Quick Lesson from LKY's Passing

With the passing of Lee Kuan Yew, the world has been extra critical in debating his legacy. No one disputes Singapore’s economic progress achieved under his 31 years of PM rule. However, many also see him as a ruthless autocrat who cracked down on free speech and political opposition senselessly. Lee Kuan Yew is well aware of these criticisms. He believes there is no freedom without order and people value economic freedom more than political freedom.

Seeing himself as Singapore’s father who knows what people need best, he says “you take a poll of any people. What is it they want? The right to write an editorial as you like? They want homes, medicine, jobs, schools.” As a result, he has made his utmost effort in building Singapore’s prosperity, not democracy.

Now, I am not here to debate whether Lee Kuan Yew is right. I am here to talk about cultural understanding. For the most part, Westerners are more critical of the political repression while Easterners are more forgiving of such human costs. Having grown up in the East and West, I understand the historical vestiges, the government agendas, and the family upbringing that contribute to this different interpretation of Lee. However, for most of the world, people grow up with one dominant value system. As a result, cultural misunderstandings are bound to happen right? I disagree.

The pace of globalization post the fall of the Iron Curtain has caught the world by surprise. It seemed like just yesterday when people still used point cards to dial internationally. (I vividly remember my parents dialing a million digits just to have a ten minute conversation with family abroad.) Now, internet, smartphones, apps have bridged all gaps, except cultural ones. Now on to the final frontier, how do we overcome cultural differences? I believe replacing heuristics with common sense is all we need.

When one uses heuristics, judgement shortcuts, to approach another culture, one is bound to pigeonhole the said culture to either end of the extreme. Cultures are never inherently exotic or common; it all depends on the frame of reference. Just because another culture’s food seems exotic does not make the said culture’s values alien. Just because another culture’s life style is western does not make the said culture’s beliefs western. Heuristics that simplify a culture’s complexity down to a simple transitive equation are inadequate for today’s society. The walls have come down, but the neighborhoods are still divided. Cultural sensitivity issues, most analogous to the left over barb wires from the torn down walls, scare people away. However, there is nothing to be afraid of. Common sense over heuristics is all one needs to understand other cultures. Like most things in the world, the truth is always somewhere in the middle so book that flight, sign up for that exchange program, follow that blog, and explore all that the world has to offer.

Borders to Conflicts and Inequality

One way or another, they sit huddled together quietly, usually with some sort of blanket draped over their backs. They are fatigued, but alert. Wherever they are, whether on a boat or a truck, they are all trying to immigrate to a new land. From the Indonesians going to Australia, the Libyans going to Italy, the Mexicans going to the US, or the Rohingyas going to wherever that accepts them, these migrants leave everyone and risk everything for a chance to get out and get in. Most have grown insensitive to these news, barely raising their eyebrows as they come across these headlines. At the same time, there are also many who share statuses, wear T-shirts, attend rallies, host meeting, and everything else they can do to bring light to the issue. Lastly, there the policy makers who talk about it and… just talk about.

Immigration policy is a hot topic. It stirs up xenophobia. The fear of the undesirable economic, community, and identity impact is enough to turn an otherwise kind individual nasty. Simply put, there is no shortage of why dislike newcomers. However, I believe the popular opinion against immigration actually fails to understand the whole issue. A closed door immigration policy leads to conflicts and economic inequality.

First, the closed door policy strengthen dictatorships and their regimes. For instance, before fences, the immigration centers, and the passports, people were able to migrate more freely. As self-interested humans as they are now and forever will be, they go to places that gives them the best opportunity. Under this system, people flee oppressive regimes more freely for fairer rules. This mobility punishes the bad kings and rewards the good kings since the size of the population determines the kingdom’s military and economic strength. A large population allows a large military, a large tax base, and a large pool of productive workers. As a result, there is a natural accountability system in place to promote progress. However, this current system breaks the natural order. For instance, because developed countries set strict limits on immigration, the policy is not able to accommodate all those who wish to come to enter. Therefore, they are forced to stay and empower the bad kings’ military and economic strength. This translates to a false legitimacy for the bad king, lending him credit and enabling him to conduct the further oppressive policies. So what does this mean for those in the developed countries and how does this hurt them? The closed policy fosters these bad kings, allowing the so called Axis of evil countries to continue their ways. In the end, at least in the case of the US, this leads to military conflict, death, hatred, and terrorism. The xenophobia and closed door policy contributes to the death of young soldiers, terrorist attack victims, and countless tragedies. One may have been able to minimize change by rejecting immigrants, but one has also contributed to a more violent, unstable, unsafe, and tragic world for everyone.

