A Biblical Seven Years
By THOMAS L. FRIEDMAN
Beijing
After attending the spectacular closing ceremony at the Beijing Olympics and feeling the vibrations from hundreds of Chinese drummers pulsating in my own chest, I was tempted to conclude two things: “Holy mackerel, the energy coming out of this country is unrivaled.” And, two: “We are so cooked. Start teaching your kids Mandarin.”
However, I’ve learned over the years not to over-interpret any two-week event. Olympics don’t change history. They are mere snapshots — a country posing in its Sunday bests for all the world too see. But, as snapshots go, the one China presented through the Olympics was enormously powerful — and it’s one that Americans need to reflect upon this election season.
China did not build the magnificent $43 billion infrastructure for these games, or put on the unparalleled opening and closing ceremonies, simply by the dumb luck of discovering oil. No, it was the culmination of seven years of national investment, planning, concentrated state power, national mobilization and hard work.
Seven years ... Seven years ... Oh, that’s right. China was awarded these Olympic Games on July 13, 2001 — just two months before 9/11.
As I sat in my seat at the Bird’s Nest, watching thousands of Chinese dancers, drummers, singers and acrobats on stilts perform their magic at the closing ceremony, I couldn’t help but reflect on how China and America have spent the last seven years: China has been preparing for the Olympics; we’ve been preparing for Al Qaeda. They’ve been building better stadiums, subways, airports, roads and parks. And we’ve been building better metal detectors, armored Humvees and pilotless drones.
The difference is starting to show. Just compare arriving at La Guardia’s dumpy terminal in New York City and driving through the crumbling infrastructure into Manhattan with arriving at Shanghai’s sleek airport and taking the 220-mile-per-hour magnetic levitation train, which uses electromagnetic propulsion instead of steel wheels and tracks, to get to town in a blink.
Then ask yourself: Who is living in the third world country?
Yes, if you drive an hour out of Beijing, you meet the vast dirt-poor third world of China. But here’s what’s new: The rich parts of China, the modern parts of Beijing or Shanghai or Dalian, are now more state of the art than rich America. The buildings are architecturally more interesting, the wireless networks more sophisticated, the roads and trains more efficient and nicer. And, I repeat, they did not get all this by discovering oil. They got it by digging inside themselves.
I realize the differences: We were attacked on 9/11; they were not. We have real enemies; theirs are small and mostly domestic. We had to respond to 9/11 at least by eliminating the Al Qaeda base in Afghanistan and investing in tighter homeland security. They could avoid foreign entanglements. Trying to build democracy in Iraq, though, which I supported, was a war of choice and is unlikely to ever produce anything equal to its huge price tag.
But the first rule of holes is that when you’re in one, stop digging. When you see how much modern infrastructure has been built in China since 2001, under the banner of the Olympics, and you see how much infrastructure has been postponed in America since 2001, under the banner of the war on terrorism, it’s clear that the next seven years need to be devoted to nation-building in America.
We need to finish our business in Iraq and Afghanistan as quickly as possible, which is why it is a travesty that the Iraqi Parliament has gone on vacation while 130,000 U.S. troops are standing guard. We can no longer afford to postpone our nation-building while Iraqis squabble over whether to do theirs.
A lot of people are now advising Barack Obama to get dirty with John McCain. Sure, fight fire with fire. That’s necessary, but it is not sufficient.
Obama got this far because many voters projected onto him that he could be the leader of an American renewal. They know we need nation-building at home now — not in Iraq, not in Afghanistan, not in Georgia, but in America. Obama cannot lose that theme.
He cannot let Republicans make this election about who is tough enough to stand up to Russia or bin Laden. It has to be about who is strong enough, focused enough, creative enough and unifying enough to get Americans to rebuild America. The next president can have all the foreign affairs experience in the world, but it will be useless, utterly useless, if we, as a country, are weak.
Obama is more right than he knows when he proclaims that this is “our” moment, this is “our” time. But it is our time to get back to work on the only home we have, our time for nation-building in America. I never want to tell my girls — and I’m sure Obama feels the same about his — that they have to go to China to see the future.
Wednesday, August 27, 2008
Monday, August 25, 2008
Pan Shiyi and Zhang Xin
It’s Sunday night in Beijing, and a private lift sweeps me up to the 32nd-floor penthouse of Jianwai Soho tower: the family apartment of Zhang Xin and Pan Shiyi, China’s most visible and flamboyant property tycoons. When the door opens, I am led into a huge living room, with floor to ceiling windows and amazing Chinese art on white walls. I have met them before, in London, and they greet me warmly, Zhang, attractive and charismatic, dressed informally in black trousers and leather gilet, and Pan, who looks like a clever faun, with dark eyes that miss nothing behind black-rimmed spectacles.
They have invited me and a couple of friends for an informal dinner, and we sit down to delicious Chinese fare, while the conversation is peppered with financial jargon. No wonder. Jianwai is just one of several large-scale developments they have built in Beijing’s central business district (CBD), making them the largest developers of residential and commercial buildings in the city. Married since 1994, they started their company, SOHO China, in 1995, and took it public last year, raising US $1.9 billion (£950 million) on the Hong Kong stock exchange – a high point in a dizzying career which has seen them build a fortune in 12 years through fusing brilliant land deals, marketing genius and innovative architecture in a city where until recently everything was grey.
By contrast, their buildings are designed by renowned architects such as Japan’s Kengo Kuma, and make use of dramatic visual effects, either white or black, with splashes of colour in the interiors. Their business and personal lives have also been publicly intertwined, turning them into style icons and lending a fascination to the brand they represent. “They are the It-couple of China,” comments Sein Chew, an investment specialist from Hong Kong and New York. Pan has become famous through his blog on property and society at sina.com, which quickly surpassed 30 million hits.
Their current portfolio includes seven mixed-use developments: from New Town, their first project, which they started in 1995, on land no one wanted, to Chaoyangmen, due to complete in 2011. There is a residential development in Boao, on the emerging leisure destination of Hainan Island, and the extraordinary “Commune by the Great Wall”. Opened in 2002, it was mainland China’s first high-end luxury resort – a showcase of houses master-planned by Hong Kong architect Rocco Yim and designed by Asian architects, including Yung Ho Chang.
Boao and the Commune are managed by Kempinski Hotels, as Zhang, by her own admission, was not experienced in running resorts. “It didn’t really start as a business; it was a dream,” she says, a dream fuelled by her interest in architecture. Now, corporate giants such as Motorola, LVMH, Diageo and the Museum of Modern Art New York come for business weekends and brainstorming.
In the process, Zhang and Pan (the Chinese put surnames first), 43 and 44, have become symbols of the New China. Their success is underpinned by a deep knowledge of their customers – both the international corporate community and the rapidly increasing Chinese middle class, who are building their fortunes in the economic climate that emerged with the reforms of the Eighties and Nineties.
After all, before they became billionaires Zhang and Pan lived the life that SOHO China’s customers aspire to, young cosmopolitan types for whom the SOHO concept – “Small Office-Home Office” – was perfectly suited. The concept was inspired by the emergence of internet technology, the rise of small companies and the need for more live-work spaces. The company changed its strategy two years ago, from luxury housing developer to a focus on office and retail developments – in response to a government clampdown on the top-end housing market designed to control soaring prices.
