The security briefing in Toronto for our trip to Haiti was run by a burly ex-Mountie—big moustache and all—who now protects businesspeople from what he described succinctly as "bad situations."
"Do you plan on going out at night in Port-au-Prince?" he asked matter-of-factly. I can't imagine visiting any city without sampling its nightlife. "Sure," I said. He looked at me sternly. "That changes everything."
"What about Carnival?" I asked. Carnival is Haiti's massive, three-day Mardi Gras festival in February—hundreds of thousands of people dancing in the streets day and night. Of course I wanted to go.
"That will require twice the security," he said, looking at his notes. "I would suggest using locals," he added. "You'll stick out enough as it is."
ings—the manufacturer of official Major League baseballs—and a Club Med resort.
At first, Jean-Bertrand Aristide, a popular Catholic priest who had bravely spoken out against Baby Doc, appeared to offer some hope. Aristide was elected president in 1990, but was then ousted in a coup the following year. In 1994, he was reinstalled by the Clinton administration, which deployed thousands of U.S. troops to Haiti. Constitutionally barred from serving consecutive terms, Aristide was succeeded by René Préval, his prime minister, in 1996. But the two split, and, in 2000, Aristide won a presidential election that was boycotted by opposition candidates.
Which of the two is a hero and which is a villain is still the subject of violent political divisions in Haiti. Suffice it to say that by 2004, Aristide's critics were denouncing him as an autocrat who had to rely on thugs to maintain his authority. The U.S. and other developed countries wanted him out, and he was overthrown and eventually relocated to South Africa.
The United Nations moved in and set up its Stabilization Mission in Haiti (MINUSTAH—the French acronym). Basically, it's trying to rebuild the government and police force from scratch. The mission deployed a few thousand peacekeepers at first, including Canadians. Two years later, however, gangs still controlled the streets, so the UN boosted its troop contingent to more than 7,000, many from Brazil and other Latin American countries. They restored order in Port-au-Prince the way that armies do—they shot people. The fiercest fighting was in the city's poorest slum, the Cité Soleil, still loyal to Aristide.
In 2006, amid allegations of vote rigging, Préval was again elected president, with 51% of the vote in the first round, thereby avoiding a runoff. MINUSTAH, the World Bank and the International Monetary Fund (IMF) would like the next transition of power in 2011 to be a peaceful, democratic one—only the second time ever in Haiti. Their concern is strategic as well as humanitarian. The UN presence is widely regarded as a test case for what might happen in Cuba after the Castro regime falls.
All that said, during our week-long visit, Port-au-Prince was relatively calm. There were just 10 kidnappings for ransom, including the former minister of the interior and his wife. "It's not a serious crime here, like murder or rape," one businessman later assured me. "No one that I know of has ever paid more than $20,000 to be returned." A shootout at a grocery store was deadlier—one armed guard and one of nine assailants were killed. Offshore, near Great Exuma in the Bahamas, the U.S. Coast Guard plucked 131 Haitians off a leaky boat bound for Florida.
While the streets of Port-au-Prince didn't look all that dangerous, they were certainly surreal in many ways. Everyone looked about 15 years old to me—and half of Haiti's population is, indeed, under the age of 19. There also appears to be no middle class. Late-model cars clogged the streets, but the vast majority of people get around by walking, or by riding in the back of covered, colourfully painted small pickup trucks that function as taxis. They'd be a tight fit with eight passengers, yet many carry more than 20.
In Pétionville, the wealthy enclave of mansions in the hills where Haiti's remaining elite live, we passed the odd small stretch of stores as luxurious as ones you'll find on Bloor Street in Toronto or Robson in Vancouver. But prudent locals have an armed guard watch their Escalade or Porsche Cayenne if they shop during the day or dine at an elegant, yet well-hidden restaurant at night. Many also have guards posted 24/7 outside the gates to their homes. Centuries-old racial distinctions persist as well—between light-skinned French speakers at the top of the social scale and dark-skinned Creole speakers at the bottom.
All of this fit in with the grim economic assessments I'd read before I arrived. According to the IMF, Haiti's annual gross domestic product per person in 2007 was about $630 (all currency in U.S. dollars), or 151st out of 179 countries ranked. That's less than one-sixth the per capita GDP of neighbouring Dominican Republic, which many Canadian tourists find impoverished. Adjusting for inflation, per capita income in Haiti has actually declined steadily since the 1960s. The country no longer grows rice—a crop the locals were once proud of—in any quantity, nor does it have a commercial dairy of any size. One business that is booming, although it doesn't show up in official economic statistics, is the transshipment of cocaine and other illegal drugs to the U.S.
In early April, two months after we visited, riots erupted in the south, this time because of soaring international food prices, and spread quickly to Port-au-Prince. The cost of a small bowl of rice has more than doubled since last year to over 60 cents. When you earn less than $3 a day—as most working Haitians do—that hurts your stomach. Some locals have fallen back on terre, a biscuit of vegetable shortening, salt and mud, traditionally served to pregnant women and children to settle their stomachs.
Yet, against the steepest of odds, some Haitian and foreign businesses are still making money here—good, legal money.
You have to be very dogged and clever to maintain a business in Haiti, and our hotel in Pétionville was an excellent example. The first 12 rooms of the Hotel Montana were built in 1946 by Frank Cardozo and his wife, Edna. It has expanded to 120 rooms over the years, surrounded by wonderfully lush gardens. The hotel is still owned by Cardozo's daughters, Nadine Cardozo Riedl and Garthe Cardozo Stephanson, regarded as two of the hardest-working and toughest entrepreneurs in the country.
There aren't many tourists these days, but UN dignitaries, foreign leaders, the occasional celebrity, and rich Haitian expatriates visiting from Miami, Montreal or Paris want four-star accommodation. Photos of recent guests on display at the hotel include Kofi Annan, Paul Martin, and Brad and Angelina, who stayed in January, 2006. Cardozo Riedl maintains high standards, but it's an almost daily ordeal. When the city's electrical power is interrupted, the hotel's diesel-powered generators—with enough fuel to run for three weeks straight—kick in. All water is delivered from a private spring—20 truckloads a day.
Cardozo Riedl didn't discuss a more harrowing ordeal. In November, 2004, she was dragged from her car after an armed gang hijacked her motorcade. Security guards and police had apparently been paid to look the other way. She was held for eight days, and shackled and abused by her captors, until a large ransom was paid.
Her husband, Reinhard Riedl, a German dentist, is more chatty and upbeat. He's a bon vivant who could have walked out of the pages of Graham Greene or Somerset Maugham. The couple met at the 1972 Olympics in Munich. One afternoon at the Hotel Montana's cozy News Bar, he treated us to "the best rum sours in the Caribbean," mixed with Barbancourt Haitian rum by his favourite bartender.
His wife's kidnapping was "regrettable," Riedl acknowledged. And, yes, hundreds of Préval supporters stormed the hotel in January, 2006, and frolicked in the pool. South African Archbishop Desmond Tutu, who was visiting at the time, came out of his room and appealed for calm—in English, which the crowd didn't understand. But the country is now safer than it was two years ago, said Riedl. "Things are looking up for us here in Haiti."
Two Canadian companies that already have solid roots in Haiti are Montreal-based T-shirt manufacturer Gildan Activewear (more about it later) and Scotiabank. The bank has operated in Haiti since 1972, through all the upheavals.
Maxime Charles, 53, is the bank's country head. Dapper and polished, he's a proud and articulate spokesman for his employer and for Haiti. His father was ambassador to Washington in the 1940s. Charles earned business and law degrees in Haiti, and joined the bank in 1976. In 1981, he went to graduate school in France, earned a master's in international relations and law, then returned home.
As he and other Scotiabank executives repeatedly point out, the bank wouldn't have stayed unless it was earning a profit. The key has been to pick the right niches. Charles quickly reviewed the history: The bank started mainly as a corporate lender to manufacturers of baseballs, electronic switches and, more recently, clothing. But even poor individuals can benefit from banking services, and in recent years, Scotiabank has also expanded into retail deposit taking and lending.
Auto loans—$5,000 at about 20% interest being typical—have been a particularly encouraging success. "We had to convince car dealers that it would increase business," said Charles.
The bank now operates four branches in Port-au-Prince and two bank mach-ines. The branches were closed during Carnival, which is basically a week of national holidays, but just walking around the exterior of one of them was intriguing. It looked the same as suburban Scotiabank branches in Canada: red signs outside, grey countertops inside, and a drive-through.
But a small building out back housed diesel-powered emergency generators and dozens of batteries. Stuck to the window of the main door, in addition to a sign with hours of business, was another with an outline of a handgun with an X through it. Back in Toronto, Scotiabank CEO Rick Waugh later told me that checking guns at the door is indeed a service provided by the bank in many countries.
The branch was also by far the tidiest building in the neighbourhood, and we only had to drive down the street for a few minutes to see how impoverished the retail customer base can be in Port-au-Prince. We arrived at a dusty open-air market with dozens of stalls that were no more than bits of cloth or plastic held up with tall sticks. A dozen ragged-looking cows were tethered near a refuse pile. As traffic roared past, a dog drank out of an open sewer across the road.
Any talk of cash in Haiti also brings up the question of drugs, corruption and money laundering. Charles is firm and polite, but short on details. "There are a lot of clichés about this country," he said. He and other bank executives also note that the operations in Haiti have to conform to Scotiabank's corporate rules on cash transactions, as well as Canadian law and international standards. Charles is also chair of a Haitian commission on money laundering.
The more familiar and immediate risk for Charles is personal safety—his own and that of his 79 employees. Two of them have been kidnapped. Both were returned safely after their families paid ransoms, and they are still working for the bank. Charles has two armed guards around the clock at his family's own elegant three-storey house in the hills. However, the only robbery of a Scotiabank branch in Haiti that anyone recalls was 30 years ago. In Canada, on average, one Big Six bank is robbed every day.
Are the risks in Haiti worth it? And would the bank ever leave? These are questions for Waugh and Rob Pitfield, Scotiabank's executive vice-president of international banking back in Toronto. They point out that Scotiabank has been active in the Caribbean for more than 120 years, and now operates in 25 countries in Central and South America. "We're an international bank that happens to have its head office in Canada," said Waugh.
Sure, Haiti and other developing countries look daunting, said Pitfield, but "people manage these issues." A global bank needs a broad mindset. "Canadians are somewhat insular and not aware of the countries out there with wonderful people trying to get what we have," he added. "It's taught the bank to be open to ideas and to be tolerant."
The flip side of that, however, is that Waugh and Pitfield have to be very guarded about talking about political risk, especially any suggestion that the bank might leave a country. The only time that's happened was in Argentina in 2002, when the country was in a financial crisis. Waugh, then head of Scotiabank's international operations, told a reporter the bank was looking for a way to stay. Argentine newspapers turned the remark around, forcing the bank to sell a subsidiary. So Waugh now sticks to a script. "Each foreign country for Scotiabank has its own operational risk," he said.
By our third day in Port-au-Prince, I wished some people would let down their guard more. Fortunately, that evening, they did.
A stroke of luck: A handful of local business leaders agreed to sit down for a dinner in a French restaurant in Pétionville. Apart from a small sign outside, it would be easy to miss when driving past, but the traditional, richly-coloured Haitian interior was elegant. Though our conversations were off the record, I can tell you that our guests represented old-family money and a variety of businesses—manufacturing, shipping, publishing and several others.
