Jim "Bowtie" Grant

From head to toe and toe to head, Jim Grant just seems to drag on forever. Tall and gangly, he is the preeminent financial journalist in the country.  Having weathered through past decades of financial storm, Jim writes, comments, and warns of financial disasters. He has been right, he has been wrong, and most importantly, he has been there. Looking back at past decades of turbulence going back to the 70s, one wonders whether the relentless economy grounded him down to his cloth rack like frame, in which no amount of shoulder padding is able to help.

His glasses, perfectly circular to the point where all the possible digits of pi have been exhausted, sit on his tall, sharp nose. When Jim thinks and squints in search of an answer, his squints convey doubt and anxiety. At the same time, he also wears an oversized colorful bowtie. Its quirkiness makes one take him less seriously, only until he speaks again. Sitting obediently on his neck, the bow tie greeted the room during that hot summer day.

As an intern working at an Investment Management firm, I had the chance to join the analysts and managers in hearing his views. He passed his carefully crafted “Grant’s Interest Rate Observer” around the table and began to talk. Reading from his piece, he could not hide his pride when quoting himself. He would read and stop, looking up for any disbelief conveying raised brows, then resume quoting himself with a faint smirk. To an ordinary American, interest rates matter, but not by that much. If anything, it only seems to be a concern when one looks to get a mortgage to buy a house. However, to these investment professionals, it is everything. It is just a single number, but one that their world revolves, and they would argue your world, too, revolves around. He read his interest rate insights theatrically, as if he were doing a spoken word performance. While odd to many, his dramatic seemed to be the only way to do justice to the respect this crowd had for interest rate, especially the treasury rate. As the fundamental rate that dictates the cost of borrowing money throughout the world and the government’s key tool in combatting the high unemployment rate, the room gave Grant all the attention. 

As an interest rate expert, he has built a long career. Beginning his journalism career with the Baltimore Sun in 1972 and finding his own publication in 1983, Jim has written seven critical books examining current financial topics. Most known for his independent thinking that steer clears of popular opinions, he is a respected expert. Different from the blabbering guests on MSNBC and Bloomberg, two major finance networks, when he speaks, people listen. For 30 years now, he has written his bi-monthly piece, “Grant’s Interest Rate Observer,” and shared his views on interest rates. He is frequently quoted by financial literature and was considered by Ron Paul for his Federal Reserve Chairman candidate. While he has been around for the past 30 years, his skepticism has been drawing the finance community’s attention.

In an ever changing world challenged by technology, globalization, and unfailing surprises, people often look for easy, general, and understandable rationalizations of their world. First appearing in academic papers, then quoted in media, and eventually passed around as if it were the gospel, such ideas provide comfort to the world antsy and impatient for an answer, but they may not always be right. As a result, to the investment managers in the room who are essentially in the business of competing to predict the future, they listened to Grant attentively and jotted down notes. For me, a Finance and Economic student, who has been taught to accept different theories underlying assumptions unquestionably and learn to be comfortable with the instructed material, his words struck me. As he shared his concerns for the world’s unwavering beliefs in employment statistics, interest rate’s accuracies, and the Federal Reserve System’s experimental polices, I realized his every word unshackled me from my deep rooted, yet unproven beliefs. Educating a room of relatively young professionals, he preached on. In his mind, economic models, financial policies, and respected academics alike all need to be reexamined. He warned of the consequence of accepting any conditions as given.

After the booming 2000s ended up with not one, but two crashes, the Dot-Com-Bubble and the Global Financial Crisis, Jim Grant began to develop more of a following. For 30 years, he has questioned everything from statistical errors to the market’s search for convenient truths. Throughout this time, he has been doubted, ridiculed, and credited, but he has not changed. While the debate is not likely to end anytime soon for the questions he raised, they will continue to be relevant. As a seasoned veteran, he does not seek anymore validation for he merely aims to share the truth as he has discovered. That day I discovered what it means to be a professional. 

A Fighting Chance or Unsolved Problem

The text message read: "Dude. I owe you big time! Come over one day after work and I'm opening a bottle of Bollinger." It sounded ordinary enough, but the context was much darker.