Their own home, informal yet elegant, makes apparent that they have moved on to greater things. Zhang and Pan are frequent speakers at international conferences such as the World Economic Forum in Davos. Zhang, chief executive of SOHO China, of which Pan is chairman, was selected as one of the “Ten Women to Watch in Asia” by the Wall Street Journal. But they are still adjusting to the responsibility of running a publicly quoted company.
“I am exhausted,” Zhang tells me, every inch the chief executive in a Prada tweed suit and stiletto heels when I visit her in her office. “Since the IPO, we are on a different level. The projects are just flying through the doors. Everyone knows we have capital and a brand name and there are thousands of developers thirsty for cash.” She becomes visibly excited when talking about her latest project, Tiananmen South (Qianmen) – 360,000sq m of conservation and 201,831sq m of new buildings, in the largest hutong conservation zone in Beijing.
Hutongs are the low traditional houses that have disappeared rapidly in China’s construction boom, but now the government wants to breathe new life into the city’s cultural heritage. It turned to SOHO China for this project, and the company took it on once the government had relocated the people living there. Her description makes me melancholy, the sweeping away of old for new in the name of progress; she acknowledges it was painful to watch parts of old Beijing disappear. But only three years ago, there were dilapidated houses with severe fire hazards, and “20 families living on top of each other, shops with lots of yelling and screaming, and grandmothers sitting with their grandchildren”, Zhang says.
For the project Zhang employed leading international architects, from Herzog & de Meuron to David Adjaye. The main street will open in time for the Olympics, complete with a large Apple shop. The company is restoring old façades or working with photographs from the Thirties and Forties to re-create the authentic style. The irony of SOHO China being involved in conservation when it was part of the modernisation process is not lost on Zhang, but she is realistic: “On the whole, everyone is better off than they were ten years ago. When I am mandated to do a new building I do that. But I am equally proud to rebuild [old] Beijing.”
In her office, there are photographs of their sons, Sean, 9, and Luke, 8, who go to the international school and speak fluent English. At our dinner, it was Pan who put them to bed, while Zhang continued the conversation. And at SOHO China, Zhang’s office is lighter than Pan’s more modest one. They are not very social: “My kids are my priority,” she says. Their lives rotate around work, family and, increasingly, a search for spiritual values. She became a Baha’i two years ago; Pan is a Taoist who is “still exploring”, Zhang says. She is arguably the more worldly. Her parents were Chinese immigrants in Burma who returned to Beijing in the Fifties; they were translators at the Bureau of Foreign Languages, her mother translating Chou-Enlai and Deng Xiaoping “from Burmese to Chinese and vice versa”, says Zhang. Zhang herself worked her way up from a garment factory in Hong Kong and an assembly-line job at an electronics manufacturing plant to study economics at Sussex and Cambridge, and later work on Wall Street.
In the mid-Nineties, like other expatriate Chinese fascinated by the economic change, she wanted to move back to China. A friend suggested she check out a property company called Beijing Vantone, where Pan was a partner. They met and four days later he proposed; a year later they started a company called Hongshi, renamed SOHO China in 2002.
“I’m a person with a strong concept of family,” Pan tells me through an interpreter at his office. He was born in Gansu Province to a family stricken by poverty during the Cultural Revolution – his father a thwarted teacher, his mother an invalid. “My father is the one who has influenced me the most,” says Pan. “He taught me how to live and survive in the worst environment. During my childhood [in the early Seventies] in my village many children died of disease and starvation. In my family, no one died.”
He went to college at the Beijing Petroleum Institute in 1982, and worked in property, before co-founding Vantone. He sums up the extraordinary developments Beijing has been through: “Twenty years ago, the average living space was 7 to 8sq m. Now, the average living space is almost 30sq m – that’s a big change.”
Of meeting Zhang he says, “At different stages you have different needs, and our needs coincided” – and arguably marrying her may have been the best business decision Pan made. They complement each other perfectly: Zhang is in charge of aesthetics and design; Pan is the dealmaker. “How we divide work is just semantics,” he says. “Both of us have mutual respect and understanding and even if there is conflict, we can overcome it.”
With the Olympics looming – the opening ceremony is on August 8 – China’s major cities, in particular Beijing, are gripped by the building boom, which even warnings of a downturn cannot quell. It is a period of consolidation for the property market, where the big players swallow smaller companies. Indeed, SOHO China spent about $300 million of its raised money buying two high-end properties in Beijing – and the companies that owned them.
“In China there is a saying that the economists are never right; businessmen have always been right; and the government is sometimes right,” Pan says. “The reason that economists haven’t got it right is because China has been static for hundreds of years – the Tang Dynasty is the only one which has interacted with the West. But now the Chinese deep down are really interested in the outside world.”
SOHO China is currently building in Beijing only, but Zhang says this may change in the future. A city with an official population of 12.04 million, it has a migrant population of 5.1 million more. Rural workers are making their way to the city and the middle class is expanding fast, creating extraordinary demand. There are various estimates on billionaires, but China is closing in on the US’s No 1 spot. A year ago, there were 15 billionaires in China; Forbes has now documented 66, many of them property barons like Zhang and Pan.
When I ask them about the future, Zhang mentions their foundation, launched two years ago, which focuses on an educational strategy adapted to today’s needs: “Education is stuck in the Seventies and Eighties, as if China still had a communist ideology.”
But it sounds as if, in the longer term, they are also intent on developing SOHO China into a world-class company. “The world is becoming one,” Pan said at dinner – and perhaps what this means is that it will be more Chinese. “I want to see what a company will look like in ten years’ time,” Zhang says. “It will not be like a US company. There will be a dominant company in China then, which will be very different. Ultimately, US companies are the result of capitalism, but China is neither communist nor capitalist. Each has pros and cons – clearly, the world is moving ahead.” Tellingly, the invitation to their party at the Commune by the Great Wall, in honour of the Olympic Games, reads: “The 8th day of the 8th month of the 8th year of the millennium is proclaimed the official start of the new China Century.” And they are setting the pace.
They have invited me and a couple of friends for an informal dinner, and we sit down to delicious Chinese fare, while the conversation is peppered with financial jargon. No wonder. Jianwai is just one of several large-scale developments they have built in Beijing’s central business district (CBD), making them the largest developers of residential and commercial buildings in the city. Married since 1994, they started their company, SOHO China, in 1995, and took it public last year, raising US $1.9 billion (£950 million) on the Hong Kong stock exchange – a high point in a dizzying career which has seen them build a fortune in 12 years through fusing brilliant land deals, marketing genius and innovative architecture in a city where until recently everything was grey.
By contrast, their buildings are designed by renowned architects such as Japan’s Kengo Kuma, and make use of dramatic visual effects, either white or black, with splashes of colour in the interiors. Their business and personal lives have also been publicly intertwined, turning them into style icons and lending a fascination to the brand they represent. “They are the It-couple of China,” comments Sein Chew, an investment specialist from Hong Kong and New York. Pan has become famous through his blog on property and society at sina.com, which quickly surpassed 30 million hits.