Over steaks, seafood and much more, they gave us an earful. Right off the bat, just about all of them were vitriolic about a short article in a January issue of Forbes magazine that placed Haiti fourth on its list of the "World's Most Dangerous Destinations." Haiti? Only slightly behind Somalia, Iraq and Afghanistan? Worse than Pakistan (No. 5), Zimbabwe (No. 9), and nearby trouble spots like Jamaica and Mexico? Preposterous!
The magazine used data compiled by two international consulting firms, Annapolis, Maryland-based iJet Intelligent Risk Systems and London-based Control Risks. Forbes cited Haiti's poverty, civil unrest and police corruption. Haiti scored 5 out of 5 on a scale of danger, the only country in the western hemisphere to do so. In a telephone interview after we got home, Tobias Friedl, iJet's regional manager for Latin America, defended the rating, pointing out that kidnapping is a particularly serious threat to foreign businesspeople. Also, while there are stretches of calm in Haiti, the situation can change very quickly.
Indeed, when prodded, our guests at dinner, like just about everyone we spoke to in Haiti, agreed that the economy and government are "fragile" at best. To diversify their personal risk, pretty well all of them have a "place to go"—children abroad, a condo in Miami, a house in Montreal, an apartment in Paris and so on. Sure, they'd like Préval and the UN to succeed, but the government still can't provide basic infrastructure, social services or protection.
And their role? Like paying their workers just $2.50 a day? It's the market rate, they said, and no one is offering Haitians anything better. Corruption and drug smuggling? Business owners can control their own premises, but not what goes on beyond. As one of them put it, "there isn't even a fucking rowboat" to patrol Haiti's 1,800 kilometres of coastline.
Bracing stuff, but I also wanted to get a closer look at what a large operating Haitian business looked like. The next day, we wheedled our way into one of those, too.
There's a large industrial park just a few kilometres west of Port-au-Prince's airport. It consists of about 50 low-rise buildings that employ more than 20,000 workers, mostly sewing T-shirts and other garments. To call them factories is a bit of a misnomer. Erected in the 1970s, they would really be more suitable as warehouses. The ceilings are high, which reduces the heat, but air-conditioning them would be prohibitively expensive. They could also run 24 hours, but no one wants to risk being attacked when travelling home after dark—even workers paid $2.50 a day are targets.
In late 2006, the U.S. gave the manufacturers a huge break by lifting import duties. In the 1990s, a trade embargo nearly brought Haiti to its knees. Now, the country exports 54 million T-shirts a year, and is the fourth-largest supplier to the U.S. after Honduras, Mexico and El Salvador. It's also the cheapest, delivering shirts at an average cost of $14.66 per dozen.
All the Haitian T-shirt makers' operations are broadly similar, and the plant we toured was typical. We saw dozens of rows of workers at individual sewing machines. By and large, the factories only assemble the garments from cloth manufactured and cut out in the Dominican Republic by bigger and more sophisticated machines. Haiti provides the lowest-value-added step in the process, in part because the sewing machines would be easy to pack up and ship out of the country, if necessary.
Years ago, cocaine traffickers succeeded in concealing transshipments from Haiti in industrial containers filled with finished garments. So brand-name U.S. clothing companies now require their Haitian manufacturers to certify shipments as drug-free. The factories buy highly specialized sniffer dogs, some costing as much as $10,000. Workers are also searched as they enter and leave work. Many of them drift from factory to factory, but plant managers are used to the turnover, and don't see any need to increase wages. Ultimately, said one manager, the plants will keep operating "as long as the assembly work force remains cheap and docile."
Montreal-based Gildan also has a factory in Port-au-Prince, but it's not located in the industrial park. It bought a property of its own in 2006 and built a new factory, investing a total of $10 million in Haiti. We didn't tour the plant, but Geneviève Gosselin, Gildan's director of corporate communications, talked about it with me after I returned from Haiti.
Protecting the company's 1,100 workers and the building are major objectives. Gosselin said the plant is "highly secure." Workers are paid $50 for a 5 1/2-day work week—almost triple what some Haitian factories pay—and the company provides subsidized meals and transport. No employees have been kidnapped, and production has rarely been interrupted.
Gildan's resolve should help Haiti, said Gosselin. "Being in the country, plus staying, brings visibility to attract other companies." For the moment, however, Gildan has no plans to increase (or re-duce) its investment in Haiti.
Are subsistence-level wages alone the basis for an influx of new investment? Even the Haitian factory owners would say no. Just about everyone we talked to agreed that it's a chicken-and-egg problem: Investors and tourists will only flock to Haiti if the political and social turmoil subside, and that turmoil will only subside when there are real economic improvements.
The UN mission leaders aren't all that confident, either. MINUSTAH is headquartered in a 1970s highrise hotel that was basically stripped of furnishings and fixtures before the UN arrived, and that has been converted to offices. Mission head Hédi Annabi is Tunisian, but sitting in his office in a grey suit, he's almost a movie version of a taciturn French diplomat.
He said MINUSTAH has made huge progress. In August, 2006, then-secretary-general of the UN Kofi Annan had to ride into Cité Soleil in an armoured personnel carrier, wearing a flak vest, and could only peer at the locals through a periscope. Last August, Annan's successor, Ban Ki-moon, strolled through the slum in a suit and tie. "The trip was without incident," Annabi said proudly.
Drumming up business and investment is a much taller order, and that's part of the job of Joël Boutroue, the lively and argumentative deputy special representative for the secretary-seneral and coordinator of humanitarian aid. He rattled off some recent aid infusions—$100 million from Canada, $50 million from the World Bank, $30 million from Spain, and more. He's also trying to codify business laws that stretch back to the 1820s. "You need to know the laws before you can enforce them," he said.
Among Boutroue's biggest disappointments, however, are the Haitian expatriates in Miami, Montreal and beyond. They're known as the "diaspora," and he thinks they should be doing much more. "I'm doubtful they will ever return," he said with a sigh. "We have to find new investors—ones that don't run from danger."
Who is stepping up to the plate? We found signs of hope in some unexpected places. On a visit to the Fame Pereo Institute clinic in Port-au-Prince, which specializes in HIV/AIDS and leprosy, we watched Dr. Claude Péan deliver a compelling PowerPoint presentation to Maxime Charles, hoping that Scotiabank would increase its contributions. On an annual budget of just over $100,000—60% from corporate donors—the clinic sees thousands of patients a year and maintains a staff of 39, including five doctors.
With Péan was the clinic's administrator, Réal Charlebois, an 82-year-old Catholic priest who was sent to Haiti by Paul-Émile Cardinal Léger of Montreal in 1953 to found a leprosy clinic. In the 1980s, the clinic started to treat other skin diseases as well, and in 2004, HIV/AIDS. Charlebois was also Maxime Charles's high-school Latin teacher. When we asked Charlebois later how the situation in Haiti today compares with the early '50s, he said, wistfully, in French, "It was a paradise."
Given the checkered track record of Haiti's politicians, we weren't expecting much when we entered the century-old military barracks on the Place du Champ de Mars, near the presidential palace, to meet with Préval's Minister of Finance, Daniel Dorsainvil. But the tall, robust, U.S.-educated economist was a shot of adrenalin. He dismissed the Forbes article as "Georgian," and quipped that someone had "got their teaching assistant to do it."
Dorsainvil then ticked off a long and impressive series of statistics from memory: Trade balance and government budget balance both improving, inflation down to single digits, and so on. Still, he acknowledged weaknesses—the biggest being the diaspora. About three million Haitians live outside the country, from virtual slave labourers in the Dominican Republic to multimillionaires in Miami and Europe. They sent back $1.65 billion in foreign remittances to Haiti in 2006, about 35% of the country's GDP. A U.S. economic downturn could choke off much of that flow.
True, the government is having some small successes collecting income taxes at home. But most of its revenues still come from customs and excise—the easiest kind of taxes for even a shaky regime to collect.
For the moment, however, many Haitians complain that the government is actually hoarding cash. Dorsainvil says the country doesn't have enough experts to get many much-needed capital projects going. "There simply aren't enough educated people left in the country to do case studies of investment proposals forwarded to the government," he said.
On the last day of our visit, our escorts took me to a dark downtown indoor market—with only open louvres on the side of the building for lighting—so I could buy a couple of plastic voodoo dolls for $5. The dolls still sit on a trading desk at my company's offices in Toronto. No one has dared to touch them yet.
Our return flight to Miami from Port-au-Prince was cancelled, but we weren't surprised. Scotiabank's staff got us seats on a later plane. On the flight back to Toronto, I thought about the more than 30 UN personnel who've been killed in Haiti since 2004, trying to make the place better. In early April, I watched news footage of the food riots and UN forces using tear gas in Port-au-Prince—on a tree-lined street where we had stood just two months before, waiting to interview Dorsainvil.
Saturday, May 31, 2008
ROGUES' GALLERY
Six traders who bet big and lost
2006
BRIAN HUNTER -$7.3 billion
The 32-year-old, Calgary-based energy trader, who earned about $100 million in 2005, brought down $9-billion (U.S.) hedge fund Amaranth Advisors by trading in natural gas futures. He's now an adviser with Boston-based money manager Peak Ridge Capital Group.
2008
JÉRÔME KERVIEL -$7.2 billion
Kerviel staked $80 billion--more than Société Générale's entire market cap--on European futures markets and forged documents to cover up his activity. He claims the bank was complicit in his actions, and he is being hailed as a hero in France.
1996
YASUO HAMANAKA -$3.5 billionThe Japanese copper trader at 300-year-old Sumitomo Corp. forged documents to cover up his losses in illicit trades that rocked world metal markets. He was sentenced to eight years in prison.
1995
NICK LEESON -$2 billionThe Singapore-based trader wiped out the entire cash reserve of Barings Bank while trying to cover bad bets on the Japanese stock exchange. He served three years for fraud and forgery. His book, Rogue Trader, was turned into a film starring Ewan McGregor.
1995
TOSHIHIDE IGUCHI -$1.5 billion
An executive at Japanese bank Daiwa's New York office, he falsified records for 11 years to cover his losses and claimed his managers lied to the Fed to cover his tracks. Iguchi got four years in jail; Daiwa paid a $340-million (U.S.) fine and was expelled from the U.S.
1996
PETER YOUNG -$855 millionYoung, a mathematician and fund manager at Deutsche Morgan Grenfell in London, set up holding companies to purchase oversized stakes in speculative stocks. He showed up for sentencing in a skirt and makeup, and was declared unfit to stand trial.
2006
BRIAN HUNTER -$7.3 billion
The 32-year-old, Calgary-based energy trader, who earned about $100 million in 2005, brought down $9-billion (U.S.) hedge fund Amaranth Advisors by trading in natural gas futures. He's now an adviser with Boston-based money manager Peak Ridge Capital Group.
2008
JÉRÔME KERVIEL -$7.2 billion
Kerviel staked $80 billion--more than Société Générale's entire market cap--on European futures markets and forged documents to cover up his activity. He claims the bank was complicit in his actions, and he is being hailed as a hero in France.
1996
YASUO HAMANAKA -$3.5 billionThe Japanese copper trader at 300-year-old Sumitomo Corp. forged documents to cover up his losses in illicit trades that rocked world metal markets. He was sentenced to eight years in prison.
1995
NICK LEESON -$2 billionThe Singapore-based trader wiped out the entire cash reserve of Barings Bank while trying to cover bad bets on the Japanese stock exchange. He served three years for fraud and forgery. His book, Rogue Trader, was turned into a film starring Ewan McGregor.
