The Swedish Vs Asian management styles

This local Swedish article describes how the Swedes manage and lead in their organizations. As mentioned in the article, the Swedish management style is characterized by easy communication, low internal competition and anti-hierarchical organization structures.

Having been spending the last couple of months providing consulting work in a Swedish financial institution, the article pretty much sums up my experiences here. I am not exactly sure if I find their management style appealing. Having spend the earlier part of my life in Singapore, the experience here with the Swedes has been a totally new learning experience.
For one, decisions take ages to be made up, as it is management by consensus, not by pragmatism.
A decision which usually takes the Asian/Singaporean management a week to make would typically take two months for the Swedish management to do the same. In a Swedish organization, all related parties are consulted and if there are disagreements, decisions are postponed to a later date so that both parties can revert with even more information to justify their cases. There is no "ultimate" decision-maker who will preside over the issue, everyone involved is entitled to his/her views and unless everyone is satisfied, the issue will remain unresolved.
The article is also accurate in pointing out that the Swedes usually do plan ahead and try to anticipate all possible scenarios. But then again, there is only so much one can plan, there are some unknown unknowns which will only be made known when as the plan is being implemented.
Low internal competition also meant that there is little incentive for anyone to do better or aim higher than their peers, though on the brighter side, there is less politicking in the office. Personally, I think that part of the reason why internal competition is low is due to the fact that there is little monetary incentive to perform better than your peers.
Compensation in the front offices in financial institutions are typically calculated based upon profit numbers and very heavily performance calibrated. However, for this financial institution, compensation is primarily calibrated on hierarchy or seniority, little incentive for good performance.
I guess this management style is a exemplification of the Swedish society as a whole which places heavy emphasis on social equity.

The Singaporean Worker (vs the French)

Having had the chance to work in a French bank for 5 months alongside the notoriously fun and leisure loving French, it is perhaps only natural that I put forth some observations here.

The French (excluding those snobbish types living in Paris) have a wicked sense of humor - sometimes judged a tad crude or sexual. But one thing is for sure, once they are comfortable with you, they can be ridiculously funny, made even funnier when they try their jokes in English. They are best mixed with a relaxed attitude towards work, and a take-it-easy spirit. Oh yes, and they will try their utmost to include you in their discussions by speaking in English and if they ever break into their native French, they apologise for it. This is truely something I can take back with me.

The generous welfare benefits for the French employee are another stark contrast to what we have in Singapore. A typical employee in a financial institution gets up to 45+10 (compulsory+voluntary) days of annual leave to compensate them for working longer that the stipulated 35 hours a week. The 9+3 months of paid maternity+paternity leave is another feature of the generous welfare given to the French. Not forgetting also the free healthcare and education right up to university levels. The costs of this all? A rather breath-taking tax rate of as high as 45%, not including the various fees, muncipal taxes, etc. And a shrinking (in deficit currently) social benefits pool which could basically mean that current generation may not get to enjoy the full pensions promised to them in retirement. So you gain some, you lose some.

Whilst talking to a group of them over lunch once, I asked what they thought of their equivalent in Singapore. What's said was not surprising at all - their Singaporean counterpart works really hard and long hours and has twice their workload. And I believe, more than likely not paid any more than they are. [There are 1.5 Singaporeans in the team supporting Asia and sometimes NY, compared to 4 French in the team. The Singaporeans who get off work at 10pm SG time will be heartbroken to know that the French office is almost empty by 6pm FR time]

So how do we explain this? Paying a premium for a group of workers who seemingly have less work over another? Perhaps the French are indeed more productive? Perhaps it is a lifestyle thing? Or perhaps it is due to the fact that it is a French bank?

There's an ideal amongst the French and it is that they believe everyone should be entitled to a certain quality and standard of living which from my vantage is quite high (you got to forgive a Singaporean who grew up in a three-room HDB flat and living in the heartlands). So to them, life and time outside work is extremely important and they will not spend more time than what they are paid.

I guess for Singaporeans, like one senior minister once remarked, working hard is something we cannot shake off...

When the underlying assumptions are wrong ...