Their current portfolio includes seven mixed-use developments: from New Town, their first project, which they started in 1995, on land no one wanted, to Chaoyangmen, due to complete in 2011. There is a residential development in Boao, on the emerging leisure destination of Hainan Island, and the extraordinary “Commune by the Great Wall”. Opened in 2002, it was mainland China’s first high-end luxury resort – a showcase of houses master-planned by Hong Kong architect Rocco Yim and designed by Asian architects, including Yung Ho Chang.
Boao and the Commune are managed by Kempinski Hotels, as Zhang, by her own admission, was not experienced in running resorts. “It didn’t really start as a business; it was a dream,” she says, a dream fuelled by her interest in architecture. Now, corporate giants such as Motorola, LVMH, Diageo and the Museum of Modern Art New York come for business weekends and brainstorming.
In the process, Zhang and Pan (the Chinese put surnames first), 43 and 44, have become symbols of the New China. Their success is underpinned by a deep knowledge of their customers – both the international corporate community and the rapidly increasing Chinese middle class, who are building their fortunes in the economic climate that emerged with the reforms of the Eighties and Nineties.
After all, before they became billionaires Zhang and Pan lived the life that SOHO China’s customers aspire to, young cosmopolitan types for whom the SOHO concept – “Small Office-Home Office” – was perfectly suited. The concept was inspired by the emergence of internet technology, the rise of small companies and the need for more live-work spaces. The company changed its strategy two years ago, from luxury housing developer to a focus on office and retail developments – in response to a government clampdown on the top-end housing market designed to control soaring prices.
Their own home, informal yet elegant, makes apparent that they have moved on to greater things. Zhang and Pan are frequent speakers at international conferences such as the World Economic Forum in Davos. Zhang, chief executive of SOHO China, of which Pan is chairman, was selected as one of the “Ten Women to Watch in Asia” by the Wall Street Journal. But they are still adjusting to the responsibility of running a publicly quoted company.
“I am exhausted,” Zhang tells me, every inch the chief executive in a Prada tweed suit and stiletto heels when I visit her in her office. “Since the IPO, we are on a different level. The projects are just flying through the doors. Everyone knows we have capital and a brand name and there are thousands of developers thirsty for cash.” She becomes visibly excited when talking about her latest project, Tiananmen South (Qianmen) – 360,000sq m of conservation and 201,831sq m of new buildings, in the largest hutong conservation zone in Beijing.
Hutongs are the low traditional houses that have disappeared rapidly in China’s construction boom, but now the government wants to breathe new life into the city’s cultural heritage. It turned to SOHO China for this project, and the company took it on once the government had relocated the people living there. Her description makes me melancholy, the sweeping away of old for new in the name of progress; she acknowledges it was painful to watch parts of old Beijing disappear. But only three years ago, there were dilapidated houses with severe fire hazards, and “20 families living on top of each other, shops with lots of yelling and screaming, and grandmothers sitting with their grandchildren”, Zhang says.
For the project Zhang employed leading international architects, from Herzog & de Meuron to David Adjaye. The main street will open in time for the Olympics, complete with a large Apple shop. The company is restoring old façades or working with photographs from the Thirties and Forties to re-create the authentic style. The irony of SOHO China being involved in conservation when it was part of the modernisation process is not lost on Zhang, but she is realistic: “On the whole, everyone is better off than they were ten years ago. When I am mandated to do a new building I do that. But I am equally proud to rebuild [old] Beijing.”
In her office, there are photographs of their sons, Sean, 9, and Luke, 8, who go to the international school and speak fluent English. At our dinner, it was Pan who put them to bed, while Zhang continued the conversation. And at SOHO China, Zhang’s office is lighter than Pan’s more modest one. They are not very social: “My kids are my priority,” she says. Their lives rotate around work, family and, increasingly, a search for spiritual values. She became a Baha’i two years ago; Pan is a Taoist who is “still exploring”, Zhang says. She is arguably the more worldly. Her parents were Chinese immigrants in Burma who returned to Beijing in the Fifties; they were translators at the Bureau of Foreign Languages, her mother translating Chou-Enlai and Deng Xiaoping “from Burmese to Chinese and vice versa”, says Zhang. Zhang herself worked her way up from a garment factory in Hong Kong and an assembly-line job at an electronics manufacturing plant to study economics at Sussex and Cambridge, and later work on Wall Street.
In the mid-Nineties, like other expatriate Chinese fascinated by the economic change, she wanted to move back to China. A friend suggested she check out a property company called Beijing Vantone, where Pan was a partner. They met and four days later he proposed; a year later they started a company called Hongshi, renamed SOHO China in 2002.
“I’m a person with a strong concept of family,” Pan tells me through an interpreter at his office. He was born in Gansu Province to a family stricken by poverty during the Cultural Revolution – his father a thwarted teacher, his mother an invalid. “My father is the one who has influenced me the most,” says Pan. “He taught me how to live and survive in the worst environment. During my childhood [in the early Seventies] in my village many children died of disease and starvation. In my family, no one died.”
He went to college at the Beijing Petroleum Institute in 1982, and worked in property, before co-founding Vantone. He sums up the extraordinary developments Beijing has been through: “Twenty years ago, the average living space was 7 to 8sq m. Now, the average living space is almost 30sq m – that’s a big change.”
Of meeting Zhang he says, “At different stages you have different needs, and our needs coincided” – and arguably marrying her may have been the best business decision Pan made. They complement each other perfectly: Zhang is in charge of aesthetics and design; Pan is the dealmaker. “How we divide work is just semantics,” he says. “Both of us have mutual respect and understanding and even if there is conflict, we can overcome it.”
With the Olympics looming – the opening ceremony is on August 8 – China’s major cities, in particular Beijing, are gripped by the building boom, which even warnings of a downturn cannot quell. It is a period of consolidation for the property market, where the big players swallow smaller companies. Indeed, SOHO China spent about $300 million of its raised money buying two high-end properties in Beijing – and the companies that owned them.
“In China there is a saying that the economists are never right; businessmen have always been right; and the government is sometimes right,” Pan says. “The reason that economists haven’t got it right is because China has been static for hundreds of years – the Tang Dynasty is the only one which has interacted with the West. But now the Chinese deep down are really interested in the outside world.”
SOHO China is currently building in Beijing only, but Zhang says this may change in the future. A city with an official population of 12.04 million, it has a migrant population of 5.1 million more. Rural workers are making their way to the city and the middle class is expanding fast, creating extraordinary demand. There are various estimates on billionaires, but China is closing in on the US’s No 1 spot. A year ago, there were 15 billionaires in China; Forbes has now documented 66, many of them property barons like Zhang and Pan.
When I ask them about the future, Zhang mentions their foundation, launched two years ago, which focuses on an educational strategy adapted to today’s needs: “Education is stuck in the Seventies and Eighties, as if China still had a communist ideology.”