1995
TOSHIHIDE IGUCHI -$1.5 billion
An executive at Japanese bank Daiwa's New York office, he falsified records for 11 years to cover his losses and claimed his managers lied to the Fed to cover his tracks. Iguchi got four years in jail; Daiwa paid a $340-million (U.S.) fine and was expelled from the U.S.
1996
PETER YOUNG -$855 millionYoung, a mathematician and fund manager at Deutsche Morgan Grenfell in London, set up holding companies to purchase oversized stakes in speculative stocks. He showed up for sentencing in a skirt and makeup, and was declared unfit to stand trial.
Risk - SINCLAIR STEWART
In the fall of 1752, a seasoned captain by the name of Henry Kent boarded the Dragon, a 310-ton merchant vessel, and set sail from the southern coast of England, bound for Bengal.
During his previous 14 years in the employ of the East India Co., both as a mate and a commander, Kent had amassed a remarkable record for punctuality: Despite the great distance of this trading route, and the perils of pirates, disease and weather, the sailor always returned to his home port on time.
But on this, his final trip, Kent veered into uncharted waters. Although he rounded the Cape of Good Hope in early 1753, squarely on schedule, he did not continue on to Bengal. Instead, he spent four months on the coast of Madagascar, cutting side-deals with the local population for his own benefit, helping to build a factory, bartering alcohol, and even buying slaves.
This sojourn caused him to miss the seasonal window for a return passage to England, conveniently enabling him to extend his extracurricular business pursuits (and no doubt imposing significant costs on his employer, the East India Co.).
Kent may prove to be among the first rogue traders of the global economy, a swashbuckling precursor to the likes of Nick Leeson, who sank the British bank Barings in 1995, and, more recently, Jérôme Kerviel, the 31-year-old Frenchman whose allegedly unauthorized trading cost Société Générale about $7.2 billion in losses this year. Like these latter-day renegades, Kent used the resources of a powerful and well-capitalized company to engage in improper trades; and, like them, he incurred considerable risk when he did so.
"The mortality rate was 60% on these ships, and people were dying like crazy," explains Emily Erikson, a professor at the University of Massachusetts who chronicled Kent's travels in a paper she co-wrote with Peter Bearman of Columbia University. "There had to be some sort of compensation, and that was engaging in this illicit activity."
Risk taking has been part of human culture since the prehistoric era, whether it be hunting big game or rolling a primitive form of dice known as knucklebones.
Yet rarely has the subject occupied such a central place in the collective consciousness. The U.S. economy is teetering on the brink of recession and threatening to pull other countries down along with it. Investors have lost faith in some of the world's most storied banks, whose reckless promotion of exotic derivatives products fuelled an ill-advised boom--and resultant collapse--in the subprime mortgage industry, leading to hundreds of billions of dollars worth of losses and the savaging of the credit and equities markets.
And then, of course, there are the alleged escapades of Kerviel, the rogue trader who improbably hoodwinked one of Europe's largest banks and, in the process, became an overnight poster boy for a global banking culture drunk on risk.
Kerviel came from modest means (his mother was a hairdresser; his father taught metalworking), and attended a middle-of-the-road university. The French banking system is known for its class-consciousness, and it rewarded Kerviel's unassuming pedigree with a correspondingly unassuming job: He was sequestered far from the limelight of the trading floor, performing administrative work.
Eventually, he was promoted to junior trader on the "Delta One" team and specialized in European stock index futures--the trading equivalent of giving kids plastic cutlery so they can't hurt themselves.
Kerviel was supposed to be looking for arbitrage opportunities--discrepancies between index futures and underlying cash prices that might yield a small profit. Instead, he began making a series of escalating bets on the direction of these markets, and used his knowledge of the back room to evade his superiors, creating fictitious offsetting trades. These offsets made it look as though he had removed himself from a position, when in fact he was accumulating a portfolio worth billions. It worked swimmingly until early this year, when the market suddenly turned, forcing him to backtrack in an even more audacious fashion. By the time the bank learned of his alleged duplicity and took action to unwind his trades, it was staring into the maw of a $7-billion loss. It was by far the most devastating account of rogue trading in history, and perhaps the most unusual.
What sets Kerviel apart from his predecessors is his apparent lack of motive. Unlike, say, Captain Kent and Leeson, he didn't seem to be making the unauthorized trades in order to feather his own nest. In fact, he suggested to prosecutors that he just wanted to be recognized within the firm and perhaps bag a bonus of a few hundred thousand dollars--chump change by the heady standards of investment banking.
That raises some interesting questions, not merely about lax supervision at SocGen, but about the very genesis of risk taking in the financial community.
It has typically been assumed that self-enrichment is the catalyst for this behaviour. But as Kerviel's example suggests, maybe there are other, less discernible, motives at work. What if his propensity for risk is genetically hard-wired? What if he just wanted to belong? What if, as he has intimated, the very culture of banking was complicit in his misdeeds?
The study of risk, like many disciplines, has tended to fracture along academic fault lines, with neurologists, psychologists, sociologists, evolutionary biologists and, most recently, geneticists weighing in on why we engage in this sort of behaviour.
"As I see it, there is not a single human act with total certainty of outcome. Ergo, all behaviour is risk-taking behaviour," says Gerald Wilde, a professor emeritus of psychology at Queen's University in Kingston, Ontario. "The art of life isn't the art of minimizing risk--the art of life and of decision-making is the art of maximizing risk. One has to venture, but the question is, how much to venture?" In other words, what compels one person to drive at reckless speeds or sky-dive, or risk a prison sentence for illegal trading, while another steers away from the shoals?
There is mounting evidence that some of these tendencies have a strong genetic component.
Geneticists have long suspected that, in centuries past, men who were successful hunters and warriors were perceived as better mates, and were therefore likely in a better position to pass along their genes--assuming their heightened willingness to take risks didn't get them killed first.
But it wasn't until the 1970s, when noted psychologist Marvin Zuckerman conducted tests on twins, that more quantifiable evidence began to emerge. His study led him to conclude that about 60% of sensation seeking--a personality trait closely linked to risk taking--is genetically determined.
"Risk is a subjective thing. Very few people actually know the risk of something they undertake," says Zuckerman, a professor emeritus from the University of Delaware. "Impulsive sensation seeking tends to be linked to a tendency to act without planning ahead, which can also be a characteristic linked with sensation seekers in the financial world."
Zuckerman points out that high-sensation seekers tend to have low levels of monoamine oxidase type B, or MAO-B, an enzyme that helps break down and regulate dopamine. Dopamine receptors have been linked directly to our thresholds for sensation seeking, and the implication is that without sufficient MAO-B to keep our urges in check, people could be prone to risky behaviour.
Not surprisingly, women have higher natural levels of MAO-B than men, and the amount we have in our bodies increases with age, mirroring our tendencies to become more conservative and risk-averse as we get older.
More recent studies have focused on stathmin, a gene that plays a key role in the way we respond to fear. In 2005, a research team bred mice that had no stathmin and then placed them in a large box. Whereas normal mice instinctively scurry to the safety of a corner or wall, the genetically modified mice would often linger in the open space, seemingly oblivious to what should naturally be, at least for them, a fearful situation. In turn, that reduction in fearfulness prompted them to take the additional risk of remaining in a vulnerable position. "When there is a lack of fear, it can modify behaviour," explains Gleb Shumyatsky, the Rutgers professor who led the research effort. "Here, this deficiency in fear leads to improper risk assessment."
Risk taking, however, can't simply be boiled down to genetic determinism, any more than Kerviel's rogue trading can be solely attributed to low MAO-B levels or a stathmin deficiency. While genes influence personality traits, so too do myriad other circumstances, from diet to childhood experiences to one's physical environment and emotional makeup.
Indeed, one study published this year has determined--much to the chagrin of some classically trained economists--that our emotional state greatly influences the way we make supposedly rational financial decisions. The research was conducted by two experts in neurofinance, an emerging discipline that seeks to understand trading and investment behaviour through the lens of neuroscience.
Camelia Kuhnen, a finance professor at Northwestern University, and Brian Knutson, a psychology professor at Stanford University, triggered heightened emotional responses in men by showing them erotic material, and then measured their brain activity. Next, they presented the men with two gambling options, one of which involved taking on more risk. As their arousal increased, so did their propensity to opt for the riskier bet.
"The message of our work is the fact that emotions determine very high-level decisions, like your portfolio, and investors should be aware of this fact," says Kuhnen. "If I may speculate, money has become what psychologists call a primary reinforcer. The sight of a $100 bill and a platter full of hot lasagna when you're hungry--they do the same thing to your brain. Money is now, in an evolutionary sense, comparable to any other sort of primitive reward, like food."
Yet that still doesn't explain why people who are already incredibly rich continue to incur serious risks in the hope of making more money. Nor does it account for why someone like Kerviel would risk public humiliation and jail time seemingly without the possibility of gleaning much in the way of financial reward.
Addiction specialists don't see much difference between a rogue trader losing billions of dollars and a compulsive gambler sinking into debt at a casino: Both can be addicted to the adrenalin rush of winning, and both can be prone to doubling down repeatedly in an effort to reclaim their losses. "The pattern tends to be people who have some pretty high expectations of themselves and who have had some success," says Nina Littman-Sharp, who manages the problem gambling services unit of the Centre for Addiction and Mental Health in Toronto. "People get very hooked by an early win, particularly if things aren't going well for them otherwise."
Kerviel himself, in discussions with prosecutors, seemed to acknowledge he had a similar problem. By December, 2007, he was actually sitting on an estimated $2-billion profit realized through his unauthorized trades. That was just before the market turned against him, converting those profits into billions in losses and sending him into a spiral of more fake trades to hide his mistakes. "I didn't know how to deal with it. I was happy and proud of myself, but I didn't know how to justify it," he said in a transcript released by French authorities. "Thus I decided not to declare it, and to hide the sum, I created an opposite fictional operation."
As for his decision to engage in this activity in the first place, he only hinted at a motivation. He was a middle-class outsider who lacked the social and educational credentials of his peers in the banking community; as armchair sociologists pointed out in the aftermath of the scandal, he may have taken on such outsized risk to earn respect and prove himself an equal. "I was aware, starting from my first meeting in 2005, that I was less well-considered than the others, as regarded my university degree and my professional and personal background," Kerviel told prosecutors. "I had not come directly to the front office, but had passed through the middle office, and I was the only [trader] to have done that."
Kerviel surrendered himself to police in January, and spent five weeks in jail while his lawyers negotiated his release on bail. He has been charged with forgery and breach of trust, and a trial is expected to begin next year.
Although he has not denied making the trades, he has remained unusually defiant, implicating the company in his scheme. To his way of thinking, the bank's silence while he was making unauthorized trades, its refusal to question his unwillingness to take vacation, and the regular alerts it issued to him for exceeding his trading limits, was a form of passive acceptance. The pursuit of profit, in his mind, begat willful blindness.
SocGen has vehemently denied this, of course. But some risk experts believe Kerviel might be onto something: that the financial community doesn't just have a problem managing risk (as has been clearly evidenced both by l'affaire Kerviel and the banking sector's disastrous foray into subprime mortgages); it actively encourages the wrong kind of risk.
"I'd argue that there's good risk taking and bad risk taking, and Wall Street is not good at drawing a line between the two," says Aswath Damodaran, a professor of finance at New York University and author of Strategic Risk Taking. "Investment banks are manic-depressive when it comes to taking risks. People are encouraged to take the wrong types of risks for the wrong types of reasons."