In as early as 2005, traders around the world in London, New York, and Tokyo began to rig the London interbank offering rate, LIBOR. They asked each other to submit phony numbers to the British Bankers’ Association, who finds LIBOR from the top 16 banks’ submitted median rate. Communicating through calls, emails, and texts, they asked each other to turn in artificial figures in order to derive their desired rate, one that they can readily make money on. Taking advantage of the anachronistic practice, inherited from the 18^th century when only a handful of banks opened shop in London, they exploited its need for a long overdue reform. Furthermore, through blatantly cheating the system, they acted as if they were above the media, the public, and the law, but they were wrong.

In 2012, government regulators such as the SEC, the security and exchange commission, unveiled the rigging and handed out hefty fines to the involved institutions. As part of the settlement, they agreed to disclose their records. As if the traders never bothered to cover their tracks, they left a trail of mind boggling crumbs. The evidences are not only juvenile compared to the sophistication of the financial system, but also insulting to the SEC regulators. One can get the picture just by reading a few lines- LIBOR fixing was rampant and the traders had no filter, no qualms, and no remorse. In some ways, fixing the LIBOR seemed to be as common as rolling up the sleeves and sipping on coffee at work.

Nothing is implied and no decrypting is necessary, they said everything in plain English. One Barclays trader asked another to raise the rate in May 31 2006, “"We have another big fixing tom[orrow] and with the market move I was hoping we could set the 1M and 3M Libors as high as possible." In response, his counterparty followed suit. There is no pledging, no fraternity, and no brotherhood, yet all the traders understood the rule. As financial professionals who studied at similar institutions, received similar trainings, and interested in similar goals, they are all too familiar with the implicit rule of the game, “I scratch your back, and you scratch my back.” As a result, they comply, and often with great enthusiasm. They joked back and forth; traders from all over the world resonated in their light hearted responses, “for you ... anything,” “always happy to help, leave it with me, Sir," and "Done ... for you big boy ...."

Furthermore, while there are some such as RBS’s Tan who saw the fixing justified and filed an unlawful dismissal suit for his firing, most understood the crime. However, the guilty conscience or at least law breaking acknowledgement failed to deter them from participating. As if receiving an honorable invitation to join the mafia, they relished at the opportunity. One trader commented “its just amazing how libor fixing can make you that much money” while the other proclaimed “its a cartel now in london[.]” The unlawful practice was beyond just a few individuals. In 2008, a Barclays Treasury manager claimed that Barclays’ involvement has been overstated, "we're clean, but we're dirty-clean, rather than clean-clean" and the counterparty responded "no one's clean-clean." Such prevalent practice led Barclays to internally agree to defend the banks’ accurate and fair LIBORs to the media on 29 May 2008, as shown in disclosed records.

With the scandal blown out of the water, the media has been at the front and center in covering the rigging. Since 2012, major business publications such as the Wall Street Journal, Financial Times, Business Week, and Economist have dedicated extensive reports on the details of the scandal. Their month long coverage culminated in SEC’s fine announcements. It fined RBS, UBS, and Barclays a combined 2.3 billion dollars and is investigating 20 more firms for their involvement. Given the media’s heavy scrutiny and the law enforcement’s hard response, contrary to the traders’ belief, they were not above the media and the law. However, they may be right about the public.

While the press and the regulatory bodies have all been outraged by this mess, the case has not resonated much with the public. For weeks, finance publications interviewed financial professionals, analyzed the event timeline, and speculated on future regulations. Through eye catching covers and brow raising front pages, they eagerly sought the public’s attention. Yet, as egregious as the rigging is, it does not seem to be much of a surprise to the Main Street- the wolves on Wall Street are still wolves. Long accustomed to the banks’ disappointing behaviors, many may have not only institutionalized their distrust, but also grown numb to the injustices. But that does not convey the full picture.

One potential reason behind Main Street’s underwhelming reaction may be because few understand the depravity of the fixing. In some ways, the traders at the banks were right, what they were doing is above an ordinary person. However, the rigging affects everyone, even to those who intend on hiding behind the veil of inattention and indifference. LIBOR, the London interbank offering rate, is a rate used to set interest rates from all over the world. It affects eight trillion dollar worth of financial derivatives. What this means is that anyone who has a bank account may have been overcharged for the loan or underpaid for the deposits.

LIBOR, which represents the rate at which the top European banks are lending its deposits to each other, is formed organically through supply and demand. Based on the demand for loans by creditors and the supply of deposits from depositors, banks pull back and forth in a tug of war to yield LIBOR. For instance, if creditors have a high demand for loans, banks would prefer to lend to them at the higher rate versus lending to other banks at a lesser rate. At the same time, if creditors have a low demand for loans, banks would prefer to lend to each other at the lower rate versus earning no interest from the idly sitting excess deposits. As a result, given the market forces between banks, LIBOR is formed. Since banks make money from the difference between the rate at which it pays its depositors and the rate at which it charges its creditors, they pay the utmost attention to this process.

