AIG Bonus

The much debated bailout funds approved by Congress was recently used up by AIG for bonus payouts worth $34million to 52 individuals. How this slipped through the cracks, only the Feds could answer. In the words of AIG CEO, it was necessary to retain top executives. One wonders with all the major banks in the US going bust, where would the top execs go to seek employment? US Treasury Secretary, who mistakenly did not pay his tax before taking his oath, had said that executive pay in the US has been exorbitant.

Poor Americans are being chased out of their homes for defaulting their loans, an error on the government side for making it too easy to withdraw loans in the form of subprime mortgages. Executives on the other hand are cashing in. So will Obama's message during inauguration of making America once again the "beacon of hope" materialize?

Congress later passed a legislation to tax the executives heavily.

How Malaysia Deals with the Downturn

In January alone, America has seen 600,000 jobs vanished into thin air. Global car sales have gone down in the vicinity of 40%. Airlines around the world have reported reduced travels. Oil price has been low floating in the average of $30-odd per barrel, forcing small independents to minimize their losses and cash out, also rendering 10% of rigs unoperational. Some have been cold stacked (after being re-activated with the hype of $140-oil). The frenzy of building massive fleets of boats and rigs have ceased. Shell announced its first quarterly loss in 10 years last quarter of USD2.8B. Only 2 industries were reported to have grown in the US last year, video games and alcohol. Retirees are forced to continue to work, fearing that their savings would not be sufficient to weather this rough storm.

In Malaysia, we are not so worried about the economic downturn. We are insulated from the rest of the global community. "Constitutional crisis" and "judicial reform" take center stage and make headlines. Metro continues to be the highest-selling circulation in the country. By-elections seem to be trendy these days (no disrespect intended for a couple of Yang Berhormats who passed away). As Yang Berhormats, it's acceptable to vacate your seat to give way to your husband. It's also acceptable if you intend to switch alliance, get caught in a sex scandal or other reasons.

Malaysia will soon become net-importer of petroleum. This means that we would be consuming more oil than we are producing. In lieu of foreign exchange, the cost to purchase oil per barrel from foreign countries would be enhanced. How would this affect the government's revenue to continue to operate? We have a cornucopia of resources and industries available but are we taking full advantage of these? Are we ensuring that subsidies are not hurting our bottom line?

Are we committed to improve the education in this country to beef up our human capital in the years to come, not just constructing empty schools with an ill-prepared teaching work force which scorn teaching our kids in English? Do our graduates pass muster or are they too concerned of their rights to be involved in politics? Are we not worried of the 100,000 unemployed graduates and many more retrenched recently from factories? Are we complacent with our universities ranked in the top 200? Are we not troubled that Vietnam would overtake us in GDP by next year? Don't even mention football.

It is a conundrum that many of these issues receive little, if any, attention. Maybe if we dish out enough dato'ships, the problems would diminish and eventually rectified.

Short Clips 3: The Bankrupt Nation

In the US, millions no longer define the problems Wall Street has pulled the whole country into. Obama is now talking about trillions of dollars to review the bankrupt country. Where is this money coming when people are losing their jobs, which means less tax revenue for the Government? Where is this money coming from when the US spends billions of dollars to mobilize their troops worldwide? The dollar is no longer backed by gold, so where is this money coming from?

With all the technology, trades and exports from US inc, mega oil companies, successful IT ventures, cutting-edge tech industry, entertainment and so on, one is fascinated to reason, where did all the money go to? Pockets of CEOs, fund managers, owners of Private Military Contractors? Who knows. Obama alone raised almost USD 1B before getting elected as the next President of the United States. Don't forget the money both McCain and Clinton collected during the race. That's just national politics. Where did this money come from? From average American who donated USD20-50 each? It has been reported that Obama intended to avoid withdrawing funds from lobby groups. The world watches as it hopes that the prodigal 44th POTUS carries out his audacious change campaign and not falter and comply to Washington lobbyists demands.