There are several fundamental flaws, according to Damodaran, the biggest of which is Wall Street's compensation packages. Salaries and bonuses are based on the ability to generate fees from advising on deals, creating new products or trading; that, in turn, creates an incentive to push these products and deals through the system, regardless of whether they are likely to be good for investors.
Look no further than the subprime collapse, in which banks were pumping out collateralized debt obligations and other complex derivatives that made mortgages more readily available to borrowers with sketchy credit histories.
These derivatives may have been a boon to the bankers who were selling the products, but they proved to have a calamitous effect on homebuyers and credit markets, as well as on investors in the banks themselves.
Some of the world's largest financial institutions have already written off hundreds of billions of dollars worth of subprime exposure, and one, Bear Stearns, collapsed in a broken heap. True, some executives have lost their jobs over the mess and have seen their shareholdings tumble in value, but they've nevertheless exited with handsome--or, to many, galling--severance packages. Stan O'Neal exited the CEO chair at Merrill Lynch with about $161 million (U.S.) last October, after the firm reported billions of dollars in subprime-related losses. Chuck Prince, who resigned as head of Citigroup amid similar writedowns in November, left with $68 million (U.S.).
"It sets up a compensation system where you get rewarded for upside risk but not penalized as much for downside risk," says Damodaran. "We're seeing the risk we're seeing because of the asymmetry of payoffs that are created. This system is designed for strange people, weird people, people almost on the edge, who can take you to the cleaners."
There is also what's known as a "selection bias" in Wall Street's hiring practices that has nurtured this environment of risk taking, Damodaran believes. The MBA students recruited by investment banks tend to be good salespeople with a natural inclination toward taking risks and thereby generating revenue; the ones who have the hardest times getting jobs at these banks, he says, tend to be more thoughtful and cautious.
Virtually every function of a bank, at its core, involves assessing and managing risk, whether it be approving a loan or deciding where to invest deposits. Most investment banks have large compliance and risk departments that are charged with monitoring trading, policing conflicts of interest, and determining the thresholds for acceptable risk.
Yet, on balance, these systems have proved to be woefully incompetent.
Few can figure out how a low-level employee like Kerviel was able to take such massive positions without arousing suspicion among risk experts in the bank. And few can figure out why top executives at Wall Street's most sophisticated firms--and some Canadian ones, too, like CIBC--were seemingly ignorant of the fact they were strapping on billions of dollars worth of debt backed by risky mortgage securities.
One partial explanation: Risk departments have been neutered in the froth of a bull market, their voices afforded less input into decision-making. No one wants to hear someone preach caution when revenue is breaching record levels and creating monster bonuses.
Risk management, it seems, only becomes empowered in the bad times, after disasters have ensued and investors have already been punished. Although banks like Citigroup, SocGen and Merrill Lynch insist they have learned a painful lesson and are upgrading their supervisory structures accordingly, the real test of their mettle will come when markets turn beneficent again. Will hiring practices change? Will risk managers be able to pull the plug on a promising business that could deliver billions in profit--but might also cause potentially grave problems in the future? And will a trader like Kerviel get fired for making huge amounts of money the wrong way, outside of acceptable risk limits? Observers like Damodaran aren't much convinced.
"The people who get the most glory are people who fight battles, even if these are stupid battles," he says, borrowing a page from the evolutionary psychologists. "I'm not sure there's been a huge deviation in human nature over the last millennium, but in financial markets, I think it's become exaggerated. It's at the core of everything we do."
During his previous 14 years in the employ of the East India Co., both as a mate and a commander, Kent had amassed a remarkable record for punctuality: Despite the great distance of this trading route, and the perils of pirates, disease and weather, the sailor always returned to his home port on time.
But on this, his final trip, Kent veered into uncharted waters. Although he rounded the Cape of Good Hope in early 1753, squarely on schedule, he did not continue on to Bengal. Instead, he spent four months on the coast of Madagascar, cutting side-deals with the local population for his own benefit, helping to build a factory, bartering alcohol, and even buying slaves.
This sojourn caused him to miss the seasonal window for a return passage to England, conveniently enabling him to extend his extracurricular business pursuits (and no doubt imposing significant costs on his employer, the East India Co.).
Kent may prove to be among the first rogue traders of the global economy, a swashbuckling precursor to the likes of Nick Leeson, who sank the British bank Barings in 1995, and, more recently, Jérôme Kerviel, the 31-year-old Frenchman whose allegedly unauthorized trading cost Société Générale about $7.2 billion in losses this year. Like these latter-day renegades, Kent used the resources of a powerful and well-capitalized company to engage in improper trades; and, like them, he incurred considerable risk when he did so.
"The mortality rate was 60% on these ships, and people were dying like crazy," explains Emily Erikson, a professor at the University of Massachusetts who chronicled Kent's travels in a paper she co-wrote with Peter Bearman of Columbia University. "There had to be some sort of compensation, and that was engaging in this illicit activity."
Risk taking has been part of human culture since the prehistoric era, whether it be hunting big game or rolling a primitive form of dice known as knucklebones.
Yet rarely has the subject occupied such a central place in the collective consciousness. The U.S. economy is teetering on the brink of recession and threatening to pull other countries down along with it. Investors have lost faith in some of the world's most storied banks, whose reckless promotion of exotic derivatives products fuelled an ill-advised boom--and resultant collapse--in the subprime mortgage industry, leading to hundreds of billions of dollars worth of losses and the savaging of the credit and equities markets.
And then, of course, there are the alleged escapades of Kerviel, the rogue trader who improbably hoodwinked one of Europe's largest banks and, in the process, became an overnight poster boy for a global banking culture drunk on risk.
Kerviel came from modest means (his mother was a hairdresser; his father taught metalworking), and attended a middle-of-the-road university. The French banking system is known for its class-consciousness, and it rewarded Kerviel's unassuming pedigree with a correspondingly unassuming job: He was sequestered far from the limelight of the trading floor, performing administrative work.
Eventually, he was promoted to junior trader on the "Delta One" team and specialized in European stock index futures--the trading equivalent of giving kids plastic cutlery so they can't hurt themselves.
Kerviel was supposed to be looking for arbitrage opportunities--discrepancies between index futures and underlying cash prices that might yield a small profit. Instead, he began making a series of escalating bets on the direction of these markets, and used his knowledge of the back room to evade his superiors, creating fictitious offsetting trades. These offsets made it look as though he had removed himself from a position, when in fact he was accumulating a portfolio worth billions. It worked swimmingly until early this year, when the market suddenly turned, forcing him to backtrack in an even more audacious fashion. By the time the bank learned of his alleged duplicity and took action to unwind his trades, it was staring into the maw of a $7-billion loss. It was by far the most devastating account of rogue trading in history, and perhaps the most unusual.
What sets Kerviel apart from his predecessors is his apparent lack of motive. Unlike, say, Captain Kent and Leeson, he didn't seem to be making the unauthorized trades in order to feather his own nest. In fact, he suggested to prosecutors that he just wanted to be recognized within the firm and perhaps bag a bonus of a few hundred thousand dollars--chump change by the heady standards of investment banking.
That raises some interesting questions, not merely about lax supervision at SocGen, but about the very genesis of risk taking in the financial community.
It has typically been assumed that self-enrichment is the catalyst for this behaviour. But as Kerviel's example suggests, maybe there are other, less discernible, motives at work. What if his propensity for risk is genetically hard-wired? What if he just wanted to belong? What if, as he has intimated, the very culture of banking was complicit in his misdeeds?
The study of risk, like many disciplines, has tended to fracture along academic fault lines, with neurologists, psychologists, sociologists, evolutionary biologists and, most recently, geneticists weighing in on why we engage in this sort of behaviour.
"As I see it, there is not a single human act with total certainty of outcome. Ergo, all behaviour is risk-taking behaviour," says Gerald Wilde, a professor emeritus of psychology at Queen's University in Kingston, Ontario. "The art of life isn't the art of minimizing risk--the art of life and of decision-making is the art of maximizing risk. One has to venture, but the question is, how much to venture?" In other words, what compels one person to drive at reckless speeds or sky-dive, or risk a prison sentence for illegal trading, while another steers away from the shoals?
There is mounting evidence that some of these tendencies have a strong genetic component.
Geneticists have long suspected that, in centuries past, men who were successful hunters and warriors were perceived as better mates, and were therefore likely in a better position to pass along their genes--assuming their heightened willingness to take risks didn't get them killed first.
But it wasn't until the 1970s, when noted psychologist Marvin Zuckerman conducted tests on twins, that more quantifiable evidence began to emerge. His study led him to conclude that about 60% of sensation seeking--a personality trait closely linked to risk taking--is genetically determined.
"Risk is a subjective thing. Very few people actually know the risk of something they undertake," says Zuckerman, a professor emeritus from the University of Delaware. "Impulsive sensation seeking tends to be linked to a tendency to act without planning ahead, which can also be a characteristic linked with sensation seekers in the financial world."
Zuckerman points out that high-sensation seekers tend to have low levels of monoamine oxidase type B, or MAO-B, an enzyme that helps break down and regulate dopamine. Dopamine receptors have been linked directly to our thresholds for sensation seeking, and the implication is that without sufficient MAO-B to keep our urges in check, people could be prone to risky behaviour.
Not surprisingly, women have higher natural levels of MAO-B than men, and the amount we have in our bodies increases with age, mirroring our tendencies to become more conservative and risk-averse as we get older.
More recent studies have focused on stathmin, a gene that plays a key role in the way we respond to fear. In 2005, a research team bred mice that had no stathmin and then placed them in a large box. Whereas normal mice instinctively scurry to the safety of a corner or wall, the genetically modified mice would often linger in the open space, seemingly oblivious to what should naturally be, at least for them, a fearful situation. In turn, that reduction in fearfulness prompted them to take the additional risk of remaining in a vulnerable position. "When there is a lack of fear, it can modify behaviour," explains Gleb Shumyatsky, the Rutgers professor who led the research effort. "Here, this deficiency in fear leads to improper risk assessment."
Risk taking, however, can't simply be boiled down to genetic determinism, any more than Kerviel's rogue trading can be solely attributed to low MAO-B levels or a stathmin deficiency. While genes influence personality traits, so too do myriad other circumstances, from diet to childhood experiences to one's physical environment and emotional makeup.
Indeed, one study published this year has determined--much to the chagrin of some classically trained economists--that our emotional state greatly influences the way we make supposedly rational financial decisions. The research was conducted by two experts in neurofinance, an emerging discipline that seeks to understand trading and investment behaviour through the lens of neuroscience.
Camelia Kuhnen, a finance professor at Northwestern University, and Brian Knutson, a psychology professor at Stanford University, triggered heightened emotional responses in men by showing them erotic material, and then measured their brain activity. Next, they presented the men with two gambling options, one of which involved taking on more risk. As their arousal increased, so did their propensity to opt for the riskier bet.
"The message of our work is the fact that emotions determine very high-level decisions, like your portfolio, and investors should be aware of this fact," says Kuhnen. "If I may speculate, money has become what psychologists call a primary reinforcer. The sight of a $100 bill and a platter full of hot lasagna when you're hungry--they do the same thing to your brain. Money is now, in an evolutionary sense, comparable to any other sort of primitive reward, like food."