LIBOR is then used to set prices for all kinds of financial derivatives. One way to understand it is through a lemonade stand. As if the financial derivatives were the freshly squeezed lemonade, the bank is the lemon farmer. Similar to how the lemon farmer sets the price of the lemon based on the harvest supply and the seasonal demand, the bank sets the cost of borrowing money the same way at LIBOR. As the child buys the lemon, squeezes it into juice, and sells it to kind hearted friends and family, the price of the cup is marked up from the price of the lemons to make up for the labor the child put into running the stand. The cost of borrowing money also increases in the same way. As a result, to the end user, whether it may be a cash starved small business owner, a newly wed house buyer, or freshly loaned student, the interest rates they receive are all the original LIBOR plus some.

While all this information may be too dense for an average reader to understand, hope is not lost. While the Main Street has no idea what is going on, the SEC has been protecting the consumers and have recently stepped up its law enforcement. Signed into law by President Roosevelt in 1933 under the Securities Exchange Act, the SEC investigates frauds, audits financial records, litigates in court, and upholds the law. The agency has been most active in busting insider trading, accounting frauds, and business malpractices. Its notable victories include the WorldCom fraud in 2000s and the Mortgage Backed Securities debacle in 2008. With more than 723 settlements reached in 2012 and an average of 1 million per case, it has fought to return more than 700 million to the victims. Though in the past, it has been criticized for its policy favoring quick settlement over costly and long court room battles, which allows guilty firms to neither admit nor deny and settle with fines, it is undergoing a paradigm shift. It still acknowledges the usefulness of such practice, but is also ready to do whatever it takes to get Wall Street in line.

Since the new commissioner, Mary Jo White, came into power, the SEC has handed out record fines, sought criminal prosecution, and scared the banks into playing nice. Though the SEC is by no means soft, with its 2.3  billion fine to RBS, Barclays, and UBS for LIBOR fixing, 920 million fine to J.P Morgan for its rogue London trader, and 417 million fine to Credit Suisse for mortgage backed securities related issues, it has answered the call to toughen its position. For instance, in addition to having JP Morgan pay 920 million to compensate the shareholders for the damage, it also required the firm to admit to its poor risk management strategies. Forcing the firm to admit to their poor practice, which involved encouraging traders to take riskier bets in a “double or nothing” play in an attempt to recoup the trading loss instead of calling it a day, the SEC is no longer playing the nice cop. It wants the firm to face its mistakes and shareholders straight on. Furthermore, White also reversed the previously agreed settlement with Harbinger Capital Partners to seek harsher punishments for the guilty Philip Falcone. Refusing to let the billionaire walk off easily with paying just a small fraction of his fortune, 18 million out of his 1.2 billion dollars’ net worth to be exact, she overruled the case and opened it up for a new round of settlement.  The overrule decision in August 2013, three months after the initial agreement, is a strong signal that White is serious about reforming the SEC. Lastly, it has recently handed out a record 13 billion dollar fine to JP Morgan for its role in the financial crisis. As the firm that acquired Lehman Brothers and Bear Stearns, two culprit and victim banks of the 2008 financial crisis, JP Morgan is now being held responsible for their acquired firms’ actions. Considering the gravity of these banks’ poor mortgage backed security selling practice, which led to the housing collapse, economic recession, and high employment, the SEC handed out its biggest fine in recorded history. Even after such onerous fine that would wipe away half of JP Morgan’s annual profit, it also kept its right to criminally prosecute the responsible individuals. Five years after the financial crisis, the SEC is cracking down ruthlessly on banks and individuals alike. These decisive moves, all made within White’s short 9 month stint, reflect her determination to clean up Wall Street.

