Friday, May 11, 2012

Risky Systems, Dire Consequences...

Yesterday night a somber CEO had to announce publicly that his bank had lost U$2B dollars in set of complex synthetic derivatives trade,

This CEO is no ordinary CEO but the king of Wall Street, Jamie Dimon, one of the most astute bankers around. The bank went through the financial crisis unscathed but suffered heavy losses last week when a unit of the bank took on complex derivative positions that resulted in unexpected losses:

“This portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the firm previously believed,” - Jamie Dimon, CEO JP Morgan.[Link[

If Jamie Dimon and his bank can't figure the risk they were taking, how will the rest of us ever fully appreciate the risks we are exposed to? The risk we are taking sometimes only becomes apparent when we are faced with the dire consequences. In today's world, financial risk is not so apparent. With all the technology that mankind has evolved and 2000 years of civilization, you would think that we should be able to run stable financial systems that don't erupt into chaos - but it does look that way in the last 2 decades ....we have had crisis after crisis....



Sometimes we are persuaded to take risks because everyone around is doing the same thing. In Singapore, taking a six figure loan for a car and 30 year mortgages are common practices. People think it is safe. But just look around the world  at what has happened. The people in Ireland and Spain, 4 years ago also thought that housing was an excellent investment. Both countries along with the USA have brought down by housing bubbles that burst. Yet, many Singaporeans refuse to believe the same thing can happen here. If you go back to 2005,  US home prices have not fallen  for several decades so nobody expected housing to collapse. Ireland's economy was so strong, it was known as the Celtic Tiger and the people there too thought that housing prices would never fall. Even before the US housing bubble, we have Japan that saw home prices falling for more 20 consecutive years  after its housing bubble burst. With so many examples around the world showing us the dire consequences of housing bubbles, our leaders still kept on telling us that our expensive housing is affordable - even a person earning $1000 can/should take up a 30 yr mortgage for a home. Instead of learning from what has happened to so many countries in recent years, the govt simply allowed the same thing to happen here and pass the risk to Singaporeans as it fills its coffers with the sale of new HDB flats.  The high prices and ability of Singaporeans to service loans are build on dangerous assumptions of low interest rates, low unemployment and stable incomes - things than can change abruptly.

Earlier this month when our inflation rate hit 5.2%, Minister Tharman said:

Speaking at the May Day dinner on Sunday, Tharman said that, while the Consumer Price Index (CPI) rose by about 5.2 per cent in March in this year from the same month last year, “it does not mean that the average Singaporean will feel this high inflation”. 

He explained that people who already own homes and are not buying new cars are not affected, because more than half of the inflation is due to higher cost of new car ownership and higher housing rents" - Link


So ordinary Singaporeans are not hurt by the high inflation because they have no aspirations to upgrade their homes and cannot buy cars. If the price of meat increases, you can avoid the inflation by not eating meat. If the price of clothes go up, most people don't feel it because they bought all their clothes during Chinese New Year? Our ministers are great at inventing funny logic when problems show up.

The main problem with high inflation is it erodes our savings and income. A 5% inflation means that your income fell by 5% even if you're paid the same numerical amount. High inflation is extremely dangerous when we have CPF returns fixed at 2.5%. A sustained period high inflation will hurt Singaporeans' ability to retire. For this reason almost all other pension funds such as Malaysian EPF and Hong Kong MPF invest their money with the goal of beating inflation and achieving real returns. Fixing returns on CPF is not safe but dangerous because the buying power of money is relative cost of goods we need to purchase when we retire - the safest approach has always been to  properly invest the funds in assets that preserve the buying power of the money and this is not the approach undertaken by the Singapore govt - it passes on the risk of inflation to Singaporeans by fixing the low returns.

Ordinary citizens in whatever country are often blissfully unaware of what is going on in govt, how the system works and what dangers lurk in the system they belong to. If you talk to a Greek citizen or an Icelander 4 years ago,  they won't be able even to imagine that their countries were about to sink into the depth of crisis and despair. But all the troubles are not entirely unpredictable if govts operate with full transparency and check and balance is in place to stop the missteps.



38 comments:

Anonymous said...

I have never heard Temasek or GIC coming out to talk about losses. Time for us to have a Freedom for Information Act.

Ghost said...

Lucky, you cannot put all derivatives under the same basket. As a former trader on the futures market, I will say some derivatives are pretty safe. It all depend on what market you're entering and the risk you are willing to take. Jamie Dimon admitted they took a bad risk. That's all there is to it. They made a bad decision, it got nothing to do with the derivatives market.

Anonymous said...