Yet that still doesn't explain why people who are already incredibly rich continue to incur serious risks in the hope of making more money. Nor does it account for why someone like Kerviel would risk public humiliation and jail time seemingly without the possibility of gleaning much in the way of financial reward.
Addiction specialists don't see much difference between a rogue trader losing billions of dollars and a compulsive gambler sinking into debt at a casino: Both can be addicted to the adrenalin rush of winning, and both can be prone to doubling down repeatedly in an effort to reclaim their losses. "The pattern tends to be people who have some pretty high expectations of themselves and who have had some success," says Nina Littman-Sharp, who manages the problem gambling services unit of the Centre for Addiction and Mental Health in Toronto. "People get very hooked by an early win, particularly if things aren't going well for them otherwise."
Kerviel himself, in discussions with prosecutors, seemed to acknowledge he had a similar problem. By December, 2007, he was actually sitting on an estimated $2-billion profit realized through his unauthorized trades. That was just before the market turned against him, converting those profits into billions in losses and sending him into a spiral of more fake trades to hide his mistakes. "I didn't know how to deal with it. I was happy and proud of myself, but I didn't know how to justify it," he said in a transcript released by French authorities. "Thus I decided not to declare it, and to hide the sum, I created an opposite fictional operation."
As for his decision to engage in this activity in the first place, he only hinted at a motivation. He was a middle-class outsider who lacked the social and educational credentials of his peers in the banking community; as armchair sociologists pointed out in the aftermath of the scandal, he may have taken on such outsized risk to earn respect and prove himself an equal. "I was aware, starting from my first meeting in 2005, that I was less well-considered than the others, as regarded my university degree and my professional and personal background," Kerviel told prosecutors. "I had not come directly to the front office, but had passed through the middle office, and I was the only [trader] to have done that."
Kerviel surrendered himself to police in January, and spent five weeks in jail while his lawyers negotiated his release on bail. He has been charged with forgery and breach of trust, and a trial is expected to begin next year.
Although he has not denied making the trades, he has remained unusually defiant, implicating the company in his scheme. To his way of thinking, the bank's silence while he was making unauthorized trades, its refusal to question his unwillingness to take vacation, and the regular alerts it issued to him for exceeding his trading limits, was a form of passive acceptance. The pursuit of profit, in his mind, begat willful blindness.
SocGen has vehemently denied this, of course. But some risk experts believe Kerviel might be onto something: that the financial community doesn't just have a problem managing risk (as has been clearly evidenced both by l'affaire Kerviel and the banking sector's disastrous foray into subprime mortgages); it actively encourages the wrong kind of risk.
"I'd argue that there's good risk taking and bad risk taking, and Wall Street is not good at drawing a line between the two," says Aswath Damodaran, a professor of finance at New York University and author of Strategic Risk Taking. "Investment banks are manic-depressive when it comes to taking risks. People are encouraged to take the wrong types of risks for the wrong types of reasons."
There are several fundamental flaws, according to Damodaran, the biggest of which is Wall Street's compensation packages. Salaries and bonuses are based on the ability to generate fees from advising on deals, creating new products or trading; that, in turn, creates an incentive to push these products and deals through the system, regardless of whether they are likely to be good for investors.
Look no further than the subprime collapse, in which banks were pumping out collateralized debt obligations and other complex derivatives that made mortgages more readily available to borrowers with sketchy credit histories.
These derivatives may have been a boon to the bankers who were selling the products, but they proved to have a calamitous effect on homebuyers and credit markets, as well as on investors in the banks themselves.
Some of the world's largest financial institutions have already written off hundreds of billions of dollars worth of subprime exposure, and one, Bear Stearns, collapsed in a broken heap. True, some executives have lost their jobs over the mess and have seen their shareholdings tumble in value, but they've nevertheless exited with handsome--or, to many, galling--severance packages. Stan O'Neal exited the CEO chair at Merrill Lynch with about $161 million (U.S.) last October, after the firm reported billions of dollars in subprime-related losses. Chuck Prince, who resigned as head of Citigroup amid similar writedowns in November, left with $68 million (U.S.).
"It sets up a compensation system where you get rewarded for upside risk but not penalized as much for downside risk," says Damodaran. "We're seeing the risk we're seeing because of the asymmetry of payoffs that are created. This system is designed for strange people, weird people, people almost on the edge, who can take you to the cleaners."
There is also what's known as a "selection bias" in Wall Street's hiring practices that has nurtured this environment of risk taking, Damodaran believes. The MBA students recruited by investment banks tend to be good salespeople with a natural inclination toward taking risks and thereby generating revenue; the ones who have the hardest times getting jobs at these banks, he says, tend to be more thoughtful and cautious.
Virtually every function of a bank, at its core, involves assessing and managing risk, whether it be approving a loan or deciding where to invest deposits. Most investment banks have large compliance and risk departments that are charged with monitoring trading, policing conflicts of interest, and determining the thresholds for acceptable risk.
Yet, on balance, these systems have proved to be woefully incompetent.
Few can figure out how a low-level employee like Kerviel was able to take such massive positions without arousing suspicion among risk experts in the bank. And few can figure out why top executives at Wall Street's most sophisticated firms--and some Canadian ones, too, like CIBC--were seemingly ignorant of the fact they were strapping on billions of dollars worth of debt backed by risky mortgage securities.
One partial explanation: Risk departments have been neutered in the froth of a bull market, their voices afforded less input into decision-making. No one wants to hear someone preach caution when revenue is breaching record levels and creating monster bonuses.
Risk management, it seems, only becomes empowered in the bad times, after disasters have ensued and investors have already been punished. Although banks like Citigroup, SocGen and Merrill Lynch insist they have learned a painful lesson and are upgrading their supervisory structures accordingly, the real test of their mettle will come when markets turn beneficent again. Will hiring practices change? Will risk managers be able to pull the plug on a promising business that could deliver billions in profit--but might also cause potentially grave problems in the future? And will a trader like Kerviel get fired for making huge amounts of money the wrong way, outside of acceptable risk limits? Observers like Damodaran aren't much convinced.
"The people who get the most glory are people who fight battles, even if these are stupid battles," he says, borrowing a page from the evolutionary psychologists. "I'm not sure there's been a huge deviation in human nature over the last millennium, but in financial markets, I think it's become exaggerated. It's at the core of everything we do."
Tuesday, May 27, 2008
Yet another reason why banks are always winners - FABRICE TAYLOR
Don Coxe loves commodities for the long run and that's what his new publicly traded fund will invest in. But the fund's prospectus makes a better case for financial institutions. Bank of Montreal, Mr. Coxe's employer and the promoter of the fund, will make a much better return on investment than investors.
The Coxe Commodity Strategy Fund, which made its debut yesterday, was a hot seller, raising the maximum $260-million. It's likely that the underwriters will exercise their overallotment rights, bringing the total gross take to just under $300-million.
Investors were obviously drawn to the commodity thesis. But they were also drawn to Mr. Coxe, the loquacious financial historian whose Basic Points publication is eagerly awaited by thousands of investors, big and small, every month.
Mr. Coxe has enjoyed a fairly good track record in recent years. He didn't predict the bull market in commodities but he embraced it early and, more important, he stuck to it. He wasn't the first to figure it out, nor the best at shifting from one commodity to the other, but he was no slouch and he had conviction, which is so rare in his world. His work and reputation has earned BMO Nesbitt Burns a lot of money and goodwill. The offering of Mr. Coxe's fund continues the trend, where money is concerned anyway.
Let's look at the numbers: Assuming the overallotment is exercised, the closed-end fund will raise $297.5-million. The investment bankers, led by BMO, will earn more than $15-million. The lawyers and auditors, etc., will earn a few hundred thousand. Net proceeds to the fund will by just over $280-million. That means that a unit sold for $10 is worth only $9.47 right out of the gate.
Those are pretty standard fees as far as equity offerings are concerned but this is an initial public offering for a closed-end fund. What's the risk to the underwriters? Nothing. All the underwriters had to do was "encourage" their sales force to sell the thing to clients. Investors had better hope Mr. Coxe and his stock pickers deliver because factoring in the IPO, management and trailer fees, the fund will have to earn almost 8 per cent in its first year just to skate investors back on side. Tough to do, especially when it will take six months to fully invest the fund.
Mr. Coxe is the fund's consultant, meaning he will advise on how to weight the fund's investment between various classes of commodities. He will also advise on stock selection, although the fund has a manager to pull the trigger on stocks. The fund can hedge currencies but has no plans to, which is surprising given Mr. Coxe's often strong views on the subject.
Having stock pickers might be a good thing, since in his writing Mr. Coxe tends to think in terms of asset classes, or subclasses, and then defer to the BMO research department for individual stocks.
The management fees will be split between the money manager (in this case Harris Investment Management, a BMO subsidiary), the administrator (another BMO subsidiary) and the consultant, Mr. Coxe, a BMO employee.
If you're not yet convinced of our bank-over-fund thesis, consider that best part of the story: The Coxe Commodity Strategy Fund has an excellent strategy on how to expand its asset base, and therefore fees, with very little effort.
The fund's securities are called "combined units," because they're actually one fund unit combined with a warrant. The warrant gives the investor the right to buy another unit in two years for $11.25, regardless of where the units are trading.
Sound good? Truth is, there's little to no advantage to the investor. Derivatives are a zero-sum proposition, so if all investors exercise their warrants, they all get diluted by the same amount. They gain nothing. The warrants will be tradable but in an efficient market that doesn't change anything. Not exercising, on the other hand, might hurt you.
So why include warrants? Because it makes it highly likely that the fund will grow if, in three years, the units are trading above $11.25. And since the underwriters will help themselves to 25 cents per warrant exercised, they'll make a few more million from that exercise. Plus, of course, the management and trailer fees will be applied to a bigger base. More money for the banks.
Mr. Coxe, in case you're wondering, can't invest in this fund because he's a U.S. resident. But if he could, why would he? He's better off earning his fees, salary, bonus and stock options from BMO. Like I said, it's a much better return on investment.
Coxe fund offers great returns for (BMO) investors
$million other than per unit figures
Gross proceeds to the fund $297.50
Agents' fees $15.30
Expenses of issue $0.60
Net proceeds to the fund $281.60
Net/unit $9.47
Selling price $10.00
Opening deficit 5.30%
Annualized trailer fees $1.10
Annualized management expense $4.40
Year one gain required to restore value $21.40
In percentage terms 7.60%
Fees earned by banks/dealers on warrant exercise $7.40
Incremental annualized MER/trailer fees if warrants exercised $6.50
Assumes over-allotment is exercised
The Coxe Commodity Strategy Fund, which made its debut yesterday, was a hot seller, raising the maximum $260-million. It's likely that the underwriters will exercise their overallotment rights, bringing the total gross take to just under $300-million.
Investors were obviously drawn to the commodity thesis. But they were also drawn to Mr. Coxe, the loquacious financial historian whose Basic Points publication is eagerly awaited by thousands of investors, big and small, every month.
Mr. Coxe has enjoyed a fairly good track record in recent years. He didn't predict the bull market in commodities but he embraced it early and, more important, he stuck to it. He wasn't the first to figure it out, nor the best at shifting from one commodity to the other, but he was no slouch and he had conviction, which is so rare in his world. His work and reputation has earned BMO Nesbitt Burns a lot of money and goodwill. The offering of Mr. Coxe's fund continues the trend, where money is concerned anyway.