Now with White in power who firmly believes in the SEC’s mission to “protect investors, facilitate capital formation, and insure the fairness and integrity of the marketplace,” the consumers have a fighting chance against the dominant banks. However, it still does not change the fact that traders were right, the fixing was and is above the public. As much as the main street is satisfied with the surged up SEC, the world needs more preventive actions and the preventive actions come from the public. In addition to defrauding and betraying the consumers, LIBOR scandal also demonstrated the scary consequence of people’s inattention. Given the wide knowledge gap between the Wall Street and the main street, financial scandals are likely to happen again and again, all right under people’s nose. Financial illiteracy has contributed to the world’s indifference and apathy to the actions of financial institutions, until something goes wrong. This damaging cycle may be contained by the SEC, but it can only truly be fixed by the public. Through public awareness and civil activism, people can truly make a difference in taming the wolves. The public pressure can deter deregulation lobbyists, accelerate market reforms, and incentivize financial institutions to clean themselves up. As much talk is there about the wrong doings of these banks, there is insufficient concern for the wide spread financial illiteracy. At best, it can lead to minor inconveniences such as paying higher loan rates. At worst, it can lead to financial crimes such as Bernie Madoff’s frauds that lost the investors 18 billion. It is a problem, in which no one ever talks about and given the dominating stakes and influence of the financial industry, people simply cannot afford to ignore it anymore.

For now, the charged up SEC and other regulators have bought the world some time. The SEC continues to investigate banks for their roles. UK’s Financial Security Authority stripped the British Bankers’ Association of its LIBOR calculating responsibility, handed it to a data provider and regulated exchanges, and revamped the rate calculating scheme. UK courts have also begun to try the involved traders criminally and arbitrate on whether to break the financial contracts based on the faulty LIBOR rates. The stepped up regulators are beginning to whip Wall Street in line, however it will not last. Until these white collar criminals learn that they are not above the media, the law, and the public, financial scandals will continue to happen. It may be overly optimistic to wish that society will learn to be financially aware and become agents of change, but it is not too much to ask people for take this problem more seriously until the next one strikes again.

China Watching

“If you think of the Chinese as yellow-skinned people of a totally different race from us, you probably will never get to know them” –The Pocket Guide to China

In 1943, the US Army handed out military pamphlets to the GIs stationed in China. Fighting side by side with the Chinese, the government promoted cultural exchange to strengthen its alliance. At the time, China was a military strategic partner and not much more. 70 years later, the need to understand China has increased far beyond just to the GIs. As the most populous nation, the second biggest economy, and the fourth largest country, China now demands the U.S.’s attention.

Though much has changed about the views toward China, the increased attention did not necessarily translate to increased understanding. As if staring at a piece of abstract art, Americans are watching, but most do not know what to watch for. They struggle to understand its complex political economy, dense language, and seemingly insulated society. Despite the increased media coverage, language studies, and travel opportunities, not much seems to make sense. Yet, as most Americans just scratch their head and stare at the piece, the American China watchers have been making the most out of it.

Ever since China became a global interest after its leader, Deng Xiao Ping, decreed “to get rich is glorious,” marking the shift to capitalism, the world has been eager to enter China. Since then, the newfound attention has created a need for bridges to connect the East and West. The West wanted to access the cheap labor, navigate the government, and more recently, break into the market; the East wanted to attract the foreign technology, management, and capital. As for these experts, they sought an adventure and have reinvented their careers as China insiders. With backgrounds in international affairs, economics, or journalism, American expats use their academic training to analyze evidences and recommend actions. Through reading dense academic research papers, conducting insider interviews, and visiting firms and agencies in on-site due diligence trips , they figure out the specific ins and outs of China and present their findings to clients, news outlets, conferences, and publishers.  Ranging from topics such as the financial system, business law and practices, government structure, to foreign relations, their detailed research has helped firms and governments vie for economic and political interests.  Adept at turning muddled data and into clear cut action plans, they have excelled at institutions, think-tanks, consulting firms, or investment research firms.

As experts, they fulfill useful, if not expensive, roles. Given China’s presence, clients are willing to go to great lengths for the insider economic, political, and cultural developments since each detail bears great significance to foreign relations, businesses, and investments. As a result, the high demand from clients and the low supply of experts have allowed them to capitalize on the first mover advantage and monopolize the market. They have the knowledge and the world is willing to pay for it. With fees up to $13,000 per newsletter subscription annually and opportunities at TV networks, conferences, and publishers, these savvy, entrepreneurial expats have been able to make a good living out of their roles.

Yet before such opportunities, they were just like any other American who stared idly at the abstract art piece of China. It all began with their challenge to explore the unknown. For many, the journey began with study abroad, English teaching, or company assignments. Throughout the years, while their American peers trickled back to the U.S. for home, for the better living standards, or the comfortable familiarity, the China watchers stayed behind. Driven by their curiosity, zest, and hard work, they caught up on their lack of cultural and language understanding and created a life for themselves abroad. Undaunted by the media portrayal, the language barrier, and the inherent career risks, they took the risk and sought the adventure.