But it sounds as if, in the longer term, they are also intent on developing SOHO China into a world-class company. “The world is becoming one,” Pan said at dinner – and perhaps what this means is that it will be more Chinese. “I want to see what a company will look like in ten years’ time,” Zhang says. “It will not be like a US company. There will be a dominant company in China then, which will be very different. Ultimately, US companies are the result of capitalism, but China is neither communist nor capitalist. Each has pros and cons – clearly, the world is moving ahead.” Tellingly, the invitation to their party at the Commune by the Great Wall, in honour of the Olympic Games, reads: “The 8th day of the 8th month of the 8th year of the millennium is proclaimed the official start of the new China Century.” And they are setting the pace.
Friday, August 22, 2008
Inflation to take off?
Scary article about the outlook for inflation in the US
Washington Is Quietly Repudiating Its Debts
By GERALD P. O'DRISCOLL JR.
August 22, 2008; Page A15
Will the U.S. Treasury repudiate its obligations to its creditors, be they citizens or investors around the world? Most observers would answer "no" without hesitation. But Congress, with the complicity of the White House and the Fed, has arguably embarked on a stealth repudiation.
In his famous treatise, "The Wealth of Nations," Adam Smith noted there had never been a "single instance" of sovereign debts having been repaid once "accumulated to a certain degree." We may have reached Smith's threshold.
1
Corbis
The bond markets are certainly not protecting creditors from the risk of what Smith called "pretended payment" through inflation. Nor did they do so until far into the great inflation of the 1970s. Not until late 1977 and into 1978 did the bond market fully incorporate the reality of the debased dollar, by demanding higher long-term interest rates.
How can this happen? Markets are supposed to be forward-looking and efficiently price in all relevant risks. Yet monarchs have been repudiating debt explicitly and implicitly throughout recorded history.
Many years ago, the Austrian economist Ludwig von Mises offered an explanation. He suggested that while you can't, in Abraham Lincoln's words "fool all of the people all of the time," you can fool all of the people at least some of the time. And this is easier to do if a central bank has in the past earned credibility in fighting inflation.
In the 1980s, Ronald Reagan and Paul Volcker worked together to get inflation under control. They were greatly assisted by the "bond vigilantes," traders who were by then exerting discipline in bond markets by bidding up interest rates to double-digit levels. The outcome of the Reagan/Volcker policy of tight money and low marginal tax rates was not only a great economic expansion, but also a great boost to the Fed's credibility. The Fed proved it was able and willing to withstand political heat in the fight against inflation.
Alan Greenspan built on the Volcker legacy and, at least in the early years of his long tenure, continued the fight against inflation. In the 1990s, when Mr. Greenspan faced his own banking crisis, he was able to adopt a policy of comparatively low short-term interest rates. Banks used the opportunity to borrow cheaply and lend profitably to grow their way out of the crisis. Credibility allowed the Fed to engineer a recovery without stoking inflation fears.
After the collapse of the dot-com bubble in 2000, and then 9/11 and its aftermath, Mr. Greenspan again relied on the Fed's credibility to drive down the federal-funds rate to 1% and then hold it there for a year. This time there was a rumbling of doubts. But eventually the Fed did reverse course to preserve its inflation-fighting credentials, and briefly hiked the federal-funds rate to over 5%.
Now Fed Chairman Ben Bernanke has decided to try for a hat trick, and spend the Fed's reputational capital on an easy credit policy. He is doing so under considerably more adverse circumstances than his two predecessors.
Thanks to Reagan and Volcker -- and the credibility he built up on his own early on -- Mr. Greenspan did not face strong inflationary forces in the 1990s. But Mr. Bernanke began his easy money policy with inflation already picking up steam. Worse, we have the accumulated effects of seven years of loose fiscal policy.
Yes, we had the Bush tax cuts, but their beneficial, growth-enhancing effects have long since been swamped by an explosion of government spending. As Milton Friedman long ago taught us, government spending is the ultimate tax on the economy: It extracts real resources from productive, private use and puts them to unproductive, public use. And there is the rub.
Not even a President Obama and a Congress controlled by House Speaker Pelosi and Senate Majority Leader Reid is going to hike taxes enough to pay for all their spending. Indeed, they have shown themselves quite unwilling to engage in honest budgeting. The best example is saddling Fannie Mae and Freddie Mac with $500 million of new (off-budget) obligations to fund cheap housing at a time when the two companies were already on the ropes. Is it any wonder the stock prices of these two companies are imploding?
The markets have long assessed the debt of Fannie and Freddie at AAA because of the Treasury's guarantee, now explicit. But no one has ever seriously assessed the Treasury's creditworthiness with Fannie and Freddie on its books. The public guarantee is entirely open-ended and unbounded. The appetite of the two companies to balloon their balance sheets and take on risk has not been curtailed. Meanwhile, Congress spends apace with new programs for constituents in an election year.
We are at a Smithian moment, in which the temptation for the Fed to spend its last dime of credibility may prove irresistible. Investors are already being taxed by inflation and can rationally expect that tax rate (the inflation rate) to be raised going forward. Wages are not keeping up. Main Street is being taxed to fund Wall Street excess. Anyone who works, saves and invests is exposed to confiscation of his capital and earnings through inflation.
If the Fed maintained its independence of action and said no to the inflationary finance of Congress's profligacy, we wouldn't have reached this point. But the Fed has forsaken that independence amid an absence of leadership.
Perhaps, as rarely happens, Adam Smith will be proven wrong. Let us hope so, because hope appears to be all we have.
Mr. O'Driscoll is a senior fellow at the Cato Institute and a former vice president and economic adviser at the Federal Reserve Bank of Dallas.
Washington Is Quietly Repudiating Its Debts
By GERALD P. O'DRISCOLL JR.
August 22, 2008; Page A15
Will the U.S. Treasury repudiate its obligations to its creditors, be they citizens or investors around the world? Most observers would answer "no" without hesitation. But Congress, with the complicity of the White House and the Fed, has arguably embarked on a stealth repudiation.
In his famous treatise, "The Wealth of Nations," Adam Smith noted there had never been a "single instance" of sovereign debts having been repaid once "accumulated to a certain degree." We may have reached Smith's threshold.
1
Corbis
The bond markets are certainly not protecting creditors from the risk of what Smith called "pretended payment" through inflation. Nor did they do so until far into the great inflation of the 1970s. Not until late 1977 and into 1978 did the bond market fully incorporate the reality of the debased dollar, by demanding higher long-term interest rates.
How can this happen? Markets are supposed to be forward-looking and efficiently price in all relevant risks. Yet monarchs have been repudiating debt explicitly and implicitly throughout recorded history.
Many years ago, the Austrian economist Ludwig von Mises offered an explanation. He suggested that while you can't, in Abraham Lincoln's words "fool all of the people all of the time," you can fool all of the people at least some of the time. And this is easier to do if a central bank has in the past earned credibility in fighting inflation.
In the 1980s, Ronald Reagan and Paul Volcker worked together to get inflation under control. They were greatly assisted by the "bond vigilantes," traders who were by then exerting discipline in bond markets by bidding up interest rates to double-digit levels. The outcome of the Reagan/Volcker policy of tight money and low marginal tax rates was not only a great economic expansion, but also a great boost to the Fed's credibility. The Fed proved it was able and willing to withstand political heat in the fight against inflation.