Second, the closed door policy contributes to greater inequality. It is true that the family and environment one is born in plays a great role in determining one’s economic well-being. However, except for the extremely impoverished and wealthy tails of the normally distributed population, most probably lie somewhere in the middle, only differing by the type of house they live in and the type of vacation they go on. As a result, for this group of general population to become richer, they need to work to accumulate their wealth. Yet, it is always easier said than done. High paying jobs are competitive and wage growth is slow. There are many theories behind wage growth, such as the labor productivity gains, the technological improvements, and a country’s monetary policy, but I would just like to focus on one, the supply and demand of the labor. I believe now that developed economies have most of their basic needs met, such as food, housing, clothing, and transportation, the equilibrium supply and demand price has little room to grow. The peak in demand leaves little room for wage pressure; the political pressure to keep employment high leaves little space for supply cuts. These forces combine to cap a lid on wage growth. It is true that new demand can be created, but niche demands only has enough room to benefit a selected few and structural demands take time to form. Therefore, the only logical answer to this wage growth cap is markets with new demands. When one looks around, one will realize there are many such markets. These emerging markets have insatiable demand for modern goods and services, which can translate to high equilibrium supply and demand prices. While it is debatable whether these emerging markets can afford all the modern good and services they need or want, the demand is irrefutable. As a result, anyone who can supply this demand will make a fortune right?

Wrong. Only a selected few will be able to supply this demand. Since those with a deep enough pocket to negotiate with foreign governments and those with a long enough investment horizon to wait for emerging market consumers to pay are able to supply the demand, common folks will lose out again. They may observe the demand, but will not be able to supply the demand and drive up their supply and demand equilibrium wage. As a result, large corporations will again be able to keep a wage ceiling on such jobs due to the large labor supply. They will again either work for in a low wage growth job or fight to death for the competitive, high paying job. In the end, those fortunate enough to be born in the extremely wealth tail of the population will win out again. However, it does not have to be like this. In a more freer border environment, the entry barrier to these emerging markets may be lower and an eager entrepreneur may have a fighting chance against the big corporation. Furthermore, a freer border environment may have a strengthened accountability system mentioned before and the emerging market and developed country gap may be smaller.

Obviously, there are many other things to consider when it comes to immigration. A country’s fiscal budget has to be conserved, a community’s tolerance for foreigners is limited, and most of all, politicians’ political lives are fragile. In the end, whether developed countries’ closed door immigration policies to those in need lead to military conflicts and domestic inequality, politicians will just continue to talk about and… just talk about it.

A Reflection: MBA and the Sun Flower Movement (Part 2)

         First, finance taught me to evaluate a project’s pros and cons without bias. Defined by the Investopedia as the science that describes the management, creation and study of money, banking, credit, investments, assets and liabilities, finance provides me the tools and methods to appropriate a project’s value. The calculation of the project’s value generally follows three steps: list out the project’s revenues and cost, discount the net revenue to adjust for the time value of money, a concept based on the concept that a dollar today is worth more than a dollar a year from now, and sum up the discounted values to find the net present value. However, proponents and opponents of the agreement both presented the costs and benefits with much bias. For example, based on the protestor’s AMA, the costs heavily outweigh the benefits.