For instance, Bill Bishop, the blogger of Sinocism, has reinvented his career as an online journalist. Having starting out his career as a business executive, Bishop gave up on climbing the corporate ladder and pursued his undergraduate Chinese studies interest. Decades later, he has blossomed as an online Journalist with his blog. Sinocism is a newsletter that compiles important China news stories to more than 12,000 investors, policy makers, and diplomats. By providing timely economic and political insights, Bishop has gained credibility and followers. His growing influence has allowed him to write for the New York Times as well as being named one of the top 100 foreign policy “Twitterati” by the Foreign Policy Magazine. Having the foresight to anticipate for his 12,000 subscribers’ demand, he is now one of the preeminent western bloggers in China. Now, as Bishop writes from his apartment in Beijing, his words influence companies, investors, and policy makers worldwide.

Nicholas Consonery from Eurasia Group, a political risk consultant firm, also seized opportunities based on his Chinese interest. Complementing his Asian studies degree from George Washing University and Furman University with a language program in China, Consonery expanded his horizons. Pouring through hours of classes, rote memorization, and uncomfortable practices, he mastered Mandarin. Since then, he has worked as a private equity analyst in Tianjin, a US consulate member in Shanghai, a security risk analyst in Washington D.C, and now as a top senior analyst at Eurasia Group. As a regular expert commentator on networks such as Bloomberg, CNBC, and Fox and contributor on the New York Times and the Wall Street Journal, he has capitalized on China’s growing prominence. More than just an interest, Consonery has developed a career all during his 20s and 30s.

In addition to natural China enthusiasts, Michael Pettis, an established Wall Street trader also joined in on the ride. Sparked by an interest in emerging markets, Pettis gave up his Wall Street Managing Director position for opportunities in China. Though he had little expertise in China, Pettis capitalized on his education, transferred his skillsets, and became the University of Peking finance professor and an influential blogger. On a day to day basis, he teaches finance, observes economic patterns, theorizes future developments, and provide commentaries on the future. Frequently quoted by finance magazines and praised by the Wall Street Journal as a “brilliant economic thinker,” he leads the pact of the China watching community with his timely insights. Furthermore, as a punk rock enthusiast, he has also taken on the challenge to support and develop the local music scene. As the owner of the Beijing’s punk night club, D22, he creates opportunities for local bands, as well as his sponsored Chinese band, Carsick Cars, to play. Though he is still known for his finance, his passion and involvement in the local music scene is notable. Taking risks and living large in China, Pettis carved out a new life in China.

While most China watching community members are a fan of China, such is not the requirement. Carson Block, the founder of Muddy Waters, is far from a China enthusiast. As a lawyer by training, Block is wary of China’s “too good to be true” economic stories. As a result, he founded Muddy Waters, a due diligence investment research company aimed at detecting fraudulent accounting practices at Chinese companies. Having assembled a team in China to track the company’s deliveries, accuracy of its inventory, store sales number, among other numbers, Block seeks to catch the cheaters for the investors. Furthermore, using his own research to make trades himself, Block has achieved solid returns on his short selling. With each report capable of dropping a stock drop down to 50%, investors have rushed to sign up for what he has to say and conflicting Chinese business owners have supposedly issued death threats. Block’s innovative idea instantly made himself a finance household name and redefined his career.

China’s economic boom has shifted the world’s attention and enabled these experts’ careers. Having the foresight to recognize China’s growing importance and the courage to take the risk, they have reinvented their careers.  Though so far they have been successful bridges to the East and West, this all may become ephemeral. As time goes on, more and more will join in the China watching community and their time being the world’s China consultant is limited. Within decades, their roles may be replaced or eliminated as China becomes more outward looking and the world becomes more globalized. Furthermore, time will also test the validity of their insights as the future unfolds. However, these expats’ lives are not wasted and bear greater meanings. Beyond the service they provide and the bridge they built across the east and west, what may be most valuable is their success story in China. More than their acquired, learned ability to navigate within the complexity of the Chinese government, language, and culture, it is their drive, risk-taking, and entrepreneurship that allowed them to create new lives abroad. Inheriting early pioneers’ sense for adventures, they have set out a good example for the future to follow. Tearing down national borders, cultural differences, and xenophobic tensions, they showed that it is still possible today to break out for adventures. For this generation of China watchers, they have fulfilled their needs of improving China’s transparency and connecting the East and West, but their most important contribution is the reminder that the world is still full of unknowns and adventures and rewards await those who have the drive, risk-taking, and entrepreneurship to follow.   

