sunday. The movie was proof that, even if money itself doesn't sleep, movies about money can send you to sleep. Oliver Stone's take on the 2008 financial crisis was almost as bad as CNBC's original take. (And then we had to watch CNBC do it ALL OVER AGAIN in the movie.) Seeing non-financial types squirm over explaining credit default swaps and collateralized debt obligations does not amusing cinema make.I think whoever wrote the screenplay fell asleep trying to understand the nuances of a very complicated series of events and issues.
I loved the "A" story - Gordon Gekko gets out of prison, wants his money back so he can get back to raping and pillaging the idiots in this world. But somewhere along the line, the "B" story took over - mixed bunch of evil bankers (who the Hell was Josh Brolin supposed to be? He had John Thain's office, for sure) are....hmm. Doing what bankers do, which is not really movie material.
The "C" story - a love story between Gekko's daughter (the British Carey Mulligan was excellent as an American do-gooder) and the most-likely-to-be-killed-by-a-Disney-baddie Shia LeBeouf - took over and finished whatever promise the movie might have had. What is the point of Shia LeBeouf? He is not a great actor, his looks are odd (his nose could have been crafted for Mr. Potato Head dolls), and he is the least financial-looking type ever.
There were some good moments, however, most of which involved Michael Douglas. His Gordon Gekko character was intact, if weathered. Josh Brolin was all smooth looks and evil smiles, which could have gone a lot further. Maybe if Brolin had played hedge fund honcho John Paulson, squaring off against Gekko to see who could short the credit market the furthest without going bankrupt, we would have had more action. And I would have stayed awake.
I loved the "A" story - Gordon Gekko gets out of prison, wants his money back so he can get back to raping and pillaging the idiots in this world. But somewhere along the line, the "B" story took over - mixed bunch of evil bankers (who the Hell was Josh Brolin supposed to be? He had John Thain's office, for sure) are....hmm. Doing what bankers do, which is not really movie material.
The "C" story - a love story between Gekko's daughter (the British Carey Mulligan was excellent as an American do-gooder) and the most-likely-to-be-killed-by-a-Disney-baddie Shia LeBeouf - took over and finished whatever promise the movie might have had. What is the point of Shia LeBeouf? He is not a great actor, his looks are odd (his nose could have been crafted for Mr. Potato Head dolls), and he is the least financial-looking type ever.
There were some good moments, however, most of which involved Michael Douglas. His Gordon Gekko character was intact, if weathered. Josh Brolin was all smooth looks and evil smiles, which could have gone a lot further. Maybe if Brolin had played hedge fund honcho John Paulson, squaring off against Gekko to see who could short the credit market the furthest without going bankrupt, we would have had more action. And I would have stayed awake.
Thursday, September 30, 2010
On Regulation and Real Estate
Goldman Sachs is preparing another temper tantrum over regulation, this time it is threatening to quit Europe if the region comes down too heavily, according to today's FT.
The bank has already thrown some toys out of the pram in the U.S., leaking that it wants to spin off its prop trading arm well in advance of any Volcker Rule taking effect. (Although why anyone would pay GS for the privilege is beyond me, just hire the traders away!) Now CEO Lloyd Blankfein is predicting gloomily that mismatched regulation between the U.S., EU and other regions will cause banks to move. GS already booked some extra space in Zurich, but perhaps that is too close to Basel. The last thing GS wants is to have to responsibly manage its leverage.
Zurich is the next stop for many banks on the regulation underground. Escaping to Switzerland for tax purposes started a few years back and the trend has grown exponentially in the past two years as regulation in the EU looms. The U.K. is losing hedge funds and bank trading arms in droves. Geneva, arguably the most civilized and pleasant of Swiss banking centers, is overflowing with foreigners. The International School apparently has a long waiting list for entrants. Good rental accommodation is like gold dust, my sources tell me. Many bankers are leaving their families back home while they stay in hotels and try to find reasonable houses or flats to rent. And the rental rates are going through the roof.
If real estate speculation is your game (it is mine, although not on this scale), then Zurich and perhaps Zug and Basel might be good places to buy rental property. Singapore might be next.
However, it is my opinion that no one can escape the long arm of the regulators. Having a base in a lightly regulated country may help to avoid excessive taxation and perhaps even some capital requirement constraints for now. But when you go to do business in the U.S. and the U.K. or Europe, which you will, you might have your hand bitten off. I'd stick to real estate.
The bank has already thrown some toys out of the pram in the U.S., leaking that it wants to spin off its prop trading arm well in advance of any Volcker Rule taking effect. (Although why anyone would pay GS for the privilege is beyond me, just hire the traders away!) Now CEO Lloyd Blankfein is predicting gloomily that mismatched regulation between the U.S., EU and other regions will cause banks to move. GS already booked some extra space in Zurich, but perhaps that is too close to Basel. The last thing GS wants is to have to responsibly manage its leverage.
Zurich is the next stop for many banks on the regulation underground. Escaping to Switzerland for tax purposes started a few years back and the trend has grown exponentially in the past two years as regulation in the EU looms. The U.K. is losing hedge funds and bank trading arms in droves. Geneva, arguably the most civilized and pleasant of Swiss banking centers, is overflowing with foreigners. The International School apparently has a long waiting list for entrants. Good rental accommodation is like gold dust, my sources tell me. Many bankers are leaving their families back home while they stay in hotels and try to find reasonable houses or flats to rent. And the rental rates are going through the roof.