Alan Greenspan built on the Volcker legacy and, at least in the early years of his long tenure, continued the fight against inflation. In the 1990s, when Mr. Greenspan faced his own banking crisis, he was able to adopt a policy of comparatively low short-term interest rates. Banks used the opportunity to borrow cheaply and lend profitably to grow their way out of the crisis. Credibility allowed the Fed to engineer a recovery without stoking inflation fears.
After the collapse of the dot-com bubble in 2000, and then 9/11 and its aftermath, Mr. Greenspan again relied on the Fed's credibility to drive down the federal-funds rate to 1% and then hold it there for a year. This time there was a rumbling of doubts. But eventually the Fed did reverse course to preserve its inflation-fighting credentials, and briefly hiked the federal-funds rate to over 5%.
Now Fed Chairman Ben Bernanke has decided to try for a hat trick, and spend the Fed's reputational capital on an easy credit policy. He is doing so under considerably more adverse circumstances than his two predecessors.
Thanks to Reagan and Volcker -- and the credibility he built up on his own early on -- Mr. Greenspan did not face strong inflationary forces in the 1990s. But Mr. Bernanke began his easy money policy with inflation already picking up steam. Worse, we have the accumulated effects of seven years of loose fiscal policy.
Yes, we had the Bush tax cuts, but their beneficial, growth-enhancing effects have long since been swamped by an explosion of government spending. As Milton Friedman long ago taught us, government spending is the ultimate tax on the economy: It extracts real resources from productive, private use and puts them to unproductive, public use. And there is the rub.
Not even a President Obama and a Congress controlled by House Speaker Pelosi and Senate Majority Leader Reid is going to hike taxes enough to pay for all their spending. Indeed, they have shown themselves quite unwilling to engage in honest budgeting. The best example is saddling Fannie Mae and Freddie Mac with $500 million of new (off-budget) obligations to fund cheap housing at a time when the two companies were already on the ropes. Is it any wonder the stock prices of these two companies are imploding?
The markets have long assessed the debt of Fannie and Freddie at AAA because of the Treasury's guarantee, now explicit. But no one has ever seriously assessed the Treasury's creditworthiness with Fannie and Freddie on its books. The public guarantee is entirely open-ended and unbounded. The appetite of the two companies to balloon their balance sheets and take on risk has not been curtailed. Meanwhile, Congress spends apace with new programs for constituents in an election year.
We are at a Smithian moment, in which the temptation for the Fed to spend its last dime of credibility may prove irresistible. Investors are already being taxed by inflation and can rationally expect that tax rate (the inflation rate) to be raised going forward. Wages are not keeping up. Main Street is being taxed to fund Wall Street excess. Anyone who works, saves and invests is exposed to confiscation of his capital and earnings through inflation.
If the Fed maintained its independence of action and said no to the inflationary finance of Congress's profligacy, we wouldn't have reached this point. But the Fed has forsaken that independence amid an absence of leadership.
Perhaps, as rarely happens, Adam Smith will be proven wrong. Let us hope so, because hope appears to be all we have.
Mr. O'Driscoll is a senior fellow at the Cato Institute and a former vice president and economic adviser at the Federal Reserve Bank of Dallas.
Wednesday, August 20, 2008
HNWIs Stepping Back
From SCMP
Back to basics
Asia's wealthy, shaken by global financial market woes, are returning to private bankers for investment advice
Louis Beckerling
Updated on Jun 10, 2008
The shake-out of global financial markets in the wake of the United States subprime credit crisis has sent the region's mega-wealthy investors running for cover - and back into the fold of the investment advisers attached to the family offices of private banks in Asia.
For the ultra high-net-worth investors in the region who make use of family office services, the roller-coaster ride taken by markets as the credit crisis unfolded became more scary than the market meltdown that followed the collapse of regional currencies in 1997, say industry insiders.
As a result the region's super-wealthy are now paying belated attention to the advice of their private bankers and cutting back on high-risk investments - chief among them the often highly leveraged "share-accumulator" style structured products that proved popular during the equity bull run in the region and bet on big share price gains of a selected portfolio of stocks.
"The riskier equity products had become a massive focus for many ultra high-net-worth customers of private banks, and the emergence of a bear market in Asian equities has been a wake-up call to investors and the family offices that serve them to ensure greater diversification of their investment portfolios," says Nicolas Reille, managing director and head of sales and marketing Asia ex-Japan for Societe Generale.
Rather than borrowing heavily to boost returns, investors intent on preserving family wealth for successive generations are now also sitting on growing cash piles rather than investing, say bankers, and returning to the investment basic of diversifying their portfolios to limit the erosion of the family wealth.
David Cripps of HSBC's Family Wealth Advisory Group acknowledges this trend to risk aversion. "In 1997-98 we saw a big correction in growth stocks after a lot of companies got overpriced," he says. "Now people are genuinely concerned about such things as the long-term outlook for the US dollar, inflation, and talk of oil prices reaching US$200 per barrel."
Finding investments in this environment that offer secure short-term gains is now more challenging than ever, he says.
HSBC's Todd James, head of the Family Office Investment Advisory Group in Hong Kong covering structured products, says the outcome of the shake-out is that the super-rich are now becoming risk managers rather than aggressive investors.
Michael Troth, managing director and head of Global Wealth Structuring for Citi Global Wealth Management, Asia-Pacific, says with the focus of the region's wealthy families back on the preservation of that wealth, greater attention is being paid to managing risk in increasingly globalised investment portfolios and ensuring a smooth intergenerational transfer of that wealth. "For example, if I am a non-US person and wish to have a portfolio of US equities and if I were to hold those equities in my name and I passed away, I only have an exemption limit of US$60,000 after which I would start to pay US estate tax. The top rate is 45 per cent," he says.
"So for a lot of our clients we manage this by setting up a private investment company that would acquire the US equities, in which case there would be zero estate duty tax exposure for the individual." He adds that particular care is taken to ensure that such structures are compliant and not regarded as attempts to evade tax.
Citi's mega-wealth unit caters for the ultra high-net-worth families that typically have a net worth of more than US$250million, and with the increasing internationalisation of families and their investments, more attention is being paid to establishing the most tax-efficient but compliant investment structures and smooth succession planning, Mr Troth says.
Lionel Kwok, head of investment solutions, North Asia, for Credit Suisse, also notes the increasing attention being paid by the region's wealthy families to the preservation of their wealth.
"In the past few months most investors, especially North Asian who tend to be a lot more directional-trading oriented, have changed their risk appetite and are now less aggressive in taking on leveraged risk," Mr Kwok says.
While markets performed strongly last year, investors put a lot of energy and money into structured equity derivatives, Mr Kwok says, but portfolios are now less geared and more diversified. "Larger clients are now tending to look at a better allocation process and adhering to a better portfolio advisory process suggested by their bankers and a better allocation of risk."
Capital-protected structured investment products as opposed to riskier equity-linked products are now returning to favour, he says.
"We encourage our clients to look at core holdings for medium-term investment. In the short-term the present market volatility will prevail and it will be very difficult to outsmart the market in three to six months.