PIIGS or Not?

         Each proud in their great accomplishments, Portugal first globalized the world through its trades, Ireland gave the world some of its greatest poets, Italy shined as the center of the Roman Empire, Greece gave birth to democracy , and Spain conquered half of the world. Yet, during the past few years, they have been known as the “PIIGs.” This simple acronym is not merely a coincidence and reflected to some degree, people’s pejorative attitudes toward these countries’ governments.

         Protested by the government and press of these countries, many media groups and firms have either banned or phased out on this phrase. But before we completely toss the word out of our dictionary, let us take a look at why someone came up with this term and whether the reason deserves merit.  

         Since this is not a trivia game, we will not spend any time guessing why these countries belong in the same group. All of these countries, Portugal, Ireland, Italy, Greece, and Spain are the trouble makers in the sovereign debt crisis. To simplify the term, it basically means that these countries have spent more than they could make or borrow and are now asking for help.  As we went over in “Greek Tragedy,” it is common for countries to borrow money to spend, but it is less common for countries to either make so little, or borrow so much, or a combination of both, that they cannot sustain their spending. Let us also think about it this way. It is good when a person chooses to spend within a budget. Some call it frugality, financial responsibility, or simply, being an adult. On the contrary, it is bad when a person spends more than the budget and asks for more money. Therefore, it is easy to understand why investors would want to call them “PIIGS” when these countries overspend so much that they need help.

         While all of these countries are in trouble and are in need of bailout funds from the European Commission, do they deserve to be known as the “PIIGS?” Let us take a look at each country individually and give them a chance to speak for themselves.

         Portugal, like the rest of the countries, not only spends more than she makes, but also spends so much that she is unable to properly find investors to lend her money. So what did she spend all that money on anyways? For Portugal, the bloated government spending in public works and services was one of the root causes. Portugal is essentially a restaurant owner who owes a great amount of debt when customers stop coming because he or she pays heftily to the chefs and constantly renovates. The Portuguese owner claims that customers love the restaurant and for some reason (ie: the financial crisis of 2008), people just stopped coming. As a result, now the Portuguese owner has to go around and ask for more money.

         Going back to the restaurant owner example with Ireland, now the Irish owner has to ask for more money because the owner promised to take care of the chefs and six chefs have lost nearly their livelihoods gambling on housing prices. In bailing out the six main banks in Ireland who financed and lost money in the property bubble, the Irish government put itself in financial danger. As a result, regardless of how good the restaurant is, the Irish owner has to go and ask for money.

         As for Italy, the Italian owner simply owns a bad restaurant. For years, the restaurant has become dated and less competitive. Times are changing and people just do not want to go to the restaurant anymore. Especially with the overall decline in the restaurant businesses in the area, as with Europe, the Italian owner faces tough choices. Yet stubbornly refusing to adapt the restaurant or cut down on spending, the owner sees the restaurant going the way it is. As a result, Italy, just like the Italian owner is struggling. The restaurant is losing money and the owner may need to go ask for money soon.

         The Greece owner also has it pretty tough. Having a restaurant in the beautiful Mediterranean Sea, the Greek owner used to be able to cash in on all the tourists. During the heydays, the generous Greek owner paid the chefs and workers handsomely and promised riches. But with the declining number of tourists due to the bad economy (ie: the financial crisis of 2008), the Greek owner is struggling to come up with ways to continue to pay the employees like kings. As Greece’s tourism driven economy suffered hard blows in the economic downturn, it finds itself in trouble having to fulfill its obligations. As a result, the Greek owner has asked for money, and plenty of it.

         Lastly, the Spain owner has woes similar to the Portugal owner. While both of them had their fair share of good businesses and took on renovations and high paying chefs, their declining earning has different reasons. For Spain, the owner used to be able to make a lot off of tips. When the tips are good, there was no problem paying all the wages and expenses. But when the tips go bad because people are overall poorer, the Spanish owner will start to have sleepless nights. Similarly, when the housing bubble was brewing in Spain, the government enjoyed strong revenues from the property taxes. Yet, when the bubble burst and home prices went down, the government lost its luxury of the high property tax revenues. As a result, the Spain owner has also asked for money.