US$75B fraud, how did Wall Street get conned?
RCP article on New York Mayor race

When Thomas Friedman talked about the decline of the US education system and its failings for not generating enough engineers and scientists to sustain the challenges in the 21st century, he claimed that India and China are way ahead by leaps and bounds. However, you still hear of schools in India with teachers getting US35/month and tuition fee at US6/per child. Isn't it amazing that even with these challenges, both giants are still able to produce workforce that ended being the backbone of companies like Microsoft, Google and IBM. Even researches and scientists in top US colleges are typically Asians, mostly coming from China and India.

Check out school for $6 a month

For Obama, what would define his presidency is how he tackles the faltering banks, US foreign policy in Kabul and bankrupt Detroit.

Short clips 1: US Economy

• More than 1/2 million Americans have lost their job in November alone. Expect more to be retrenched if funds are not channeled into the big 3 giants in Detroit. Obama will be put to task when he promised to create 2.5 million jobs by 2010.
• Obama is redirecting war efforts from Iraq to Kabul. Already he is under fire from critics with his selection of cabinet members (supposedly not representing a 'progressive' image) and reactivating leaders from the Bill Clinton's era. Guatanamo bay is another blunder he inherited from previous presidents and will be closed if he keeps his campaign promise. If such is the case, what is the strategic methodology to process inmates?
  
• His main focus now is reviving the collapsed US economy. He intends to repair US infrastructure from roads, bridges to buildings, hence creating 1 million jobs for the next 2 years. As people are losing jobs from downsizing of major corporations across the US, healthcare must also be another top priority. No job means no health coverage.
  
• With the US economy projected to contract by 4.5% next year, can the US afford to sustain another war in Afghanistan? Is it not time to realize that military might is not the best solution in troubled regions such as Kabul and Baghdad? The war in Iraq has a bill of almost USD20B a month, redirecting war efforts to Kabul will not reduce this huge deficit. The US must realize that it cannot solve world hunger if it cannot even resolve domestic issues. Of course, the war efforts will continue as long as Osama is lurking around (perhaps an excuse to extend the 'war on terror') or perhaps pressure from the military industrial complex. Seeing that the banks and auto industries have went bust, the giant defence conglomerates might be next if foreign policies dictate 'softer' approach (Chicago Tribune has filed for Chapter 11 and no one expected the media to go bust).
• Click here for Robert Gates comments on the Pentagon's coming challenges. "I have learned many things in my 42 years of service in the national security arena. Two of the most important are an appreciation of limits and a sense of humility. The United States is the strongest and greatest nation on earth, but there are still limits on what it can do. The power and global reach of its military have been an indispensable contributor to world peace and must remain so. But not every outrage, every act of aggression, or every crisis can or should elicit a U.S. military response".
• The DOD is already the biggest oil consumer in the US at 300kbd. Fuel is needed to power up the massive military organization, especially the US Navy which has a bigger fleet than the next 13 largest navies in the world. US military procurement was budgeted at US180B this year alone. Will Obama optimize operating costs for the military to save the economy?
  

Governance Reform in Asia: Cultural Perspectives

SPEECH BY
TUN DR MAHATHIR BIN MOHAMAD
AT THE NATIONAL COMMITTEE ON GOVERNANCE:
2ND ANNUAL TOP EXECUTIVE FORUM ON GOVERNANCE
IN BALI, INDONESIA
ON 28 NOVEMBER 2008

1. When I accepted this invitation to speak on “Governance Reform in Asia: Cultural Perspectives”, the financial problem in the United States i.e. the sub-prime loans by United States banks seemed to be an American problem which had nothing to do with the rest of the world, and certainly not with Asia.

2. The international community was still talking about Globalisation, a borderless world and a free market. Countries, especially developing countries were being urged to change their ideas about political, economic and social management and policies so as to cater to the global village where trade and capital flows should be free and unrestricted, where foreign involvement in local affairs should not be considered as being against the principle of non-interference in the internal affairs of independent nations.

3. Asians are culturally conservative and orthodox. They prefer to do things the way they had done in the past. But Asians also have an inferiority complex and believe that the Europeans are superior people with brilliant ideas and ways of doing things. The Asians subscribe to the Eurocentric world and would always try to emulate the Europeans.

4. Since the first contacts with Europeans some 600 years ago Asians had become accustomed to adopting European ideas about politics, economics and social systems almost without question. This has become a part of the Asian culture.