In Sg, rich people usually kept their moneys in banks, fixed asset, equaties, bond, etc and small amount of their money in CPF. However, poor people have less choice, they are forced to save some of their money in CPF. In the ancient time, when the rich didn't take care of their comunities, the poor can gang up and rob the rich. Nowaday, the poor robbing the rich when the economy is bad are not feasible anymore. This scenario had happenned in Greece, where the Government cannot played the role of the RObin Hood by printing money to rob the rich.

Worst than Greece, if economy is bad SG GOvernment may print money to rob all CPF's members. The poor with higher percentage of cpf compared to rich would be holding on to the shorter end of a stick.
therefore it should be good to imposed higher cpf minimum sum on the rich. When disaster struck and as rich contribute more than poor, there will be little reason for the poor to rob the rich, resulting in stabilities. i hope the rich could wise up and don't mind contribute more.

Anonymous said...

We have a Freedom of Information Act in Singapore.

It's called voting in more Opposition MPs to scrutinize our government and ask questions in Parliament.

We don't need more small boys in parliament.
Whose public service to date is free porridge, free hearing aids and a promise to lobby for a wet market (that his government demolished in the first place).

Anyway, where is the money for the free porridge and hearing aids coming from?
- PAP?
- Desmond Choo?
- taxpayers' money?
- generous donors?

Anonymous said...

"Temasek or GIC coming out to talk about losses"

I thought Hojinx will very accountable to the public when she say she live a live of no regret. No regret losing countless tens of billions alongside of PapaLee of GIC.

Oh... TH even claim that they have recouped all the losses some time back. don't know how, but just trust PAP as Tharman says ...

Vote PAP to live world of utopia and illusion.

Anonymous said...

"Anyway, where is the money for the free porridge and hearing aids coming from?"

Where is the PAP attack dog ? So obediently keeping quiet instead of barking "woof, woof, where's the money come from ?" when it comes to PAP. Oh... PAP must have feed the attack dog with golden bone, and the dog so busily chewing the bone that it has no time to bark.

80-20 rule said...

Savvy Singaporeans should realize it's high time one diversifies out of SG. Look no further than your neighbors up north, which allow you to own freehold property.

Msia even allows foreigners to buy freehold landed property. And yes, you can even rent out or sell the property if you buy the right location. The key is location, location, location and catalyst factors...

Anonymous said...

"Anyway, where is the money for the free porridge and hearing aids coming from?
- PAP?
- Desmond Choo?
- taxpayers' money?
- generous donors?"
Anonymous
11/5/12 17:23

Not likely to get any answers unless we have Freedom of Information Act.

Anonymous said...

"...the Singapore govt - it passes on the risk of inflation to Singaporeans by fixing the low returns."
Lucky Tan

Don't you know that the Singapore PAP govt has a strong mandate of 93% seats in Parliament to do that?

But who gave PAP this strong mandate? The 60% who voted PAP, right?

SO ISN'T THE 60% THE ROOT OF THE PROBLEM, RATHER THAN PAP?

SO HOW TO SOLVE THE ROOT OF THE PROBLEM?

Lucky Tan, can you figure out a solution?

Anonymous said...

Root of the problem, very difficult to solve. Sometimes only God can solve.

But Lucky Tan is no God.

Anonymous said...

If the cost of property drops for whatever reason, sg government can import more foreigners to drive up the price. Why do you think the price of housing has increased even though we went through a recession a few years ago? It is due to demand from foreigners

Anonymous said...

But there are times when Man proposes, but GOD disposes.

人算不如天算

Anonymous said...

Drill down to the core basics:

You need Land
You need Labour

The rich know it
Thats why they buy land.

There is labour everywhere.. lots of labour and no work.

The rich know it
thats why they can supress wages

Capital
Its available from CPF.. almost free.

The rich know it
Thats why they borrow from it.

Even if we voted the PAP out
How can we do better?

Gripping and moaning ain't gonna help..

Anonymous said...

There were many errors, sloppiness and bad judgment,”

“These were grievous mistakes, they were self-inflicted.”

Those were the words from its CEO Jamie Dimon. And many reformers who said "We told you so"..

http://dealbook.nytimes.com/2012/05/10/a-shock-from-jpmorgan-is-new-fodder-for-reformers/

Anonymous said...

In Singapore, taking big loans to buy expensive properties, condominiums, HDB flats and cars is no issue because PAP had said that expensive properties, flats and cars are very affordable.

Recall that PAP said that Singaporeans can choose to take 30 years loans to pay off the sky high HDB flat prices using their CPF account only. You do not need to pay a single cent using real hard cash to pay off the super long term loan.