         After understanding each country’s individual predicament, one may ask an interesting question, “why cannot these countries just borrow more from its normal lenders? Are there no investors that are willing to lend to them?” This is another topic that is essential in understanding the sovereign debt crisis. The quick answer is that there almost always will be investors willing to lend to them, but these investors will also ask for much more in return. As a result, it may be a bad idea for these countries to continue to borrow from these investors. As for the long answer, keep on reading.

         When a friend borrows money, a lot of times you will lend the money based on your own financial situation, your friend’s reason for the money, and your relationship with the friend. When a country borrows money through government bonds (see “Greek Tragedy”), the investor goes through similar considerations. One, when the economy is good and the investor is rich, there may be more people to borrow money from. (One thing to note is that when the economy is good and the investor is rich, it is not necessarily cheaper to borrow money because of financial policies and the characteristics of interest rates. That is a topic for another time.) Similarly, when the economy is good and your friends are rich, it may be easier to borrow money from your friend. Two, while people do care about what they money is for when the friend borrows the money, most investors do not care as long as the country will repay the amount based on the terms. Three, when a friend asks for money, your level of friendship and your understanding of his character and background play a factor. Furthermore, the public perception of the friend may also affect your willingness to lend the money. As for countries, investors get to know the country’s character and background through debt ratings. Rating companies such as S&P and Moody’s rate a country’s credit as if rating a friend’s trustworthiness. Instead of spending time on these countries, investors believe in these ratings and make decisions off of these ratings. A higher rating means a country is more likely to pay back and vice versa. This became a key factor in the sovereign debt crisis.   

         During the crisis, rating companies downgraded many PIIGS countries’ debt ratings. As their ratings dropped, investors become more cautious about their lending to these countries. Some back off completely and those willing to stay will ask for more in return. For example, countries used to be able to borrow from investors through bonds paying a low rate, yet after the rating downgrade, they could only borrow with bonds paying a high rate. Furthermore, the self-fulfilling prophecy of risk also plays a factor. Similar to vicious rumors about a friend, concerns about a country makes it more expensive for countries to borrow, which put them in even more financial ruin. As a result, in a world inundated by information, these concerns turn into self-fulfilling prophecies in the markets and make it harder for these restaurant owners to make a comeback.

         Fortunately, there is still hope for these countries. Turning the disadvantage of these rating influenced and rumor prone investors into advantages, governments have been able to pacify these antsy investors with strong political and economic figures. Putting the Milgram experiment on obedience to authority figures into good use, European Central Bank’s Mario Draghi, Federal Reserve Bank’s Bernanke, and Germany’s Angela Merkel have been authority figures for the world. While the extent of their influence is arguable, we need and rely on their impact. It may worth your time to listen to what they said the next time they speak and how the market reacts. 

Well Paid or Overpaid?

         “Ugh, now I have to go find a husband in finance,” says Kaylie Hooper, the character by Chloe Grace Moretz in the finale of the hit show, 30 Rock. After losing to her arch nemesis, Jack Donaghy, in the final show down for the control of Kable town’s NBC, she says the line to poke fun at her own misfortune. Outwitted by Jack’s clever and ingenious plot, she now has to find a new way to make money rather than take over NBC as Hank Hooper’s favorite granddaughter. This may seem like a tangent, but behind the witty line that gave all of us this light chuckle, there lies a truth about the financial industry. People think and know that financial professionals are well paid.

         Out of all the jobs in the world though, why do the financial professionals get paid more?

         Well, for the people in the financial industry, some think they are paid well because they work hard. From the preparation and degrees required, the skills and knowledge preferred, and the long hours demanded, a career in the finance does seem like it takes a lot. It takes years of hard work in High School to do well on exams, get good grades, and gain valuable extracurricular experiences for a shot at a good business school. After that, the process is repeated again in college for a chance at a good internship. Then, after a summer (or summers) of going into work early, leaving late, picking up projects, and networking with everyone, they may be able to land a full time offer after graduation. Yet, even then, the hard work continues. People are not only expected to increase their value at work, but also expected to further themselves in different degrees, certifications, and licenses as time goes on. In such a rigorous career path exacerbated by the cut throat environment, financial professionals see their salary as the fruits of their labor, and why shouldn’t they? Factoring into all the preparation done for their career in finance, it is not unreasonable to see why finance people see their pay as a justified reward to their long term trade off. While this is a big generalization, it does capture some sentiment of the people on the inside. A major flaw with this explanation is this disclaimer: working hard does not necessitate better pay. I am sure all people work hard in their job to make a living and it is important not to discredit the work of others. Just like my professor once said, “while great investors like Warren Buffet do work really hard to get to where they are today, I am sure the factory worker who has labored himself all his life diligently did not have it any easier.”