5. So when the Europeans came with ideas about globalisation, borderless world and free trade, the general tendency was to accept
and to adapt to these ideas despite Asian countries having achieved independence. Reforms of governance must be made so as to accommodate the new vision of the world as a global village, to make possible the free flows of capital and the sanctity of the unregulated markets.

6. But even as these things were being initiated the world came to realize that the American financial crisis was not going to be confined to America alone but would engulf the whole world. All the systems of the west seem to be crumbling. Not only are they not delivering the expected benefits that they seem to have done to the world’s economy in the past but they seem about to destroy it.

7. Since globalisation and a borderless world would actually give better access of the American system and practices to all countries, including those in Asia, the question arises as to whether we should carry out reforms which would facilitate America’s and the West’s financial and economic crisis spreading to our countries.

8. I do not think Asians would want to be dragged down by an economic and financial crisis not of their own making. If we do not want this can we slow down the reforms including reforms in governance so as to minimise the fallout from the crisis in the rich Western countries. Can we in fact introduce reforms which can protect us more effectively than whatever practices that we have in place now?

9. In other words should we be carrying out reforms of governance to facilitate globalisation and free trade as we had planned or have been urged to carry out?

10. We need to rethink. If we are going to initiate reforms in whatever field we need to know what is happening to the world today in these fields. In particular we need to understand banking and finance better. The understanding may help us avoid changes and reforms which may have been the cause of the financial crisis.

11. There is evidently something wrong with the world’s monetary system. The Bretton Woods agreement provided for gold to back currencies. But the rich countries decided to go off the gold standard. Only faith determines the value of currencies including the US Dollar which was designated the reserve currency.

12. Without gold the US Dollar has no backing at all. It is basically a useless piece of paper. Only the demand for the US Dollar to settle trade payments keeps the value of the US Dollar up.

13. It is doubtful if the United States knows how much US Dollar is in circulation in the world. Its very poor security feature also makes it easy to forge.

14. If the United States manages it finances well the faith in the US Dollar would be justified. But the United States owes the world an estimated 14 trillion dollars, an amount which it can never hope to pay. For years the United States suffers from twin deficits. And everyday the United States Government has to borrow 1 ½ billion dollars to finance its administration.

15. On the top of this the United States banks had not been prudent. Without caring about their assets and resources they have lent huge amounts of money to high risk borrowers, particularly for the purchase of houses. The earnings of the banks were based on the expected interest on these loans.

16. To securitize the loans they were bundled up and offered to insurance companies. It was thought that the risk would be taken care of by the insurance companies. The mortgage companies also acquired these loans.

17. What brought down the banks, insurance companies and the mortgage companies was the huge total amount of the loans. They run into hundreds of billions. When the risky non-performing loans became bigger than the good ones and the collaterals have no buyers the banks could not recover the loans. The insurance companies were also unable to pay the banks because of the huge sums involved. Neither could the mortgage companies.

18. The main reason why all these things happen to the United States is because the introduction of numerous high return financial instruments had diverted investments from the real business of producing goods and services to investments in these financial instruments, which include risky loans, secured debts, collateral debt obligations, swaps, derivatives etc etc. Most people don’t even know what they are.

19. The free market also contributed much to the financial crisis. The theory is that markets can regulate themselves. When prices go down because of oversupply, production would be reduced and prices would recover. Governments should leave the markets alone.

20. But markets are about making money, maximising profits. The greedy soon found that shortages and oversupplies can be artificially created and manipulated. By creating an artificial shortage the prices would go up and the seller can make a high profit. When an oversupply situation is created by repeated selling, prices would fall. At that stage the goods could be bought and delivered to the buyers when prices were high, through yet another artificially created shortage.

21. That was what happened when currencies were traded.

22. Seeing what has happened to the United States and Europe should we carry out reforms of governance to enable all the systems and practices in those countries to be freely applied in our countries, in Asia. Although traditionally Asia would follow Europe, should we stick to this tradition, the Asian culture even though if may bring disaster to us.

23. I think we should think very carefully. Opening borders can result in the crisis of the United States and Europe assailing our countries. Yet we still need to deal with these powerful economies.