         These students cited the potential costs to the agreement as the collapse of small and medium enterprises, the brain drain of local talents, and loss of Taiwan’s freedom and future, among others. The provided cost and benefit analysis seems helpful, but it only painted only half the picture. By presenting a lop sided focus on the short, medium, and long term costs without the same attention to the benefits, these protestors shrouded people from being able to make a sound judgment, one based on facts, rather than fear. Business Week’s survey showing that 80.9% of surveyors say that they lack sufficient knowledge about the agreement further demonstrate the need for unbiased and complete analysis. Considering it is already difficult to evaluate the agreement’s costs and benefits when the information is complete, one should be even more careful and avoid making conclusive judgments based on inconclusive evidences.

         Second, economics allowed me to identify the reason behind Taiwan’s fragile economy. Just a few decades ago, Taiwan was one of the four Asian Tigers that shocked the world with their stellar economic performance throughout the 1960s and 1970s. However, compared to its Asian Tigers counter parts such as Hong Kong, Singapore, and South Korea, Taiwan has lost its momentum and confidence. Tormented by a decade long wage deflation, many frustrated Taiwanese are no longer dreaming of a bright economic future, rather they just wish to stop the bleeding. Worried that the increased competition brought by the agreement will lead to further declines, particularly in local printing, beauty salon, tourism, and transportation businesses, people forget the agreement also opens up further opportunities. Due to Taiwan’s shared cultural and language heritage with China, Taiwanese businessmen have long taken advantage of China’s labor and consumer market. Yet, as competition intensified, many Taiwanese businesses are no longer looking at China as the land of opportunity. Selling themselves short, they concede to defeat before the fight has even begun. It is important to realize however that Taiwan’s economic insecurity started long before the agreement. I attribute Taiwan’s economic woes largely to Taiwan’s declining domestic investments. While Taiwan invests actively abroad, particularly in China and Southeast Asia, local investments have slowed throughout the years. It dropped from 34% of GDP in the 1980s to 20% of GDP in the early 2000s. Some may point out Taiwan’s strong FDI to neighboring countries and the benefits they bring, however the payoff from these investments seemed to have only benefited those at the top, the investors and the entrepreneurs.

         As a result, these ventures abroad have not directly benefited Taiwan. As local companies fail to upgrade their businesses and grow their market shares, their employees suffer. Since salaries reflect the value of the work determined by supply and demand, it is no surprise that salaries in Taiwan have not grown when companies stagnate due to the lack the investments for transformations. By tracing Taiwan’s economic history, one realizes that the protests over the agreement are complicated not only by Taiwan’s concern for its self-determination, but also by the decade long sense of frustration and hopelessness.

         Third, organizational behavior helped explain Taiwan’s low investment. Despite Taiwan’s skilled labor pool, strong market, and business friendly government, Taiwan has suffered from a lack of domestic investments even as the Business Environment Risk Intelligence (BERI) recently ranked Taiwan's "Profit Opportunity Recommendation" as the third-best among the 50 major countries covered, after only Singapore and Switzerland. This phenomenon cannot be explained just through the lenses of finance and economics; to fill its gap, I looked to organizational behavior, the study of the way people interact within groups. So how can organizational behavior help? Its concept of organizational culture, the values and behaviors that contribute to the unique social and psychological environment of an organization, help explains factors of Taiwan’s economic insecurity.

         Since Taiwan, formally known as the Republic of China, is isolated with only 22 countries in the world recognizing its statehood, its expression of nationhood is limited. Furthermore, compounded by the pressure given by the People’s Republic of China, Taiwanese people have long come to accept the status quo with China as the best way to preserving their democracy and society. As a result, Taiwan functions like a country, but does not think like a country. Since Taiwan cannot always fully embrace its nationhood, Taiwanese people have trouble forming a cohesive organizational culture. The fear for China as a threat to their life, liberty, and property, stemming from the unresolved cross straits issue, has taken root in the very fabric of the Taiwanese society and changed mindsets and behaviors. For instance, since it is difficult to guarantee Taiwan’s status decades from now, politicians and businessmen often act myopically in their self-interest. Politicians and businessmen aim for short term gains in an attempt to accumulate wealth as quickly as possible for their families. Rather than building the society or their companies, they look to minimize risk and maximize short term gains. Such behavior has led to political gridlocks in which the government has hindered the society; companies refuse to take risk and fail to develop their opportunities. The myopic mindset has been particularly hurtful in the cycle of poor wage growth. Just as Taiwanese businesses are reluctant to invest in new projects, they are equally unwilling to invest in human capital. Fixed on the high of instant gratification, companies prefer able bodies ready to contribute rather than talents who are diamonds in the rough. This culture has led to a brain drain; as the environment in effect forces Taiwanese talent to pursue opportunities elsewhere, Taiwan loses its elites that could have reversed such trends. In short, the lack of organizational culture has contributed much to Taiwan’s economic woes that fueled the strong reaction against the trade agreement.