Moreover, PAP also mentioned that the price of HDB flats will only go in one direction, that is up and up. How can price of HDB flats crash? It is just impossible to crash sky high price of HDB flats with PAP guarantee.

Talking about properties, there are too many rich peoples dependent on the high price properties to maintain their wealth and income. As PAP million dollars salaries and bonus are peg to high income earners who derive their high income from high price property transactions, PAP has the vested selfish interest to ensure the high price properties must remain high price for as long as time can last.

As for cars, it is already very obvious that the number of COE is going to be cut further in the middle to long term. Very soon, higher than $100000 COE will be staring at your face.

Having said these, Singaporeans have to understand that PAP is after all PAP. PAP can be wrong and when the dire consequence of 30 years loan start to materialize, you may not have another second chance to recover.
You are not as fortunate as the PAP who are immune to the financial fallout as PAP has the million dollar wealth, accumulated from their million dollars salaries and bonus, to cushion the PAP comfortably.

Anonymous said...

//If Jamie Dimon and his bank can't figure the risk they were taking, how will the rest of us ever fully appreciate the risks we are exposed to?//

The system needs to perpetuate the super-power of the few previleged 'wise' ones so that they can command the stupid awe of the many daft.

Anonymous said...

//Ghost said...

Lucky, you cannot put all derivatives under the same basket. As a former trader on the futures market, I will say some derivatives are pretty safe.//

Temasek (or even Spain or Greece) should hire you to take this safe bet and multiply 1 trillion times over. Or you may already be part of their team to give us such advice.

Anonymous said...

"This CEO is no ordinary CEO but the king of Wall Street, Jamie Dimon"

Jamie is extraordinary stupid. Why didn't Jamie Dimon learn from LKY ? Or he so stupid not to follow PAP's excuse ?

All Jamie Dimon needs to do to keep his millions and dignity is to say that "it takes 30 years to recoup and profit from the bank investment." And Jamie can continue to have his millions and live a live of no regret !

http://theonlinecitizen.com/2008/09/lee-kuan-yew-on-gics-investments/

2 billions loss can scream like hell. When TH and GIC lost a combined 100 billions, singaporeans also didn't cry. the lee family still happily collecting millions and insulting lesser mortals ! Jamies is a real loser !

Anonymous said...

//Jamie Dimon admitted they took a bad risk. That's all there is to it. They made a bad decision, it got nothing to do with the derivatives market.//

Of course, of course and after the facts and after the big damage which is many times worst than $1,000/- lost in a casino for 1,000 times for someone who does not have the credential of knowing all about the complex risks that some big name insitutions know.

Before that, did they know it.

Anonymous said...

Before Tharman was promoted DPM, I see him as the most sensible minister. Now everytime he opens his mouth, rubbishs fly out. The closer these people get to the Lee family, the more eager they are to defend the absurb ideology and stone-age thinking of Lee Kuan Yew. So they abuse their brilliant minds and come up with some really weird and absurd logic. What a pity. Lee Kuan Yew is destroying whatever little talent that is left within the pap. All for what ? So that Lee Kuan Yew's thinking and ideology can reign supreme. These people are behaving like the court jesters of the olden days.

Anonymous said...

Lucky Tan,

can you make this posting and analyse in your future post ?

http://christopherbalding.com/

"The Mess that is Singapore: Part II Explaining the Role of the CPF"

This guy is a higher flyer...

appear in
http://www.youtube.com/watch?feature=player_embedded&v=Q4tdixdVvKY#!

http://forums.hardwarezone.com.sg/eat-drink-man-woman-16/make-believe-world-temasek-holdings-singapore-inc-3719918-7.html

before sin censor it.

This professor is a expert in SWF, and find something wrong with TH and gic.

Anonymous said...

Waking up the World.

http://www.youtube.com/watch?v=3zWh11S7E-I&feature=relmfu

Anonymous said...

It is not just for Lucky Tan to analyse and post on The Mess that is Singapore: Part II Explaining the Role of the CPF. The other Tan, Tony, should get the government to account for the discrepancy but he probably won't do it.

Anonymous said...

Thanks for posting this, it is very important and yes, correct, these kind of info will get blocked. Thanks.

Anonymous said...

The big question is if the smartest of the smart guys like Jamie Dimon can get it so wrong, how about DBS which has derive huge profit growth in the recent quarter from trading? The nature of trading is such that there are big profits and even bigger losses! More so because the reward is big for traders if they make and low for huge losses because there is no penalty. Wonder if MAS is on top of this?

Ghost said...