Let's look at the numbers: Assuming the overallotment is exercised, the closed-end fund will raise $297.5-million. The investment bankers, led by BMO, will earn more than $15-million. The lawyers and auditors, etc., will earn a few hundred thousand. Net proceeds to the fund will by just over $280-million. That means that a unit sold for $10 is worth only $9.47 right out of the gate.
Those are pretty standard fees as far as equity offerings are concerned but this is an initial public offering for a closed-end fund. What's the risk to the underwriters? Nothing. All the underwriters had to do was "encourage" their sales force to sell the thing to clients. Investors had better hope Mr. Coxe and his stock pickers deliver because factoring in the IPO, management and trailer fees, the fund will have to earn almost 8 per cent in its first year just to skate investors back on side. Tough to do, especially when it will take six months to fully invest the fund.
Mr. Coxe is the fund's consultant, meaning he will advise on how to weight the fund's investment between various classes of commodities. He will also advise on stock selection, although the fund has a manager to pull the trigger on stocks. The fund can hedge currencies but has no plans to, which is surprising given Mr. Coxe's often strong views on the subject.
Having stock pickers might be a good thing, since in his writing Mr. Coxe tends to think in terms of asset classes, or subclasses, and then defer to the BMO research department for individual stocks.
The management fees will be split between the money manager (in this case Harris Investment Management, a BMO subsidiary), the administrator (another BMO subsidiary) and the consultant, Mr. Coxe, a BMO employee.
If you're not yet convinced of our bank-over-fund thesis, consider that best part of the story: The Coxe Commodity Strategy Fund has an excellent strategy on how to expand its asset base, and therefore fees, with very little effort.
The fund's securities are called "combined units," because they're actually one fund unit combined with a warrant. The warrant gives the investor the right to buy another unit in two years for $11.25, regardless of where the units are trading.
Sound good? Truth is, there's little to no advantage to the investor. Derivatives are a zero-sum proposition, so if all investors exercise their warrants, they all get diluted by the same amount. They gain nothing. The warrants will be tradable but in an efficient market that doesn't change anything. Not exercising, on the other hand, might hurt you.
So why include warrants? Because it makes it highly likely that the fund will grow if, in three years, the units are trading above $11.25. And since the underwriters will help themselves to 25 cents per warrant exercised, they'll make a few more million from that exercise. Plus, of course, the management and trailer fees will be applied to a bigger base. More money for the banks.
Mr. Coxe, in case you're wondering, can't invest in this fund because he's a U.S. resident. But if he could, why would he? He's better off earning his fees, salary, bonus and stock options from BMO. Like I said, it's a much better return on investment.
Coxe fund offers great returns for (BMO) investors
$million other than per unit figures
Gross proceeds to the fund $297.50
Agents' fees $15.30
Expenses of issue $0.60
Net proceeds to the fund $281.60
Net/unit $9.47
Selling price $10.00
Opening deficit 5.30%
Annualized trailer fees $1.10
Annualized management expense $4.40
Year one gain required to restore value $21.40
In percentage terms 7.60%
Fees earned by banks/dealers on warrant exercise $7.40
Incremental annualized MER/trailer fees if warrants exercised $6.50
Assumes over-allotment is exercised
Three raging bulls as oil barrels higher - SHIRLEY WON
Energy stock funds have been on a tear as the price of oil keeps soaring, and at least one fund manager is sinking more of his own cash into his portfolio because of his belief in the "peak oil" story.
Eric Sprott, portfolio manager and controlling shareholder of Sprott Asset Management Inc., invested some of the proceeds from the firm's recent initial public offering into his Sprott Energy Fund last Friday.
"I bought units in that fund, and not an insignificant amount," said Mr. Sprott, who estimates he now holds at least 10 per cent of the energy fund he manages.
"We have been believers for a number of years ... that we are in what we call the peak oil scenario, where the prices will rise essentially forever because the world needs more oil than it can possibly produce and, in fact, production will go lower," Mr. Sprott said in an interview yesterday.
The price of crude hit a record intraday high of $129.60 (U.S.) a barrel in New York yesterday after billionaire hedge fund manager T. Boone Pickens said oil would reach $150 a barrel this year. Oil then settled at a record close of $129.07.
"We are not surprised by oil being at $129 or natural gas being north of $11 [per million British thermal units] and going higher," Mr. Sprott said. "The demand for alternative energy are all things that we would totally expect to be happening. ... Within two years, I can imagine [oil] going to $200."
Canada has hit a peak in conventional oil production, while the U.S. did so in 1970, he said. "Russia looks like it peaked about four or five months ago."
Sprott Energy's biggest holding is Timminco Ltd., a producer of silicon for use in making solar cells. It also owns companies like Oilexco Inc., Pan Orient Energy Corp. and Corridor Resources Inc.
The fund also has a big investment in "what we call the Quebec shale-gas play," said Mr. Sprott, referring to potential unconventional natural gas reserves under the shale of the St. Lawrence lowlands.
Laura Lau, a portfolio manager at Sentry Select Capital Corp., also believes in the peak oil theory. "I do believe that production is diminishing, but I also believe that, with higher prices, there will be a supply response from non-conventional sources," like oil sands and gas shale, she said.
Ms. Lau, who co-manages the Sentry Select Canadian Energy Growth Fund, sees crude oil reaching $200 a barrel, but "I would not say it would be sustainable."
People will change their habits and drive smaller vehicles, while developing countries like China, which subsidize oil prices for their consumers, may not continue to do so, she said.
Ms. Lau expects a pullback in the oil price within the next three months because there is "lot of speculation" in the commodity, but doesn't see it falling below $90 a barrel.
While investors might be concerned about jumping into an energy fund given current high commodity prices, they should understand that those stocks are only pricing in oil at $75 to $85 a barrel, and natural gas at $7.50 to $8 per million BTUs, she said.
Some of her favourites energy plays include Oilexco because of its development and exploration prospects in the North Sea and because it "doesn't have a lot of hedges" on the price of crude oil like many of its peers. Pacific Rubiales Energy Corp., the "premier oil and gas company in Colombia," is also favourite, she added. "They have tripled production and tripled their margins in less than a year."
Meanwhile, Garey Aitken, a portfolio manager with Bissett Investment Management, said he is surprised by the swift rise in the oil price. "The big unknown is the speculative forces in the marketplace," he said.
But Mr. Aitken, who runs the Bissett Energy Fund, said he is more "more bullish on natural gas" prices than oil. "I think these high crude prices will drag along natural gas prices as we move through 2008," he said.
His fund, which focuses on smaller-company stocks, includes names like NuVista Energy Ltd., which has more exposure to natural gas than crude oil. He also likes Mullen Group Income Fund, whose operating company is involved not only in conventional trucking, but also transporting drilling rigs for the energy sector.
Mr. Aitken, however, said he is not a believer in the peak oil theory. While it is getting increasingly difficult for the energy industry globally to supply oil, increased demand will only "motivate the industry to bring on incremental, higher cost supply," he said.
"In four or five years, the industry will be supplying more and more crude oil than today," he predicted.
Energy funds have lots of pep
Returns (as of April 30)
Net Assets ($million) MER Year-to-date return 1-year 3-years 5-years 10-years
Bissett Energy CC-A $5.8 2.5% 40.8% - - - -
Dynamic FocusPlus Energy Inc Trust $438.8 2.3% 31.0% 22.9% 16.3% - -
Sprott Energy $222.9 2.9% 30.8% 15.5% 22.7% - -
Sentry Select Canadian Energy Grwth $20.9 3.2% 30.3% 12.0% 12.2% 18.5% 13.1%
iShares CDN Energy Sector Index $543.3 0.6% 29.3% 20.9% 23.3% 28.4%
Sentry Select Cdn Energy Grwth Cl $4.5 3.3% 28.9% 11.0% - - -
RBC Global Energy $568.8 2.1% 21.7% 16.2% 20.4% 27.4% 16.1%
Altamira Energy Fund $18.6 2.9% 21.4% 11.0% 22.1% - -
TD Energy $271.4 2.2% 21.4% 9.5% 19.2% 25.5% 13.2%
Claymore Oil Sands Sector ETF $21.1 0.6% 21.1% 24.7% - - -
Qwest Energy Canadian Resource Cl - 3.5% 20.9% 9.6% - - -
Dynamic Global Energy Class $3.0 - 20.5% - - - -
CI Global Energy Corporate Class $193.2 2.3% 19.8% 16.1% 22.8% 31.0% -
CIBC Energy $172.4 2.4% 17.5% - 2.9% 14.1% 24.7% 14.4%
DOUGLAS COULL/THE GLOBE AND MAIL
SOURCE: GLOBEINVESTOR.COM
Eric Sprott, portfolio manager and controlling shareholder of Sprott Asset Management Inc., invested some of the proceeds from the firm's recent initial public offering into his Sprott Energy Fund last Friday.
"I bought units in that fund, and not an insignificant amount," said Mr. Sprott, who estimates he now holds at least 10 per cent of the energy fund he manages.
"We have been believers for a number of years ... that we are in what we call the peak oil scenario, where the prices will rise essentially forever because the world needs more oil than it can possibly produce and, in fact, production will go lower," Mr. Sprott said in an interview yesterday.
The price of crude hit a record intraday high of $129.60 (U.S.) a barrel in New York yesterday after billionaire hedge fund manager T. Boone Pickens said oil would reach $150 a barrel this year. Oil then settled at a record close of $129.07.
"We are not surprised by oil being at $129 or natural gas being north of $11 [per million British thermal units] and going higher," Mr. Sprott said. "The demand for alternative energy are all things that we would totally expect to be happening. ... Within two years, I can imagine [oil] going to $200."
Canada has hit a peak in conventional oil production, while the U.S. did so in 1970, he said. "Russia looks like it peaked about four or five months ago."
Sprott Energy's biggest holding is Timminco Ltd., a producer of silicon for use in making solar cells. It also owns companies like Oilexco Inc., Pan Orient Energy Corp. and Corridor Resources Inc.
The fund also has a big investment in "what we call the Quebec shale-gas play," said Mr. Sprott, referring to potential unconventional natural gas reserves under the shale of the St. Lawrence lowlands.
Laura Lau, a portfolio manager at Sentry Select Capital Corp., also believes in the peak oil theory. "I do believe that production is diminishing, but I also believe that, with higher prices, there will be a supply response from non-conventional sources," like oil sands and gas shale, she said.
Ms. Lau, who co-manages the Sentry Select Canadian Energy Growth Fund, sees crude oil reaching $200 a barrel, but "I would not say it would be sustainable."
People will change their habits and drive smaller vehicles, while developing countries like China, which subsidize oil prices for their consumers, may not continue to do so, she said.
Ms. Lau expects a pullback in the oil price within the next three months because there is "lot of speculation" in the commodity, but doesn't see it falling below $90 a barrel.
While investors might be concerned about jumping into an energy fund given current high commodity prices, they should understand that those stocks are only pricing in oil at $75 to $85 a barrel, and natural gas at $7.50 to $8 per million BTUs, she said.
Some of her favourites energy plays include Oilexco because of its development and exploration prospects in the North Sea and because it "doesn't have a lot of hedges" on the price of crude oil like many of its peers. Pacific Rubiales Energy Corp., the "premier oil and gas company in Colombia," is also favourite, she added. "They have tripled production and tripled their margins in less than a year."
Meanwhile, Garey Aitken, a portfolio manager with Bissett Investment Management, said he is surprised by the swift rise in the oil price. "The big unknown is the speculative forces in the marketplace," he said.