24. I am not competent to suggest the reforms needed in the circumstances. Asian countries have a need to make adjustments to the realities of the globalised world. We cannot isolate ourselves. In fact our growth had depended on the wealth of the Americans and the Europeans providing us with good markets.

25. If we allow them to go under or we do something that would destroy the economies of these countries we would lose the lucrative market. And we would also lose a source of capital.

26. We cannot simply shut our countries to these collapsing countries in order to protect ourselves. But we can be selective in how we accommodate them based upon the role we play in relation to them and on the basis of our economy.

27. The countries of Asia which have been most affected are those which succumbed to the easy money offered by the many financial instruments created by the brilliant minds in the financial industry in America.

28. On the other hand those which are too poor to invest in these high return instruments via the hedge funds or directly are not much affected.

29. The reforms of governance needed must therefore be selective in character. Whatever may be the reforms, there can be no doubt that Governments must come back to regulate and to supervise. It will make the free market less free perhaps, but that is a small sacrifice to make in order to minimise the effect of this unprecedented economic meltdown.

30. Bailouts must be regulated so that they adhere to legitimate banking practice. Insurance companies and other funds, including pension funds, must be subjected to Government initiated rules and supervision so as to reduce exposure to high risk investments.

31. Inflow of foreign funds must also be overseen. One of the problems faced by unregulated investment in stock market is the massive and sudden dumping of shares when things look bad or are expected to become bad. The sudden outflow of funds will have a deleterious effect on a country’s economy.

32. Foreign holdings in any local company should be limited. This is especially so for banks and insurance companies.

33. Governments must be prepared to regulate free trade. Where necessary import duties and excise duties should be used to protect local industries.

34. Exchange rates need to be realistic. Free floats needs to be looked at with caution. Where possible fixed exchange rates may be adopted and currency trading be made illegal.

35. Whatever the policy adopted to cope with this worldwide economic crisis, reforms of governance must still be made to provide for efficient Government i.e. efficient bureaucracy. Efficient bureaucracy must mean minimal bureaucratic procedures.

36. Corruption is the bane of all countries. It cannot be totally eliminated. But it can be reduced if bureaucratic procedures are minimal and take the shortest time possible. Any delay must suggest corruption and investigations must be carried out.

37. Government requirements in order to gain approval of anything must be very clear and must be made known to the public. Where compliance is full there should be no delay in approvals.

38. Being business-friendly is necessary in order to maximise private sector contribution towards economic development. It is the duty of Governments to find out what complaints the private sector has and to remedy them.

39. Some of what has been mentioned regarding reforms of governance are not really reforms. And some of the others would be too late to prevent the effects of the financial crisis of America and Europe from hitting Asian countries. But they are necessary nevertheless. They may be able to reduce the impact and perhaps enable earlier recovery.

40. The countries of Asia will have very different problems depending on the stages of their development, their resources and how much they are hitched to the global financial systems. Those which have depended on foreign credit or have been involved in investments in foreign funds would suffer most.

41. On the other had those with large reserves in foreign currencies or have big savings may be able to reduce somewhat the impact of the crisis.

42. Whatever may be the impact of the financial crisis the judicious measures in the governance of the economy will still prove helpful. The important thing is to ignore old habits of imitating everything the rich western countries does. Asian countries must in fact initiate changes, including those to the monetary and financial systems.

43. Asians have always believed in the role of Government in regulating institutions. The world is about to view Asian practices and systems more positively. Asian countries must therefore make their voices heard. And this includes the small developing economies as well. It would be fatal for them if they allow, as in the past the rich and the powerful to devise the systems by which they must all function. In particular the banking system and practices need to be looked at from the Asian developing economies point of view and interest.

44. Governance is defined as the act, process or power of governing, As the situation surrounding government changes, there must also be changes to governance to cope with the new situation or surrounding.

45. What needs to be done may constitute reforms of governance.

46. But reforms are often constrained by the culture of the people involved. There is no doubt that Asians subscribe to different values even among themselves but more so between them and the Europeans.

47. In a Eurocentric world Asians tend to accept everything that came from the West i.e. from the Europeans as right and proper. It is difficult for Asians to reject what originates from the Europeans.