"So we propose a proper portfolio advisory process that will maintain a certain percentage of a portfolio in a well-diversified core holding, with some `satellite' structured products or hedge fund holdings that may be more related to market direction," he says.
Before the subprime crisis and the collapse of several big financial institutions that followed, Asia's wealthy families paid little attention to counter-party risk when making investment decisions to preserve that wealth, he says.
"One thing we want to highlight is that we have a risk dimension in the market that we have not seen before. We now have the fear factor and liquidity risk, but most important is the realisation that there is counter-party risk as well. A lot of investors had not looked at this before, but they are now looking at who the issuer of the securities is before they invest. And, given recent developments in financial markets, they want to see higher returns if the credit is perceived to be a higher risk, which means yield is becoming more important," Mr Kwok says.
Samantha Bradley, managing director of the newly opened Hong Kong office of Withers Bergman, a unit of global law firm Withers Worldwide, says wealthy families in Asia are paying increasing attention to issues of wealth transfer and turning to Family Offices for advice.
"Our research shows that there is a lot of thought being given by wealthy families in the region to issues of succession, and another topical issue is the increasing internationalisation of investment," Ms Bradley says.
"This is particularly so with the emerging class of wealthy families in China who are looking further afield to make strategic investments across world markets," she says.
Asia's wealthy families have also become more selective about their philanthropic grants and bequests. Whereas family philanthropy used to take the form of a simple gift to charity, or possibly the establishment of a grant-making foundation, donors are now taking a more hands on approach to target their gift-giving.
Commenting on this trend, Withers Bergman says that philanthropists now expect to enhance the value of their charitable investments through maximum tax-efficiency to ensure that the most money is available for the work they wish to support at the least cost. And through using that money to meet their goals in the most efficient manner.
Back to basics
Asia's wealthy, shaken by global financial market woes, are returning to private bankers for investment advice
Louis Beckerling
Updated on Jun 10, 2008
The shake-out of global financial markets in the wake of the United States subprime credit crisis has sent the region's mega-wealthy investors running for cover - and back into the fold of the investment advisers attached to the family offices of private banks in Asia.
For the ultra high-net-worth investors in the region who make use of family office services, the roller-coaster ride taken by markets as the credit crisis unfolded became more scary than the market meltdown that followed the collapse of regional currencies in 1997, say industry insiders.
As a result the region's super-wealthy are now paying belated attention to the advice of their private bankers and cutting back on high-risk investments - chief among them the often highly leveraged "share-accumulator" style structured products that proved popular during the equity bull run in the region and bet on big share price gains of a selected portfolio of stocks.
"The riskier equity products had become a massive focus for many ultra high-net-worth customers of private banks, and the emergence of a bear market in Asian equities has been a wake-up call to investors and the family offices that serve them to ensure greater diversification of their investment portfolios," says Nicolas Reille, managing director and head of sales and marketing Asia ex-Japan for Societe Generale.
Rather than borrowing heavily to boost returns, investors intent on preserving family wealth for successive generations are now also sitting on growing cash piles rather than investing, say bankers, and returning to the investment basic of diversifying their portfolios to limit the erosion of the family wealth.
David Cripps of HSBC's Family Wealth Advisory Group acknowledges this trend to risk aversion. "In 1997-98 we saw a big correction in growth stocks after a lot of companies got overpriced," he says. "Now people are genuinely concerned about such things as the long-term outlook for the US dollar, inflation, and talk of oil prices reaching US$200 per barrel."
Finding investments in this environment that offer secure short-term gains is now more challenging than ever, he says.
HSBC's Todd James, head of the Family Office Investment Advisory Group in Hong Kong covering structured products, says the outcome of the shake-out is that the super-rich are now becoming risk managers rather than aggressive investors.
Michael Troth, managing director and head of Global Wealth Structuring for Citi Global Wealth Management, Asia-Pacific, says with the focus of the region's wealthy families back on the preservation of that wealth, greater attention is being paid to managing risk in increasingly globalised investment portfolios and ensuring a smooth intergenerational transfer of that wealth. "For example, if I am a non-US person and wish to have a portfolio of US equities and if I were to hold those equities in my name and I passed away, I only have an exemption limit of US$60,000 after which I would start to pay US estate tax. The top rate is 45 per cent," he says.
"So for a lot of our clients we manage this by setting up a private investment company that would acquire the US equities, in which case there would be zero estate duty tax exposure for the individual." He adds that particular care is taken to ensure that such structures are compliant and not regarded as attempts to evade tax.
Citi's mega-wealth unit caters for the ultra high-net-worth families that typically have a net worth of more than US$250million, and with the increasing internationalisation of families and their investments, more attention is being paid to establishing the most tax-efficient but compliant investment structures and smooth succession planning, Mr Troth says.
Lionel Kwok, head of investment solutions, North Asia, for Credit Suisse, also notes the increasing attention being paid by the region's wealthy families to the preservation of their wealth.
"In the past few months most investors, especially North Asian who tend to be a lot more directional-trading oriented, have changed their risk appetite and are now less aggressive in taking on leveraged risk," Mr Kwok says.
While markets performed strongly last year, investors put a lot of energy and money into structured equity derivatives, Mr Kwok says, but portfolios are now less geared and more diversified. "Larger clients are now tending to look at a better allocation process and adhering to a better portfolio advisory process suggested by their bankers and a better allocation of risk."
Capital-protected structured investment products as opposed to riskier equity-linked products are now returning to favour, he says.
"We encourage our clients to look at core holdings for medium-term investment. In the short-term the present market volatility will prevail and it will be very difficult to outsmart the market in three to six months.
"So we propose a proper portfolio advisory process that will maintain a certain percentage of a portfolio in a well-diversified core holding, with some `satellite' structured products or hedge fund holdings that may be more related to market direction," he says.
Before the subprime crisis and the collapse of several big financial institutions that followed, Asia's wealthy families paid little attention to counter-party risk when making investment decisions to preserve that wealth, he says.
"One thing we want to highlight is that we have a risk dimension in the market that we have not seen before. We now have the fear factor and liquidity risk, but most important is the realisation that there is counter-party risk as well. A lot of investors had not looked at this before, but they are now looking at who the issuer of the securities is before they invest. And, given recent developments in financial markets, they want to see higher returns if the credit is perceived to be a higher risk, which means yield is becoming more important," Mr Kwok says.
Samantha Bradley, managing director of the newly opened Hong Kong office of Withers Bergman, a unit of global law firm Withers Worldwide, says wealthy families in Asia are paying increasing attention to issues of wealth transfer and turning to Family Offices for advice.
"Our research shows that there is a lot of thought being given by wealthy families in the region to issues of succession, and another topical issue is the increasing internationalisation of investment," Ms Bradley says.
"This is particularly so with the emerging class of wealthy families in China who are looking further afield to make strategic investments across world markets," she says.
Asia's wealthy families have also become more selective about their philanthropic grants and bequests. Whereas family philanthropy used to take the form of a simple gift to charity, or possibly the establishment of a grant-making foundation, donors are now taking a more hands on approach to target their gift-giving.