         For people on the outside, they think financial professionals “make bank” because they are smart. While finance is really not “rocket science” and anyone with commitment and education can do it, they do have a point. What they are saying is that by supply and demand, finance pays well. Since the finance industry provides many important functions in society such as bank deposits, mortgages, insurance, and investments, there will be a demand for finance. As a result, the finance industry’s pay depends on the supply of the people who can perform these roles. When there are not a lot of people who can do these jobs, naturally, they will have more bargaining power with the employer to get more money. While there are a lot of aspiring investment bankers running around every college, if we look at the entire population as a whole, these people are definitely still a small segment. If the picture is not clear enough, let’s look at it this way, if we look at the number of people who are able to value Facebook’s growth potential and cash flow versus the number of people who are qualified to be the store greeter Wal-Mart, then we can see how supply and demand is at work here.

         While supply and demand makes sense and can also be used to justify the sky high pay of professional athletes, I believe there is more to the reason behind finance’s high pay. To me, financial professionals are paid well and will always be paid well because their business directly deals with money.

         From the early subsistence economy where goods and services are merely exchanged to the complex global economy we are in today, people continue to build wealth through the exchange and use of goods and services. One thing that differentiates these two different forms of economies though, is money. Money provides a store of value and a universal medium of exchange. Back then, farmers plant crops and trade with fisherman who fishes. One party receives protein and one party receives grains. Yet, they traded for just the amount they needed. Since the raw fish will go bad in a few hours, the farmer will not trade for more fish than he needs despite how much the fisherman needs his grains.  He would rather trade for something else no matter how many fish the fisherman is offering. Yet with the advent of money, everything changes. The farmer can now “sell” his grains to the fisherman for as much as the fisherman wants and use that money to “buy” some fish and save the rest. The saving, a newly generated value that was previously wasted, can now go on to help the farmer buy more goods and services. This allowed the economy to grow and developed into the world as we know it today.

         Fast forward to centuries later, the financial industries have evolved into the biggest beneficiary of the invention of money. The financial industry has been able to maximize money’s durable, divisible, transportable, and non-counterfeitable characteristics. For example, banks deal directly with money by collecting money from customers’ deposits and investments and lending them out as mortgages and loans. For their business, they earn interest from lending out and borrowing money from others. By taking advantage of money’s inherent characteristics, they save cost effectively and sustainably. For instance, banks’ assets, its reserve of money, do not rot due to heat, do not go out of fashion, and do not become obsolete in any shape or form. They also can be divided into smaller bills, coins, and fractions of pennies as well as wired and transported over a split of a second. Lastly, the government protects the value of the money and forbids counterfeits. While other industries need to refrigerate its supplies, have massive sales to clear out unwanted inventory, pay hefty sums for cargo transportations, and fight in lawsuits against counterfeits, banks are completely free of such concern. As a result, the financial industry can effortlessly pay its employees in money without the time and value loss other industries go through in converting their goods or services into money.

         I understand that this idea may cause some confusion, let’s also look at it this way. As we know, the sun indirectly provides us the energy we need. The sun’s power goes through several rounds of conversion, decreasing the level of energy in reach round, until it reaches us. From grass’s photosynthesis, cattle’s grass grazing, to the food in our stomach, energy is lost on each level. Similarly, a company loses value to its middle men in each round of good and services’ conversion money. On the other hand, the financial industry is the equivalent of absorbing solar energy directly without the loss in value or energy. This is why the financial industry is able to pay out such big salaries. This analogy may help, but readers have to take note of one thing. While the sun generates its own energy as a star, the financial industry relies on the activities of other industries. This is a big reason why the bankers’ pay have come down and a story for another time.

         For many, the financial industry is paid more than its social value, arguing how many financial services are merely mirroring the overall market activities. Some go even further to criticize financial professionals as overpaid and irresponsible bet takers. Regardless of the merit of the financial industry, it is interesting to always ask and answer the question of “why are financial professionals paid so well?” Especially resonated in the public in the Occupy Wall Street Movement and the recent European decision to cap bankers’ bonuses, this debate will continue to go on.