I read with interest the news from Credit Suisse Group which estimated that 200,000 foreigners will be leaving Singapore.
What are the implications of if such a scenerio happens?
I think of the property developers and the funds which are invested in the property market - this mass exodus of expats will be equivalent of a 'black swan' event. These expats, on average, earns more than most Singaporeans and have a much higher spending power. With their departure, the property market will be missing a critical source of investors.

Touted as Singapore's first hedge fund to venture into property management, this is gonna one helluva ride for their investors if the mass exodus of foreigners happens. Not to mention that this fund has also bought 100 units of a residential development along River Valley, expecting to rent out these apartments when the development is completed in the first quarter of this year. I wonder how many units can be rented out now ...

When Hedges dont work ..

In a trading environment, traders typically hedge their exposure to minimize their exposure to price risk in the event markets turn against them.
The most efficient of all hedges is to have a back-to-back trade (meaning that the trader buys an asset and then sells the off the same asset at a profit) - effectively here, they would have earned a margin without any exposure to any underlying.

For Merrill Lynch, which just reported their 2nd Quarter 2008 results, their results is simply painful to watch. Merrill Lynch is sitting on a pile of Asset-Backed Securities CDOs (hedged position) which they hedged using CDS (Credit default swaps) (hedging instrument). Now, this is not the most effective hedge but it should still offset losses under normal trading environment.
Theoretically, if their CDOs tank, their hedges would make money.
But, as we are now living in unprecedented times, even their hedges lost money, exacerbating the overall losses. This makes for really painful reading. The reason that is that there is a severe deterioration of the creditworthiness of the financial guarantors of their CDS positions, which essentially wipes out all gains made on the position. What this basically means that the counterparty which the CDS were traded against is in a less financially stable position and that there is a higher risk that the trade may not be settled.
Ouch ...

Good Bank, Bad Bank

"With lower risk and a streamlined set of businesses, we expect Citicorp to be our high-return, high-growth business over time. It will include "core" Citi and be a relationship-focused global bank to businesses and consumers.

Citi Holdings includes a great set of businesses with strong market positions. However, these assets do not sufficiently enhance the capabilities of Citi's core businesses. The leadership of Citi Holdings will focus on running these businesses well, tightly managing risks and maximizing the value of these assets by being alert to appropriate divestiture and partnership opportunities that may emerge." - Vikram Pandit

I wonder who's going to be leading the bad bank?? Nobody would want to be in-charge of this body-bag of toxic waste. First priority for this set of leadership is to find means to offload the toxic waste.

Here's a toast to a new financial landscape. Good bank = pure retail + commercial business. Banks will soon become like a utility company, just like your telecoms or water provider.

What do you do ...

Problem:
When the heating/boiler in your little Paris studio apartment is not working?
The temperature outside is minus 7 degrees and your apartment is not well-insulated?
The apartment caretaker speaks only French and is away for the weekend?
Your French sucks?

Solution:
Boil lots of water to drink.
Put on layers of clothes to sleep.
Pray that the boiler comes back on soon ....

I wonder if this is due to the Russia-Ukraine gas dispute?

Is Singapore the new London?

With deflationary pressures in full swing in the UK, it is not difficult to find a pint of beer for less than a pound (approx 2.10 SGD), lunch for a quid and endless clearance sales across all respectable retail chains like John Lewis, House of Fraser, Selfridges, and the list goes on ...
Now, compare this to the article in asiaone: 'Tourists find Singapore pricey' Either Singapore has yet to feel the full brunt of the deflectionary effects or that our economy is just plain resiliant. I doubt it is the latter.

Housing rents and prices have fallen off the cliff as well, especially those apartments near Canary Wharf. With the financial services industry in the doldrums, financial professionals are fleeing the Wharf - here supply outstrips demand. A 2 bedroom flat in Canary wharf, overlooking the River Thames cost about 360 pounds a week (about 3000 SGD a month). Now compare that to a two bed apartment in the Sail@Marina which costs about 5000 SGD a month upwards.

So, is London more expensive or is Singapore the new London?

I got a earful from property owners when trying to negotiate rent when I was back in Singapore last month...hopefully the market will now manage their expectations and they will be willing to accept a lower rent when I return ..