But Mr. Aitken, who runs the Bissett Energy Fund, said he is more "more bullish on natural gas" prices than oil. "I think these high crude prices will drag along natural gas prices as we move through 2008," he said.
His fund, which focuses on smaller-company stocks, includes names like NuVista Energy Ltd., which has more exposure to natural gas than crude oil. He also likes Mullen Group Income Fund, whose operating company is involved not only in conventional trucking, but also transporting drilling rigs for the energy sector.
Mr. Aitken, however, said he is not a believer in the peak oil theory. While it is getting increasingly difficult for the energy industry globally to supply oil, increased demand will only "motivate the industry to bring on incremental, higher cost supply," he said.
"In four or five years, the industry will be supplying more and more crude oil than today," he predicted.
Energy funds have lots of pep
Returns (as of April 30)
Net Assets ($million) MER Year-to-date return 1-year 3-years 5-years 10-years
Bissett Energy CC-A $5.8 2.5% 40.8% - - - -
Dynamic FocusPlus Energy Inc Trust $438.8 2.3% 31.0% 22.9% 16.3% - -
Sprott Energy $222.9 2.9% 30.8% 15.5% 22.7% - -
Sentry Select Canadian Energy Grwth $20.9 3.2% 30.3% 12.0% 12.2% 18.5% 13.1%
iShares CDN Energy Sector Index $543.3 0.6% 29.3% 20.9% 23.3% 28.4%
Sentry Select Cdn Energy Grwth Cl $4.5 3.3% 28.9% 11.0% - - -
RBC Global Energy $568.8 2.1% 21.7% 16.2% 20.4% 27.4% 16.1%
Altamira Energy Fund $18.6 2.9% 21.4% 11.0% 22.1% - -
TD Energy $271.4 2.2% 21.4% 9.5% 19.2% 25.5% 13.2%
Claymore Oil Sands Sector ETF $21.1 0.6% 21.1% 24.7% - - -
Qwest Energy Canadian Resource Cl - 3.5% 20.9% 9.6% - - -
Dynamic Global Energy Class $3.0 - 20.5% - - - -
CI Global Energy Corporate Class $193.2 2.3% 19.8% 16.1% 22.8% 31.0% -
CIBC Energy $172.4 2.4% 17.5% - 2.9% 14.1% 24.7% 14.4%
DOUGLAS COULL/THE GLOBE AND MAIL
SOURCE: GLOBEINVESTOR.COM
Investors offered easier way to buy hot Israeli stocks - DALE JACKSON
North American investors can commemorate Israel's 60th anniversary by owning a part of the country's benchmark index without the hassle of investing overseas.
Starting today, the first overseas exchange-traded fund that tracks the Tel Aviv Stock Exchange's TA-25 begins trading on the New York Stock Exchange under the symbol TAV.
Chicago-based Northern Trust Corp. is introducing the NETS TA-25 Index Fund as part of a series of foreign ETFs that include South Africa and Portugal.
Israeli equities have surged 150 per cent over the past five years, thanks in part to a rapidly emerging pharmaceutical, medical equipment and technology sector. The country's gross domestic product has been growing at a steady pace of 4 to 5 per cent a year and is expected to continue at that rate to 2012.
The changing face of Israel is prompting debate over the country's developing market status. Morgan Stanley lists it as an emerging market but next month the FTSE Group will upgrade Israel to the same designation as the United States, Europe and Japan.
"It's a country in the process of graduating to developed market," says Northern Trust chief investment officer Steven Schoenfeld. "It's moving to the big leagues on the economic scene."
The Tel Aviv Stock Exchange, or TASE, has a combined market value of $232-billion (U.S.). The TA-25 index tracks the shares of the 25 companies with the highest market capitalization. Nearly half of the TA-25 companies are industrials and 40 per cent are financials.
Most Canadian trading accounts currently have direct access to a vast array of Israeli stocks listed on U.S. exchanges. In fact, Israel is second only to Canada in terms of the number of stocks from a foreign country listed in the United States. However, Mr. Schoenfeld says most Israeli companies listed in the U.S., such as Checkpoint Systems and Amdocs, are too narrowly focused on global technology. "You don't have a complete Israeli portfolio without also having the domestically listed stocks. What this ETF provides is easy access for Canadian investors to the Tel Aviv-listed stocks where they don't have to worry about converting to shekels."
Cliff Goldstein has first-hand experience with both the unofficial and official Israeli equity markets. His Pennsylvania-based $3.7-billion Amidex 35 Israel index fund has been investing in the 35 largest Israeli companies trading in both countries for the past decade. He says he has witnessed a stark change in the nature of both markets. "We put in the New York side for stability and growth and the Tel Aviv side for volatility and risk. What we discovered was exactly the opposite."
Mr. Goldstein says Israel's maturing domestic economy and diversified export base have acted as a cushion against the U.S.-based credit crunch and the threat of inflation from Asia. "Israel has become a huge exporter to the world and they ain't selling oranges any more."
He expects established technology exports to continue driving the Israeli equity market. One of his holdings and the darling of global equity markets is Teva Pharmaceuticals - the largest distributor of antibiotics in the world.
Banking and insurance is the largest weighting in the Amidex 35 fund at 18 per cent, with technology accounting for 16 per cent and chemicals taking a 13-per-cent stake.
He also sees opportunity in the further privatization of public enterprises and the transfer of military technology for civilian uses. But he adds that the future for Israel is environmentally related industries. "The hot up-and-comer is green-related technologies; from water desalinization to electric cars to solar panels to hydrogen-powered vehicles."
However, as Israel looks forward to the next 60 years, investors must still come to terms with the ghosts of its past. Decades of political tension and acts of violence between the Jewish state and its Arab neighbours continues. Mr. Goldstein says that in his experience, there has never been any direct correlation between political and military events and Israeli business performance. "The fact that 50 shoppers were injured in a mall in the south of Israel is not going to affect Teva Pharmaceutical's ability to make drugs in Horsham, Pa., and ship them to India."
Amidex 35 Israel is a U.S. mutual fund and is not available in Canada for regulatory reasons. In addition to the Northern Trust TA-25 fund, investors wanting direct exposure to Israeli equities can purchase the NYSE-traded iShares MSCI Israel Capped Investable Market Index Fund, which tracks a broader assortment of stocks traded primarily on the TASE.
Starting today, the first overseas exchange-traded fund that tracks the Tel Aviv Stock Exchange's TA-25 begins trading on the New York Stock Exchange under the symbol TAV.
Chicago-based Northern Trust Corp. is introducing the NETS TA-25 Index Fund as part of a series of foreign ETFs that include South Africa and Portugal.
Israeli equities have surged 150 per cent over the past five years, thanks in part to a rapidly emerging pharmaceutical, medical equipment and technology sector. The country's gross domestic product has been growing at a steady pace of 4 to 5 per cent a year and is expected to continue at that rate to 2012.
The changing face of Israel is prompting debate over the country's developing market status. Morgan Stanley lists it as an emerging market but next month the FTSE Group will upgrade Israel to the same designation as the United States, Europe and Japan.
"It's a country in the process of graduating to developed market," says Northern Trust chief investment officer Steven Schoenfeld. "It's moving to the big leagues on the economic scene."
The Tel Aviv Stock Exchange, or TASE, has a combined market value of $232-billion (U.S.). The TA-25 index tracks the shares of the 25 companies with the highest market capitalization. Nearly half of the TA-25 companies are industrials and 40 per cent are financials.
Most Canadian trading accounts currently have direct access to a vast array of Israeli stocks listed on U.S. exchanges. In fact, Israel is second only to Canada in terms of the number of stocks from a foreign country listed in the United States. However, Mr. Schoenfeld says most Israeli companies listed in the U.S., such as Checkpoint Systems and Amdocs, are too narrowly focused on global technology. "You don't have a complete Israeli portfolio without also having the domestically listed stocks. What this ETF provides is easy access for Canadian investors to the Tel Aviv-listed stocks where they don't have to worry about converting to shekels."
Cliff Goldstein has first-hand experience with both the unofficial and official Israeli equity markets. His Pennsylvania-based $3.7-billion Amidex 35 Israel index fund has been investing in the 35 largest Israeli companies trading in both countries for the past decade. He says he has witnessed a stark change in the nature of both markets. "We put in the New York side for stability and growth and the Tel Aviv side for volatility and risk. What we discovered was exactly the opposite."
Mr. Goldstein says Israel's maturing domestic economy and diversified export base have acted as a cushion against the U.S.-based credit crunch and the threat of inflation from Asia. "Israel has become a huge exporter to the world and they ain't selling oranges any more."
He expects established technology exports to continue driving the Israeli equity market. One of his holdings and the darling of global equity markets is Teva Pharmaceuticals - the largest distributor of antibiotics in the world.
Banking and insurance is the largest weighting in the Amidex 35 fund at 18 per cent, with technology accounting for 16 per cent and chemicals taking a 13-per-cent stake.
He also sees opportunity in the further privatization of public enterprises and the transfer of military technology for civilian uses. But he adds that the future for Israel is environmentally related industries. "The hot up-and-comer is green-related technologies; from water desalinization to electric cars to solar panels to hydrogen-powered vehicles."
However, as Israel looks forward to the next 60 years, investors must still come to terms with the ghosts of its past. Decades of political tension and acts of violence between the Jewish state and its Arab neighbours continues. Mr. Goldstein says that in his experience, there has never been any direct correlation between political and military events and Israeli business performance. "The fact that 50 shoppers were injured in a mall in the south of Israel is not going to affect Teva Pharmaceutical's ability to make drugs in Horsham, Pa., and ship them to India."
Amidex 35 Israel is a U.S. mutual fund and is not available in Canada for regulatory reasons. In addition to the Northern Trust TA-25 fund, investors wanting direct exposure to Israeli equities can purchase the NYSE-traded iShares MSCI Israel Capped Investable Market Index Fund, which tracks a broader assortment of stocks traded primarily on the TASE.
Memo to women in power positions: You must never let your guard down - Harvey Schachter
Nini DeSesa, chairman of McCann Erickson's New York office, says she is seeing many good women reach the top of the corporate pyramid only to come coppling down. She gives five tips to women with power who would like to avoid such a fate:
Don't Become Drunk With Power
Once at the top, many women seem to forget the negotiating skills that got them there, Ms. DiSesa says. "Our democratic 'female' patience is replaced by the more efficient 'male' dictatorship. It seems far easier to just tell people what to do than it is to keep negotiating for peaceful collaboration," she writes in Executive Excellence. Men aren't punished for that failing since they aren't expected to be nurturing, but there are different expectations for women - so when they aren't seen to be nurturing, it's often described as a betrayal of trust.
Don't Stop Reading The Room
There is an arrogance that can accompany being top dog. Suddenly everyone is trying to read you - second guessing you, and sucking up to you. Instant power can give a false sense of security, and women may drop their defences. But they aren't invincible, particularly if brought in from the outside. If you aren't doing the expected job or disgruntled subordinates are undermining you with innuendo, you could be in for a nasty surprise. Never stop reading the room to distinguish between the people watching your back to protect it and those using it for target practice.
Avoid Becoming 'a Real Bitch'
Some women who have attained power aren't just tough or firm. They can become "bitches," Ms. DiSesa says. They treat subordinates badly, keeping them out of the loop, hoarding information. They don't listen to anyone else and micromanage. Women at the top can adopt many of the 'male characteristics' they admire, but must be wary of gender differences in terms of expectations. "It's okay to be decisive, courageous and focused - as long as we are also collaborative, nurturing, and empathetic," she writes.