Commenting on this trend, Withers Bergman says that philanthropists now expect to enhance the value of their charitable investments through maximum tax-efficiency to ensure that the most money is available for the work they wish to support at the least cost. And through using that money to meet their goals in the most efficient manner.
More info on HNWIs in Asia
From Private Banker International
Despite ploughing many millions of dollars into building up their wealth management operations in Asia, the leading global private banks still have a poor record when it comes to regional client asset-gathering on a major scale.
Between them, the top ten banks manage only 6 percent of the high net worth personal financial assets in Asia, which are estimated by the Merrill Lynch/Capgemini World Wealth Report to total $7.6 trillion. New data, based in part on UBS estimates, shows that the leaders between them had about $470 billion of assets under management (AuM) in Asia as of the end of 2006 (see table).
Top-ranked is UBS itself, with $93.3 billion or only around 1 percent. UBS’s total client assets in Asia puts it just ahead of next-ranked Citigroup, with $81.6 billion.
UBS claims a market share for the total global private banking market of about 3.5 percent, showing that it and its competitors still have much to do to attract Asian high net worth business.
The UBS data is contained in an investor presentation given by Kathryn Shih, the head of UBS Wealth Management Asia-Pacific, and Johan Riddergard, head of business development for UBS Wealth Management Asia. The ranking excludes ABN AMRO and Société Générale, but PBI has added in the totals for these two institutions.
ABN AMRO’s private banking AuM in Asia was $10 billion at the end of 2005, $15 billion by the end of last year and had ballooned to $17 billion by this May. Société Générale Private Banking also reports a year-end figure of $17 billion.
Talking about the issues of client penetration, the two UBS executives admit: “Our market share in Asia-Pacific is 1 percent and we are the biggest player – [leaving] large room for additional growth.”
As part of its costly build-up in the region, UBS had amassed 750 advisers across Asia by the end of last year, representing a compound annual growth rate of 30 percent since 2000. Over the same period, its AuM posted a compound growth of 19 percent.
The next stage of UBS’s push into Asia will be to shift increasingly into onshore wealth management, rather as it has done in Europe as traditional Swiss-style offshore banking has declined in relative importance amid fierce regulatory controls and a demand by clients for better performance.
So far, private banking in Asia-Pacific has focused on regional international wealth, but the two UBS executives contend that “the real opportunity is in domestic wealth accumulation”.
“About 90 percent of the wealth in Asia-Pacific is domestic and we have just started to capture it,” they add.
Onshore growth
Onshore wealth will grow as wealth becomes more concentrated among high net worth houses, while there is an increased need for professional advice as clients become more sophisticated and first-generation wealth passes on to the next generation, they say.
UBS’s own estimate is that total Asia-Pacific wealth management assets are worth $12.5 trillion among households with more than $210,000 of investable liquid assets, a figure higher than that of the World Wealth Report, which sets a client wealth cut-off point of $1 million and above.
These assets across Asia, excluding Japan, are projected by UBS to grow by 9.7 percent between 2007 and 2010 – versus comparable growth globally of less than 6 percent. By the end of the decade, global wealth assets as a whole are forecast to hit $55 trillion.
Despite ploughing many millions of dollars into building up their wealth management operations in Asia, the leading global private banks still have a poor record when it comes to regional client asset-gathering on a major scale.
Between them, the top ten banks manage only 6 percent of the high net worth personal financial assets in Asia, which are estimated by the Merrill Lynch/Capgemini World Wealth Report to total $7.6 trillion. New data, based in part on UBS estimates, shows that the leaders between them had about $470 billion of assets under management (AuM) in Asia as of the end of 2006 (see table).
Top-ranked is UBS itself, with $93.3 billion or only around 1 percent. UBS’s total client assets in Asia puts it just ahead of next-ranked Citigroup, with $81.6 billion.
UBS claims a market share for the total global private banking market of about 3.5 percent, showing that it and its competitors still have much to do to attract Asian high net worth business.
The UBS data is contained in an investor presentation given by Kathryn Shih, the head of UBS Wealth Management Asia-Pacific, and Johan Riddergard, head of business development for UBS Wealth Management Asia. The ranking excludes ABN AMRO and Société Générale, but PBI has added in the totals for these two institutions.
ABN AMRO’s private banking AuM in Asia was $10 billion at the end of 2005, $15 billion by the end of last year and had ballooned to $17 billion by this May. Société Générale Private Banking also reports a year-end figure of $17 billion.
Talking about the issues of client penetration, the two UBS executives admit: “Our market share in Asia-Pacific is 1 percent and we are the biggest player – [leaving] large room for additional growth.”
As part of its costly build-up in the region, UBS had amassed 750 advisers across Asia by the end of last year, representing a compound annual growth rate of 30 percent since 2000. Over the same period, its AuM posted a compound growth of 19 percent.
The next stage of UBS’s push into Asia will be to shift increasingly into onshore wealth management, rather as it has done in Europe as traditional Swiss-style offshore banking has declined in relative importance amid fierce regulatory controls and a demand by clients for better performance.
So far, private banking in Asia-Pacific has focused on regional international wealth, but the two UBS executives contend that “the real opportunity is in domestic wealth accumulation”.
“About 90 percent of the wealth in Asia-Pacific is domestic and we have just started to capture it,” they add.
Onshore growth
Onshore wealth will grow as wealth becomes more concentrated among high net worth houses, while there is an increased need for professional advice as clients become more sophisticated and first-generation wealth passes on to the next generation, they say.
UBS’s own estimate is that total Asia-Pacific wealth management assets are worth $12.5 trillion among households with more than $210,000 of investable liquid assets, a figure higher than that of the World Wealth Report, which sets a client wealth cut-off point of $1 million and above.
These assets across Asia, excluding Japan, are projected by UBS to grow by 9.7 percent between 2007 and 2010 – versus comparable growth globally of less than 6 percent. By the end of the decade, global wealth assets as a whole are forecast to hit $55 trillion.
Ultra Wealthy in Hong Kong
Ultra high net worth individuals: Mega-rich prefer to be members of an exclusive club
By Florian Gimbel
Published: December 8 2006 12:25 | Last updated: December 8 2006 12:25
Asian private banking tends to be highly profitable because clients are willing to believe they are members of an exclusive club.
Yet some want to be more equal than others – a trend that has not been lost on banks that service the ultra-wealthy.
Industry giants such as UBS, HSBC and Citigroup have been seeking to woo high-end private banking clients – ranging from entrepreneurs with $100m of assets to billionaire tycoons – by establishing dedicated teams of specialist bankers.
These clients may be a boon for the corporate finance departments of big groups because of the investment needs of their family companies. But as private banking clients, they can be a mixed blessing because of their bargaining power.
Typically, Asia’s super-rich set up companies, known as family offices, run by investment specialists who act as advisers and gatekeepers. They oversee the family’s multiple private banking relationships, which often include a mix of US and European banks as well as US brokers for aggressive trading strategies.
But unlike their counterparts in the US and Europe, ultra-wealthy Asians have balked at the idea of joining multiple family offices designed to help rich families share the cost of sophisticated investment management and back-office administration.