48. But that culture, that blind acceptance of the systems and ways of the Europeans must be modified, if not discarded.

49. What we are seeing today is the collapse of a very fundamental European institution, that of money and banking.

50. It is not enough to just tweak our present system of governance. It seems that we must be prepared for radical change. And Asian ideas must find a place in the development of these changes.

51. As the saying goes we have to go back to the drawing board. We have to question the system we have used for centuries. We have to consider redefining them, introduce new rules and regulations and provide for greater governance.

52. We may have to throw out the system altogether and devise a new one.

53. All these are not in our culture. But our culture must not stand in the way of necessary reforms, if it means saving our economies and our states.

Corporate Pirates

It's dumbfounded when you review the credit crisis in the US. AIG is in the brink of collapse, yet they have spent almost 1/2 million bucks to send their lackeys for away day, USD20 Gs for spa , USD7,000 for golf and USD150,000 on just food. At the same time, they are crying out for help to get a piece of the USD700B stimulus that was approved by Congress earlier.

On the other hand, corporate titans cringe at the idea of paying too much bonuses to their hardworking staff when their revenues sky rocket in "historic proportions" (to plagiarize Obama's description of the ailing economy). Corporate bosses spend in excess of USD20-50k per trip on their private jets on the basis of time optimization, convenience, security and efficiency (in other words, they don't like to wait in line or wait for the plane to take off). Not to mention their ridiculous pay, stock options and golden hand shakes (see my earlier notes). Don't misconstrue me. I think CEOs and Senior Management should be paid handsomely proportionately to performance, same with their working staff. However, when times are bad, it should also be proportionate. We all work for money, there's no denying that (with the exception of Buffett & Tiger Woods alike). This is when staff morale plummets seeing their big bosses perusing the latest yacht catalog while you see your colleagues being thrown out.

Obama is likely to stir the pot. He has refused lobby money profusely. He is therefore not bounded by pressure from the lobby groups. That is encouraging. The fate of the US economy will affect us and the longer it is hurting, the worse it gets for our exports & services, hence money into the country.

Meanwhile, Main Street is not happy at all. People are flabbergasted to see all their hard-earned money taxed by the Government and given back to the same people and corporations who kicked them out of their homes and took away their jobs.

Malaysian Economy is Doing Fine?

We read everywhere in international mainstream channels of the plaguing economic horror in the horizon. Some say it will be worse than the Great Depression in the 30's. People are being retrenched in the US and Europe especially by big corporations to reduce operating expenses. Companies are finding it difficult to pay salaries. Investors are exiting to get their hard cash out of the beat up market. Confidence is running low.

In China and India, real estate value has dropped more than half. People in the US are being chased out of their house because of loan default. Airline industry will face yet another challenge with losses in the billions of dollars and will be forced to consolidate even more. Banks are being closed down in heaps in the US. The US Government is forced to pump funds into the ailing banks, lest they will cause the whole economy to collapse. No banks would mean no loans, no homes to pay, no cars to use. Detroit is asking for US25B to stay afloat. Everyone's pulling their hair out.

Somehow, Malaysia's way above everyone else. We're not worried about all this. We're far too embroiled with whether yoga is permissible for Muslims, what language we should use on road signs and whether bloggers need a code of ethics. Meanwhile, crime rate and inflation are increasing, food is becoming less affordable, projects are being shelved, demand in exports is slowly dropping.

Malays are still phobic of losing their Constitutional rights but at the same time not stepping up to the challenge. We scorn at the prosperity of the Chinese and the social imbalance but don't force our kids to learn Math and Science in English, in fear of getting behind further. We don't understand the dangers of subsidy and ask for more. At the same time, we lambast GLCs who are not performing, yet demanding huge 'social obligations' especially to Malay companies. The Penang Government wants Petronas to fund the second Penang bridge but at the same time wants petrol price to be reduced (thus increasing subsidy money from Government's coffers, although it doesn't directly impact Petronas' revenue).