Remember: Make Rain
Women take the reins but sometimes forget they are held to the same standard as men: Make money or get out. Ms. DiSesa notes a blog posting titled How Five Women CEOs destroyed Confidence in the U.S. Economy. "They didn't have a list of five men who had screwed up," she writes. "There is a double standard, but no one seems to argue with the almighty buck."
Don't Forget to Be Better Than Men
The double standard remains, even at the top, so women can't relax. "We must always work smarter, think better, manage more humanely, and be more patient than men," she says.
Don't Become Drunk With Power
Once at the top, many women seem to forget the negotiating skills that got them there, Ms. DiSesa says. "Our democratic 'female' patience is replaced by the more efficient 'male' dictatorship. It seems far easier to just tell people what to do than it is to keep negotiating for peaceful collaboration," she writes in Executive Excellence. Men aren't punished for that failing since they aren't expected to be nurturing, but there are different expectations for women - so when they aren't seen to be nurturing, it's often described as a betrayal of trust.
Don't Stop Reading The Room
There is an arrogance that can accompany being top dog. Suddenly everyone is trying to read you - second guessing you, and sucking up to you. Instant power can give a false sense of security, and women may drop their defences. But they aren't invincible, particularly if brought in from the outside. If you aren't doing the expected job or disgruntled subordinates are undermining you with innuendo, you could be in for a nasty surprise. Never stop reading the room to distinguish between the people watching your back to protect it and those using it for target practice.
Avoid Becoming 'a Real Bitch'
Some women who have attained power aren't just tough or firm. They can become "bitches," Ms. DiSesa says. They treat subordinates badly, keeping them out of the loop, hoarding information. They don't listen to anyone else and micromanage. Women at the top can adopt many of the 'male characteristics' they admire, but must be wary of gender differences in terms of expectations. "It's okay to be decisive, courageous and focused - as long as we are also collaborative, nurturing, and empathetic," she writes.
Remember: Make Rain
Women take the reins but sometimes forget they are held to the same standard as men: Make money or get out. Ms. DiSesa notes a blog posting titled How Five Women CEOs destroyed Confidence in the U.S. Economy. "They didn't have a list of five men who had screwed up," she writes. "There is a double standard, but no one seems to argue with the almighty buck."
Don't Forget to Be Better Than Men
The double standard remains, even at the top, so women can't relax. "We must always work smarter, think better, manage more humanely, and be more patient than men," she says.
Saturday, May 10, 2008
Dennis Gartman's Rules of Trading
R U L E # 1
Never, ever, under any circumstance, should one add to a losing position ... not EVER!
Averaging down into a losing trade is the only thing that will assuredly take you out of the investment business. This is what took LTCM out. This is what took Barings Brothers out; this is what took Sumitomo Copper out, and this is what takes most losing investors out.
R U L E # 2
Never, ever, under any circumstance, should one add to a losing position ... not EVER!
We trust our point is made. If "location, location, location" are the first three rules of investing in real estate, then the first two rules of trading equities, debt, commodities, currencies, and so on are these: never add to a losing position.
R U L E # 3
Learn to trade like a mercenary guerrilla.
The great Jesse Livermore once said that it is not our duty to trade upon the bullish side, nor the bearish side, but upon the winning side. This is brilliance of the first order. We must indeed learn to fight/invest on the winning side, and we must be willing to change sides immediately when one side has gained the upper hand.
R U L E # 4 DON'T HOLD ON TO LOSING POSITIONS
Capital is in two varieties: Mental and Real, and, of the two, the mental capital is the most important.
Holding on to losing positions costs real capital as one's account balance is depleted, but it can exhaust one's mental capital even more seriously as one holds to the losing trade, becoming more and more fearful with each passing minute, day and week, avoiding potentially profitable trades while one nurtures the losing position.
R U L E # 5 GO WHERE THE STRENGTH IS
The objective of what we are after is not to buy low and to sell high, but to buy high and to sell higher, or to sell short low and to buy lower.
We can never know what price is really "low," nor what price is really "high." We can, however, have a modest chance at knowing what the trend is and acting on that trend. We can buy higher and we can sell higher still if the trend is up. Conversely, we can sell short at low prices and we can cover at lower prices if the trend is still down. However, we've no idea how high high is, nor how low low is.
R U L E # 6
Sell markets that show the greatest weakness; buy markets that show the greatest strength.
Metaphorically, when bearish we need to throw our rocks into the wettest paper sack for it will break the most readily, while in bull markets we need to ride the strongest wind for it shall carry us farther than others.
R U L E # 7
In a Bull Market we can only be long or neutral; in a bear market we can only be bearish or neutral.
In a bull market we can be neutral, modestly long, or aggressively long--getting into the last position after a protracted bull run into which we've added to our winning position all along the way. Conversely, in a bear market we can be neutral, modestly short, or aggressively short, but never, ever can we--or should we--be the opposite way even so slightly.
R U L E # 8
"Markets can remain illogical far longer than you or I can remain solvent."
The University of Chicago "boys" have argued for decades that the markets are rational, but we in the markets every day know otherwise. We must learn to accept that irrationality, deal with it, and move on.
R U L E # 9
Trading runs in cycles; some are good, some are bad, and there is nothing we can do about that other than accept it and act accordingly.
Thus, when things are going well, trade often, trade large, and try to maximize the good fortune that is being bestowed upon you. However, when trading poorly, trade infrequently, trade very small, and continue to get steadily smaller until the winds have changed and the trading "gods" have chosen to smile upon you once again.
R U L E # 10
To trade/invest successfully, think like a fundamentalist; trade like a technician.
It is obviously imperative that we understand the economic fundamentals that will drive a market higher or lower, but we must understand the technicals as well. When we do, then and only then can we, or should we, trade.
R U L E # 11
Keep your technical systems simple.
The greatest traders/investors we've had the honor to know over the years continue to employ the simplest trading schemes. They draw simple trend lines, they see and act on simple technical signals, they react swiftly, and they attribute it to their knowledge gained over the years that complexity is the home of the young and untested.
R U L E # 12
In trading/investing, an understanding of mass psychology is often more important than an understanding of economics.
Markets are, as we like to say, the sum total of the wisdom and stupidity of all who trade in them, and they are collectively given over to the most basic components of the collective psychology. The dot-com bubble was indeed a bubble, but it grew from a small group to a larger group to the largest group, collectively fed by mass mania, until it ended. The economists among us missed the bull-run entirely, but that proves only that markets can indeed remain irrational, and that economic fundamentals may eventually hold the day but in the interim, psychology holds the moment.
And finally the most important rule of all:
R U L E # 13
Do more of that which is working and do less of that which is not.
This is a simple rule in writing; this is a difficult rule to act upon. However, it synthesizes all the modest wisdom we've accumulated over thirty years of watching and trading in markets. Adding to a winning trade while cutting back on losing trades is the one true rule that holds--and it holds in life as well as in trading/investing.
Never, ever, under any circumstance, should one add to a losing position ... not EVER!
Averaging down into a losing trade is the only thing that will assuredly take you out of the investment business. This is what took LTCM out. This is what took Barings Brothers out; this is what took Sumitomo Copper out, and this is what takes most losing investors out.
R U L E # 2
Never, ever, under any circumstance, should one add to a losing position ... not EVER!
We trust our point is made. If "location, location, location" are the first three rules of investing in real estate, then the first two rules of trading equities, debt, commodities, currencies, and so on are these: never add to a losing position.
R U L E # 3
Learn to trade like a mercenary guerrilla.
The great Jesse Livermore once said that it is not our duty to trade upon the bullish side, nor the bearish side, but upon the winning side. This is brilliance of the first order. We must indeed learn to fight/invest on the winning side, and we must be willing to change sides immediately when one side has gained the upper hand.
R U L E # 4 DON'T HOLD ON TO LOSING POSITIONS
Capital is in two varieties: Mental and Real, and, of the two, the mental capital is the most important.
Holding on to losing positions costs real capital as one's account balance is depleted, but it can exhaust one's mental capital even more seriously as one holds to the losing trade, becoming more and more fearful with each passing minute, day and week, avoiding potentially profitable trades while one nurtures the losing position.
R U L E # 5 GO WHERE THE STRENGTH IS
The objective of what we are after is not to buy low and to sell high, but to buy high and to sell higher, or to sell short low and to buy lower.
We can never know what price is really "low," nor what price is really "high." We can, however, have a modest chance at knowing what the trend is and acting on that trend. We can buy higher and we can sell higher still if the trend is up. Conversely, we can sell short at low prices and we can cover at lower prices if the trend is still down. However, we've no idea how high high is, nor how low low is.
R U L E # 6
Sell markets that show the greatest weakness; buy markets that show the greatest strength.
Metaphorically, when bearish we need to throw our rocks into the wettest paper sack for it will break the most readily, while in bull markets we need to ride the strongest wind for it shall carry us farther than others.
R U L E # 7
In a Bull Market we can only be long or neutral; in a bear market we can only be bearish or neutral.
In a bull market we can be neutral, modestly long, or aggressively long--getting into the last position after a protracted bull run into which we've added to our winning position all along the way. Conversely, in a bear market we can be neutral, modestly short, or aggressively short, but never, ever can we--or should we--be the opposite way even so slightly.
R U L E # 8
"Markets can remain illogical far longer than you or I can remain solvent."
The University of Chicago "boys" have argued for decades that the markets are rational, but we in the markets every day know otherwise. We must learn to accept that irrationality, deal with it, and move on.
R U L E # 9
Trading runs in cycles; some are good, some are bad, and there is nothing we can do about that other than accept it and act accordingly.
Thus, when things are going well, trade often, trade large, and try to maximize the good fortune that is being bestowed upon you. However, when trading poorly, trade infrequently, trade very small, and continue to get steadily smaller until the winds have changed and the trading "gods" have chosen to smile upon you once again.
R U L E # 10
To trade/invest successfully, think like a fundamentalist; trade like a technician.
It is obviously imperative that we understand the economic fundamentals that will drive a market higher or lower, but we must understand the technicals as well. When we do, then and only then can we, or should we, trade.
R U L E # 11
Keep your technical systems simple.
The greatest traders/investors we've had the honor to know over the years continue to employ the simplest trading schemes. They draw simple trend lines, they see and act on simple technical signals, they react swiftly, and they attribute it to their knowledge gained over the years that complexity is the home of the young and untested.
R U L E # 12
In trading/investing, an understanding of mass psychology is often more important than an understanding of economics.
Markets are, as we like to say, the sum total of the wisdom and stupidity of all who trade in them, and they are collectively given over to the most basic components of the collective psychology. The dot-com bubble was indeed a bubble, but it grew from a small group to a larger group to the largest group, collectively fed by mass mania, until it ended. The economists among us missed the bull-run entirely, but that proves only that markets can indeed remain irrational, and that economic fundamentals may eventually hold the day but in the interim, psychology holds the moment.
And finally the most important rule of all:
R U L E # 13
Do more of that which is working and do less of that which is not.
This is a simple rule in writing; this is a difficult rule to act upon. However, it synthesizes all the modest wisdom we've accumulated over thirty years of watching and trading in markets. Adding to a winning trade while cutting back on losing trades is the one true rule that holds--and it holds in life as well as in trading/investing.
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