The Aftermath of Financial Crises

So what happens after a financial crisis. To have a preview of the aftermath, it is necessary to look back into the past. Professors Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard, in a recent paper entitled “The Aftermath of Financial Crises”, investigated the end-game across various countries.

Some notable points brought up in the paper:

First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years.
Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment.
Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes.

It is also interesting to note in that when it comes to banking crises, the emerging markets, particularly those in Asia, seem to do better in terms of unemployment than do the advanced economies. This is mainly attributed to wage flexibility and lack of social safety nets in emerging economies which make the unemployed more anxious to get back to the work force.
In addition, the declines in real GDP are much higher in emerging markets than advanced economies, due to the abrupt exodus of foreign credit.

The paper presented is rather short and relatively easy to understand - highly recommended for all.

Bottom in Singapore Housing still Far Off

The modus operandi of a slowdown as evident in the US and UK is as follows:

Equity Markets Collapse - Real Economy Slowdown (evident in drop in corporate profits) - Spike in Unemployment - Drop in Real Estate prices.

In Singapore, I think we are still in the second phase (real economy slowdown). The next shoe to drop is the employment rate. The Singapore government is pulling out all stops to prevent the unemployment rate from increasing. It remains to be seen if the measures work. Expect to see Singapore's unemployment rate to at least match that in the 2002 - 2004 slowdown.

The adjustments to real estate prices will follow but these adjustments will take time to work through. Real estate prices are usually 'sticky' primarily due to the fact that price discovery is usually delayed and information is not as readily available as exhibited in the equity markets. In addition, expectations of market participants in the real estate market are managed by estate agents who has every incentive to push prices up. Globally investors now have a slew of properties to chose from - London and New York property prices have dropped significantly (approx > 40% at SGD prices) - can Singapore still attract these investors?

A new life awaits

A new life awaits, and I cannot wait to embrace life with all of me.

Singapore will be one of 10 slowest growing economy in 2009

According to the Economist Intelligence Unit, Singapore will see it's economy shrink by 2% next year, making it one of the top 10 slowest growing economy in 2009.
Much of it, I believe is due to our reliance on exports to the US and Europe which will be facing even greater recessionary pressures next year.

Singapore and Iceland - why Singapore's USD 400bn war chest makes all the difference

Iceland's banking problems started surfacing as early as January this year and the Central bank of Iceland had commissioned a report in April this year to investigate the policy options available. This report remained out of public domain but since the spectacular collapse of the island banking model in October, it is now no longer deemed 'confidential'.

Having read the report I cannot help draw comparisions to Singapore:
1/ A small country with its own currency
2/ Internationally active and exposed financial sector larger than its GDP (Singapore banks have combined liabilities of approx 300 USD bn compared to our GDP of approx USD 150bn)

In Iceland case, even when their banks are fundamentally solvent (in the sense that its assets, if held to maturity, would be sufficient to cover its obligations), such a small country - small currency configuration makes it highly unlikely that the central bank can act as an effective foreign currency lender of last resort/market maker of last resort.

In Singapore's case, our USD 400 bn warchest effectively acts as a backstop in the event the state takes over the banks, to replace bank debt with soverign debt. (This is indeed the nuclear option; otherwise, we will have to borrow from the IMF or World Bank.)

Viewed in another perspective, the constraint for any of our local banks to grow regionally or internationally is that the size of our warchest have to be increased in proportion to the size of the banks' liabilities.

Equity destructors ...

Another financial structured product(Equity Accumulators) rears its ugly side for Asian investors.
Lesson to take away - nothing is for free...

Obama is the 44th President of the USA

Obama's message of change had won over the hearts of the Americans. As previously posted in this blog, Americans have shown that change in the current administration is needed. Let's hope Obama and the American people can deliver the change he has promised.

A Recession with Inflationary + Deflationary pressures is heading our way

From my little studio flat in Rue de Longchamp, Paris, as I take stock of the financial markets and what is to come:
The de-leveraging of excessive debt and credit in the financial markets is far from over.
Faced with a likelihood of recession, central banks around the world are cutting interest rates aggressively, very likely to spark inflationary pressures for raw materials.
Assets like properties, equities will suffer severe deflation of prices as consumers and corporates shore up battered balance sheets and try to recapitalize.
A new world awaits.