To Annon 11/5 21:43,
There are many derivatives products which are pretty safe. Eurodollor, the Libor for example are pretty safe. If you are own big farmland, it's almost a must to go into the futures market to protect yourself from price movement. The derivatives/futures markets can play a part in keeping investments safe.
JP Morgan undertook high risk trades for big profits and they failed. That's why they now got losses of US$2 billion with more to come if I read the reports right. It's not a matter of the derivatives/futures markets; it's a matter of bad decisions made by the company.

Anonymous said...

//Ghost said...
To Annon 11/5 21:43,
There are many derivatives products which are pretty safe. Eurodollor, the Libor for example are pretty safe. If you are own big farmland, it's almost a must to go into the futures market to protect yourself from price movement. The derivatives/futures markets can play a part in keeping investments safe.//

Like I said, mimic the same safe investment strategy & multiply it 1trillion times over - provided you have a big piece of farmland or equivalent or borrowed assets to begin with. Everything can be presumed safe logically until the 'invincibility' starts to collapse.

The only thing safe is those wheeler-dealers having their cut while peddling their safe strategies in this one big charade known as the ZERO SUM game.

Anonymous said...

Our government's mantra for the past 46 yearts since independence to the people of Singapore:

"Give up your critical faculties and a world of idiotic bliss can be yours."

Anonymous said...

Our government's mantra for the past 46 yearts since independence to the people of Singapore:

"Give up your critical faculties and a world of idiotic bliss can be yours."

Anonymous said...

//Anonymous said...
Give up your critical faculties and a world of idiotic bliss can be yours."
13/5/12 11:17//

They need a lot of people to score below 50 marks for their own 51 marks to look very good.

Unfortuantely it took the recent financial crisis to slaughter a lot of sacred beliefs and assumptions. Now we know that a lot of previous known talents are more or less similar to koyok sellers.

Anonymous said...

Dear Lucky, there is big mess everywhere, not only in Singapore. Please open your eyes and dont be subjective. Do you think european pensions scheme are better? Give me a break.

Anonymous said...

We really have to take our hats off to you for doing what you do. Just by clarifying and summarising the issues, many things are brought to mind. I used to actually never really understand what our government saying most of the time in the papers. I realise a lot of it is funny logic.

It is interesting to figure out what sort of linguistical devices are they using all the time, that makes their claims, justifications and assertions seem so plausible and highly believable on the surface.

One of the techniques I have observed is that our government frame a large part of their explainations in the form of pacification. They are actually pacifying the people.

Having socially engineered a child mentality over these decades on Singaporeans and the government taking on a so-called 'paternal' role, it is easy for the citizenry to accept such cajoling reasons.

This is why...on one hand, I know something is wrong but yet I don't "feel" there is something wrong because I was being pacified.

That's how they managed to get away with a lot of their misperfomance.

Anonymous said...

""This is why...on one hand, I know something is wrong but yet I don't "feel" there is something wrong because I was being pacified.""

Because the mainstream edia is busy with many programmes with a lot of glaring visibility and noise to divert your attention.

Anonymous said...

"Sometimes we are persuaded to take risks because everyone around is doing the same thing. In Singapore, taking a six figure loan for a car and 30 year mortgages are common practices. People think it is safe. "

This is so true. Many are buying a condo, an EC, etc.. because others are doing so. When asked if they could pay for it in their 60s, they say: "They do not think so far."

That's why we need people like you to knock some sense into them. And that's out of compassion, really.

Anonymous said...

This is the same Govt that boasted an annualised 17% return on their investments for the past 20 years but yet paid as little as 2.5% for the CPF money borrowed for the investments. What happened to the differential return of approx 13~15% that they earned from our hard earned CPF savings ?

Robbing poor Paul the pauper to pay for the salaries of rich Harry the Meansters ?

Anonymous said...

It's the assets that you are looking to own but haven't yet owned. That's when the impact of inflation is felt greatest.

Anonymous said...

///Anonymous said...
Dear Lucky, there is big mess everywhere, not only in Singapore. Please open your eyes and dont be subjective. Do you think european pensions scheme are better? Give me a break.
13/5/12 16:47///

My eyes can see see see see ours are multi-million dollars paid so they should not let it happen to singapore as they are supposed (they themselves have claimed to be talented) to be super-human and very special with long-term vision (plans made many years back) that mess should not happen in the future.

Else, what is so different & special about our great policy makers if mess is happening everywhere for them to justify their high salary.

Anonymous said...

Currently 4 major world power blocks are in trouble,EU,USA,China and Japan,the future is not too bright for the entire world really.