This reflects the fact that Asia’s mega-wealth is still in the hands of the “first generation”, the larger-than-life entrepreneurs who are fiercely competitive and deeply suspicious of their fellow tycoons.
“A family office is so personal it is hard to share it with others,” says Kathryn Shih, head of the Asian operation of UBS Wealth Management. “These businesses are run in the style of the owners and even that changes periodically.”
Fleming Family & Partners, the company launched by the UK banking dynasty, is seeking to change these perceptions. The firm, which has recently launched a Hong Kong office, is hoping to carve out a profitable niche by focusing on what it sees as truly independent advice.
“The size of many banking institutions means that, however hard they may try, they face conflicts of interest between their private banking arm and their product manufacturing business,” says Lucy Sutro, head of Fleming Family’s Hong Kong operation. “Most clients in this region have multiple private banking relationships. We will help clients assess what performance they get from their banks.”
HSBC, one of Asia’s biggest private banks, has implicitly recognised the need for greater transparency by launching a separately incorporated family office service firm. David Cripps, who leads the one-year-old venture, insists there is no sharing of client information with HSBC private bankers.
“By providing strategic asset allocation advice, we can correct imbalances and overlaps in a client’s overall portfolio,” says Mr Cripps. “We are here to provide a value-added service, but we are not set up as a profit centre within the group.”
Companies such as Citigroup, which counts a large number of Asia’s wealthiest tycoons and families among its clients, are unimpressed by the new kids on the block.
“In highly developed markets such as Hong Kong, people care about value for money,” says Kaven Leung, head of the north Asia operation of Citigroup Private Bank. “So long as the selection of the products and services is objective and valuable to clients, there will be demand regardless of whether the provider is a family office or mega-wealth team at a bank.”
A powerful weapon in the hands of the big banks, however, is their ability to offer ultra-wealthy families a chance to co-invest with the bank in sought-after private equity deals.
“Because we are taking the same risk as the clients, they know we will be objective in evaluating the opportunity,” says Mr Leung. “Above all, by co-investing with us, clients are benefiting from our due diligence and risk management expertise.”
Still, while groups such as UBS and Citigroup are happy to share some of the risk with their best clients, others believe big banks no longer have exclusive access to the best private equity deals. “Being big is not necessarily an advantage when it comes to some of the most attractive investment opportunities such as private equity, where you can invest only a limited amount,” says Philippe Damas, global head of the private banking at ING. “Moreover, big banks are no longer the first point of call for private equity deals, because everybody is chasing the best deals.”
Another potential problem for Asia’s largest private banks is the growing perception that they may be spreading themselves too thinly. Ultra-wealthy families may start to worry about banks that move too far into the affluent mass market to sustain high profit growth rates.
“I recently met two big Hong Kong clients who said: ‘please stay focused on your segment’,” says Jes Staley, global head of private banking at JP Morgan, which caters to extremely wealthy entrepreneurs and families.
Indeed, whatever they may do to woo Asia’s super-rich, banks will have to make sure they remain the kind of club that clients would actually want to join.
Copyright The Financial Times Limited 2008
By Florian Gimbel
Published: December 8 2006 12:25 | Last updated: December 8 2006 12:25
Asian private banking tends to be highly profitable because clients are willing to believe they are members of an exclusive club.
Yet some want to be more equal than others – a trend that has not been lost on banks that service the ultra-wealthy.
Industry giants such as UBS, HSBC and Citigroup have been seeking to woo high-end private banking clients – ranging from entrepreneurs with $100m of assets to billionaire tycoons – by establishing dedicated teams of specialist bankers.
These clients may be a boon for the corporate finance departments of big groups because of the investment needs of their family companies. But as private banking clients, they can be a mixed blessing because of their bargaining power.
Typically, Asia’s super-rich set up companies, known as family offices, run by investment specialists who act as advisers and gatekeepers. They oversee the family’s multiple private banking relationships, which often include a mix of US and European banks as well as US brokers for aggressive trading strategies.
But unlike their counterparts in the US and Europe, ultra-wealthy Asians have balked at the idea of joining multiple family offices designed to help rich families share the cost of sophisticated investment management and back-office administration.
This reflects the fact that Asia’s mega-wealth is still in the hands of the “first generation”, the larger-than-life entrepreneurs who are fiercely competitive and deeply suspicious of their fellow tycoons.
“A family office is so personal it is hard to share it with others,” says Kathryn Shih, head of the Asian operation of UBS Wealth Management. “These businesses are run in the style of the owners and even that changes periodically.”
Fleming Family & Partners, the company launched by the UK banking dynasty, is seeking to change these perceptions. The firm, which has recently launched a Hong Kong office, is hoping to carve out a profitable niche by focusing on what it sees as truly independent advice.
“The size of many banking institutions means that, however hard they may try, they face conflicts of interest between their private banking arm and their product manufacturing business,” says Lucy Sutro, head of Fleming Family’s Hong Kong operation. “Most clients in this region have multiple private banking relationships. We will help clients assess what performance they get from their banks.”
HSBC, one of Asia’s biggest private banks, has implicitly recognised the need for greater transparency by launching a separately incorporated family office service firm. David Cripps, who leads the one-year-old venture, insists there is no sharing of client information with HSBC private bankers.
“By providing strategic asset allocation advice, we can correct imbalances and overlaps in a client’s overall portfolio,” says Mr Cripps. “We are here to provide a value-added service, but we are not set up as a profit centre within the group.”
Companies such as Citigroup, which counts a large number of Asia’s wealthiest tycoons and families among its clients, are unimpressed by the new kids on the block.
“In highly developed markets such as Hong Kong, people care about value for money,” says Kaven Leung, head of the north Asia operation of Citigroup Private Bank. “So long as the selection of the products and services is objective and valuable to clients, there will be demand regardless of whether the provider is a family office or mega-wealth team at a bank.”
A powerful weapon in the hands of the big banks, however, is their ability to offer ultra-wealthy families a chance to co-invest with the bank in sought-after private equity deals.
“Because we are taking the same risk as the clients, they know we will be objective in evaluating the opportunity,” says Mr Leung. “Above all, by co-investing with us, clients are benefiting from our due diligence and risk management expertise.”
Still, while groups such as UBS and Citigroup are happy to share some of the risk with their best clients, others believe big banks no longer have exclusive access to the best private equity deals. “Being big is not necessarily an advantage when it comes to some of the most attractive investment opportunities such as private equity, where you can invest only a limited amount,” says Philippe Damas, global head of the private banking at ING. “Moreover, big banks are no longer the first point of call for private equity deals, because everybody is chasing the best deals.”
Another potential problem for Asia’s largest private banks is the growing perception that they may be spreading themselves too thinly. Ultra-wealthy families may start to worry about banks that move too far into the affluent mass market to sustain high profit growth rates.
“I recently met two big Hong Kong clients who said: ‘please stay focused on your segment’,” says Jes Staley, global head of private banking at JP Morgan, which caters to extremely wealthy entrepreneurs and families.
Indeed, whatever they may do to woo Asia’s super-rich, banks will have to make sure they remain the kind of club that clients would actually want to join.
Copyright The Financial Times Limited 2008
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