If real estate speculation is your game (it is mine, although not on this scale), then Zurich and perhaps Zug and Basel might be good places to buy rental property. Singapore might be next.
However, it is my opinion that no one can escape the long arm of the regulators. Having a base in a lightly regulated country may help to avoid excessive taxation and perhaps even some capital requirement constraints for now. But when you go to do business in the U.S. and the U.K. or Europe, which you will, you might have your hand bitten off. I'd stick to real estate.
Monday, September 27, 2010
SEC Tries to CONTROL High Frequency Trading KAOS
In the 1960's American sitcom Get Smart there were two opposing agencies - CONTROL and KAOS. At CONTROL you had The Chief, Maxwell Smart (Agent 86) and Agent 99 as the good guys. KAOS was the bad guys of course.
In today's seemingly perplexing world of electronic trading The Chief appears to be played by U.S. Senator Charles Schumer. The well-meaning but hapless Maxwell Smart is played by U.S. Securities and Exchange Commission Chairman Mary Schapiro. (The SEC staff can take turns as Agent 99.) KAOS is represented by high frequency and algorithmic trading.
The Chief (Schumer) made a strong suggestion (order) to regulators to get a grip on KAOS, by looking into slowing down some high-speed trading at times of market stress and investigating manipulative strategies including quote stuffing.
Agent 86 (Schapiro) got on the case and the investigation is underway (http://tinyurl.com/3yk6aou). One telling statement by Schapiro this week alluded to the algos that automate execution when she said that regulators need to decide whether they "are subject to appropriate rules and controls."
"An out-of-control algorithm not only can cause serious losses to the firm that uses it, it can also cause severe trading disruptions that harm market stability and shake investor confidence," Schapiro said in the statement. She added that the SEC will review market fragmentation and the role of dark pools of liquidity that fall outside the traditional market structure.
“High-frequency trading firms are subject to very little in the way of obligations,” Schapiro said at an event held by the Security Traders Association in Washington. “We will consider carefully whether these firms should be subject to an appropriate regulatory structure governing key aspects of their market behavior, including quoting and trading strategies.”
The SEC may also need to peer a little more closely into the market structure that preceded all of these issues. A third of TabbFORUM readers polled said that the Securities and Exchange Commission had something to do with the May 6 flash crash: 31% of respondents to the poll blamed the crash on Reg NMS. (Still, 29% said it was “something else." Cue Siegfried - the Vice President in charge of Public Relations and Terror at KAOS).
All of this investigating is good news, as long as moderation is the byword for resolution. If indeed your opinion is that HFT and algos are run by a shady KAOS-style cartel on Wall Street then the more controls the better. It is my opinion that KAOS-as-HFT is a figment of non-financial industry scaremongers, and that a lighter touch is needed.
CONTROL can best come out on top if it deploys the proper tools: pre-trade risk management and controls, real-time risk management, real-time market monitoring and surveillance. All of these will help to stop KAOS in its tracks before it has the chance to throw another bomb into the room (flash crash...get it?).
In today's seemingly perplexing world of electronic trading The Chief appears to be played by U.S. Senator Charles Schumer. The well-meaning but hapless Maxwell Smart is played by U.S. Securities and Exchange Commission Chairman Mary Schapiro. (The SEC staff can take turns as Agent 99.) KAOS is represented by high frequency and algorithmic trading.
The Chief (Schumer) made a strong suggestion (order) to regulators to get a grip on KAOS, by looking into slowing down some high-speed trading at times of market stress and investigating manipulative strategies including quote stuffing.
Agent 86 (Schapiro) got on the case and the investigation is underway (http://tinyurl.com/3yk6aou). One telling statement by Schapiro this week alluded to the algos that automate execution when she said that regulators need to decide whether they "are subject to appropriate rules and controls."
"An out-of-control algorithm not only can cause serious losses to the firm that uses it, it can also cause severe trading disruptions that harm market stability and shake investor confidence," Schapiro said in the statement. She added that the SEC will review market fragmentation and the role of dark pools of liquidity that fall outside the traditional market structure.
“High-frequency trading firms are subject to very little in the way of obligations,” Schapiro said at an event held by the Security Traders Association in Washington. “We will consider carefully whether these firms should be subject to an appropriate regulatory structure governing key aspects of their market behavior, including quoting and trading strategies.”
The SEC may also need to peer a little more closely into the market structure that preceded all of these issues. A third of TabbFORUM readers polled said that the Securities and Exchange Commission had something to do with the May 6 flash crash: 31% of respondents to the poll blamed the crash on Reg NMS. (Still, 29% said it was “something else." Cue Siegfried - the Vice President in charge of Public Relations and Terror at KAOS).
All of this investigating is good news, as long as moderation is the byword for resolution. If indeed your opinion is that HFT and algos are run by a shady KAOS-style cartel on Wall Street then the more controls the better. It is my opinion that KAOS-as-HFT is a figment of non-financial industry scaremongers, and that a lighter touch is needed.
CONTROL can best come out on top if it deploys the proper tools: pre-trade risk management and controls, real-time risk management, real-time market monitoring and surveillance. All of these will help to stop KAOS in its tracks before it has the chance to throw another bomb into the room (flash crash...get it?).
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