We need to know what inflation is forecasted to be for the next 2 years and how this would affect the middle and low-income groups. We need to know whether the over-issued hire purchase loans for cars would impact the economy, similar to the subprime crisis in the US. We need to know how Petronas would be affected if oil price drops to pre-war price of USD25/bbl, how much this would boost MAS' income and other oil-dependent businesses. We need to know if we have strict enough regulations to avoid issuing too much debt by banks. We need to know if credit card spending and debt will be our 'subprime loan crisis'. How much of our exports are affected? If this reduces, what is the remedy? Will people lose jobs? What is our backup plan? Are we exiting from losing investments in the US?

Reading our dailes, it would seem to an average Joe that all is hunky dory. Perhaps Malaysia's economy is isolated from the rest of the world. We should be fine then!!

*(Headline in Star read: "Inflation rate lower"). If you read the article, the inflation rate went from 8.2% to 7.6% in Oct. That's very soothing to know that inflation rate dropped by 6 points!

All Going South

1. Oil price has plummeted from a high USD140 per bbl to USD53 per bbl in less than 3 months. OPEC has cut down its production in view of the global economic slow down.

2. Because of the low oil price, many exploration and development work have been re-evaluated. This will cause capex reduction by operators and consequently affect service companies. The investment made in reactivating "cold" rigs and aged boats will be in vain.

3. US consumption of retail goods have declined in lieu of paying off high mortgages and credit card debts. The average household now spends close to 70% just to pay off debt. The overspending in US above its mean is a clear cut example of how capitalism and the 'invisible hand' that corrects the market have failed.

4. Detroit has failed to secure USD25B stimulus package to help the ailing auto industries. This in return further dampened market confidence and reduced the Dow Jones by another 6% last night. Japan's Nikkei lost 7% and HK lost 5.5%. Japanese exports declined by7%, the biggest in decades. Trade deficit in Japan is absolutely abnormal.

5. There are over 1.5M jobs lost over the last few months in the US. Rolls Royce has announced its job cut plan recently.

5. Property value will go south due to foreclosures in the US. Property market has always been a good indication of how healthy the market is. Except nothing less in Malaysia as well.

6. Because Asia has been prudent and learned her lesson from 98', the cash-rich Asian countries are not feeling it just yet. That doesn't mean a slow down is not in order. Already we have seen drops in traveling, hotel occupancy, retail business and such.

7. Malaysia is in a better shape, but is not out of the dog house just yet. Viable projects cannot be shelved. Projects will benefit the construction industry and attract investors. The reduction in EPF monthly contribution is not a viable option for the long run.

8. What Malaysia needs is creating value. We are merely making patches for the leaks, but the big flood will come. We have yet to have a strong second engine of growth and oil revenue is not sustainable for the next 20-30 years.

9. Space programs should be shelved for now. Archways and bullet trains can wait. Subsidies have to be reduced. Tax cut could work to reinvigorate local spending. Corporate taxes and wind fall taxes could be studied and expand to businesses shielded from the recession or enjoying subsidized fuel or electricity.

10. The RM7B is too important for a few people to decide where it goes. The National Economic Action Council and other agencies and groups should sit together and ensure that every cent in the stimulus package is put to good use. Parliament should also form a special committee to be part of it, similar to how Congress and President-Elect Obama are handling it. This committee must also include corporate chiefs, leading CEOs and senior economists, not just politicians. Malaysia is eager to know how this money is spent.

11. We need to exit from failed investments abroad (especially the ones in the US) and reorganize our foreign portfolio. It's not a bad idea to pump money into the ailing banks in the US as they will recover from this in the next 5-10 years. The banks are projected to receive at least half of the USD700B stimulus package.

12. The food industry should be monitored and ensure that recession would not hamper food production and price.

13. This is also a good time to study sustainability projects, such as power generation from waste, alternative energy generation. Cost optimization for running the Government (fed, state and local) could also be studied and implemented. Skype and video conferencing should be encouraged. Travels should be reduced unless totally necessary.

14. It's also not a bad idea to scrutinize how zakat money has been spent. An audited account should be made public, if it hasn't. Zakat money will definitely help out the poor & needy to cope with rising food prices.

15. All eyes are on Dato' Seri Najib, our soon-to-be 6th Prime Minister. This single economic challenge will, without a doubt, define his prime ministership. We should all give him our fullest support, despite political affiliation. Malaysia must remain vigil. Get productivity up and stop changing road names....