There is something wrong with the bailout

Image courtesy of NYT

I am having trouble reconciling the numbers here:

Goldman Sachs 2007 bonus pool: 18.8bn USD

Warren Buffet to invest 5bn USD in Goldman Sachs with option to invest another 5bn USD more, apparently to give the company a 'vote of confidence'.

Goldman Sachs to receive part of 250bn USD capital injections from the US government.

I wonder what GS bonus pool for 2008 would be? Why didn't these GS folks save more for a rainy day - these guys were supposed to have foreseen the subprime meltdown!

Winners' Curse

When the trio of RBS, Fortis and Santander won the US70 billion breakup of ABN Amro last year (during a period where almost every bank was getting pissed drunk on leverage), few would have envisioned the state they have ended up in now.

RBS suffered an almost 65% drop in its share price since the announcement of their take over of ABN investment banking services, on fears that the bank would have to find it increasingly difficult to boost its capital reserve ratio.

Fortis, a European banking and insurance giant had to be bailed out by the governments of the Netherlands, Belgium and Luxembourg. And worst still, as part of the plan, Fortis would have to sell off their stake in ABN Amro, most likely at a third of the price they had originally paid.

Only Santander remained in the clear, having sold part of their stake in ABN at a profit of USD 1 billion and keeping the South American operations. Currently, they are buying up assets on the cheap in UK - Abbey, A&L and B&B.

Indeed, a victorious bid in an auction may be great for the ego, but winners beware, the curse can be deadly.

Were MiniBonds/DBS Notes 'Safe' ?

Pictured above is DBS credit ratings.

I am trying to put myself into the shoes of the Bank's relationship managers who sold the MiniBonds or the DBS Notes. What would I have said back in 2007 given the market conditions?

Back in 2007, Lehman's Long term credit rating by Fitch is AA- (DBS is now AA-). So the rating agencies are assigning an equal probability of default to DBS and Lehman back in 2007. To put it simply, placing a fixed deposit with DBS would be just as risky as selling protection on Lehman (if we discount the Deposit Insurance Act in Singapore).

So what does an AA- rating by Fitch mean? On their website, it says:
Very high credit quality. 'AA' ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

So to a lay person (no access to credit market data), given the information available in 2007, it is not impossible for one to judge that Lehman was indeed a 'safe' counterparty and the risk undertaken then was miniscle.

The turn of events over the last month was truely astounding. To this date, Lehman's credit rating by S&P is still A, four notches above junk status.

Retail Investors - More handholding needed?

The current debacle concerning retail investors due to the Lehman's bankruptcy brings to my mind a conversation I overhead in August last year.
Was on the trading floor of a Scandinavian bank back in August 2007 when the credit crisis first reared it's ugly head. Global equities suffered a 15% drop, credit markets froze, the bank's corporate clients started getting jittery and began calling in, presumably taken a larger than expected hit.

Head Trader: What are we gonna do with this xxx (client's name). They have been calling us non-stop.
Chief Trader: What do they expect us to do? Hand hold 'em? They are big boys and markets can go down. They should know the risks they are taking.

Do retail investors need hand-holding or in some cases, a bailout by citing ignorance? Are retail investors really that gullible? If someone gives more money for deposits, shouldn't one ask where the 'catch' is? If something is too good to be true, shouldn't one ask why it is so?

There will always be risks involved when dealing with money. Bonds issued by the Singapore government is good only if the government does not go bankrupt. Fixed deposits placed with a bank is only as good as long as the bank does not go bankrupt. There is always a probability that things will not go the way we expect, which is why we have to be prepared for the worst scenario.

Lehman Bankruptcy - Scenes from IT Ops

I was onsite at a bank today and the IT Operations was slightly more busy than usual due to the demise of Lehman. So what happens when a bank's counterparty fails? Heres' a brief insight from the IT perspective:

a. They stop all payments sent out to Lehman - via their payment systems, SWIFT, CLS, etc.
b. They start filtering out Lehman trades in their P&L reports or meddle with the reports to reflect restructuring fees

There was relatively calm across the department as they appeared ready for this eventuality and were reporting back to work day before yesterday. Not exactly sure what's happening in their trading desks or the risk departments, must be quite a scene ;-)