         While I evaluated the protestor’s argument, related to their frustration, and zoomed out to see the bigger picture, I realized that I have taken elements from finance, economics, and organizational behavior. After four years studying at a business school, I have learned to be comfortable juggling concepts across these areas rather than merely looking at an issue through one specific angle without even referencing these subjects. After hours of following the news and researching the agreement, I believe the agreement is a necessary evil. Taiwan needs to open up itself, engage in market competition, and revive the competitive spirit. However, the government can play a more vital role in protecting the impacted industries and helping them transform their businesses. Yet, through the reflection on this issue, I learned that my education has broadened my approach and my view. In the end, though I also found my business school’s curriculum to be rigid at times and certain subjects to be taught too much on the surface, I also learned to appreciate everything my business school has given me. I cannot tell you whether it will bring you value, but after four years and some hours writing this reflection, I can proudly say, it certainly has for me. 

A Reflection: MBA and the Sun Flower Movement (Part 1)

          Does it provide value? That is the question many people are now asking about MBA degrees. In an ever changing world shaped by globalization, technology, political affairs, and climate changes, does MBA train students to become the versatile leaders that the world needs or rather mold students into factory made prototypes? While I am not in an MBA program, having gone to an undergraduate business school, I believe in the strength and effectiveness of the degree.

          To be honest, business schools are far from perfect; many criticized them for their rigid curriculums and generalist training. Many say that the academic focus discourages innovative thinking in favor of stock answers and fails to provide in depth specialization, but I see it differently. The balance of diverse subjects, theories, and applications gives students the tools to see the world in a variety of new lenses.

For example, finance and organizational behaviors, one highlighting a company’s financials and the other focusing on employee interactions, both helped evaluate the recent affairs in Taiwan called the Sun Flower Movement.

          On March 18^th, roughly 300 students stormed the Taiwanese Parliament, barricaded themselves in the building, and proclaimed their occupation to protest the Cross Strait Service Trade Agreement with China. Though the world has seen its fair share of political activities in the past few years ranging from coups to protests, the Parliament occupation is special. A harbinger for future clashes, the protest is a reaction to China’s rising power and it has the power to be the canary in the mines.The protest has been dubbed the “Sun Flower Movement” and it disagrees with a de facto free trade agreement that opens up the service sector between China and Taiwan for further investments. However, considering the scale of Chinese capital and the might of state companies, many feared that the agreement will hurt Taiwan’s economy and sovereignty. Furthermore, unhappy with the manner in which the ruling party, the Nationalist’s Party, has sought to pass the legislation, the protestors took the matter into their own hands.

          Starting out with just a couple of hundreds of students, the protestors grew exponentially over the next few weeks. They sent viral social media messages, started live streams, and even posted in Reddit’s AMA. Soon, their request grew from a clause-by-clause review of the agreement to its rejection and more monitoring in the future. Within a couple of weeks, protestors inundated the streets as well, growing to be an estimated 100,000 to 500,000 strong.

          

          Soon, articles for and against the protest started to flood the media. At first, it was difficult to evaluate all the news. Even for me, a Taiwanese American who spent my childhood growing up in Taipei, to separate facts from fictions and understand the issue. However, through the lenses of finance, economics, and organizational behavior, I identified a common bias in articles, realized the fundamental problem in Taiwan’s fragile economy, and arrived at my own conclusion.

*Sun Flower Movement Reddit AMA

http://www.reddit.com/r/IAmA/comments/21xsaz/we_are_students_that_have_taken_over_taiwans

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.