Blog

23 February 2011.

Two weeks back, we took an extensive look at the process by which "Team China" has had over various Western corporations.

Today, we look at the other side of the Western / The far east corporate interface: the experience of Western companies with joint ventures in China.

It’s been ten years since multinationals [ MNCs ] first began turning away from joint ventures in China as the preferred way to play in the world’s hottest growth story.

Many joint ventures failed to endure,

and as multinationals gained experience in China, and foreign investment restrictions loosened,

many found it easier in lots of sectors to start a business from scratch—or to acquire an existing 1 outright—

than to negotiate, establish, and run a joint venture in the long term.

No longer.

China’s hot growth has boosted valuations and increased competitors for outright acquisitions associated with Chinese companies that are often much less interested in being acquired.

That makes joint ventures a more attractive option, and so does an increasing pool of healthier prospective Chinese partners.

All this is prompting some MNCs to reconsider the joint-venture approach as an alternate avenue to get a stake in the continuing strength of China’s economy.

But as the dynamics have changed, the fundamentals have not:

companies pursuing joint endeavors would do well to reflect around the lessons of past deals to improve the chances of success.

In China, some of those lessons are especially critical, such as

• choosing partners that can make concrete business contributions,
• safeguarding intellectual property,
• ensuring functional control of the joint venture, and managing talent.

Others are crucial for joint ventures in all geographies, this kind of as

• aligning strategic priorities,
• creating a structure that permits rapid responses to change, and
• preparing up front for eventual reorientating.

When China first opened its doors in order to MNCs in the 1980s,

some undertook combined ventures with local companies that appeared to be safe bets

because of their access to and influence with the nearby or national government.

Even today, many foreign executives prefer to engage with large, well-established Chinese companions.

Yet that preference hasn’t always benefited joint ventures,

typically because the parent companies didn’t reveal the same strategic or industrial interests.

Multinationals, for example, have stressed profitability, even when growth is slow,

while their Chinese companions have emphasized growth, even without profitability,

as we stated in our piece on Chinese takeovers of Western companies.

The result has been different priorities for investments and a lack of cooperation,

both between the parent companies and inside the mixed management team.

Instead, multinationals should pair with local firms that explicitly share their proper goals.

This doesn’t eliminate large, well-established Chinese companies.

But it does open up the door to faster-growing, privately owned, and smaller companies

that bring a powerful commercial mind-set and tangible company assets to joint endeavors.

The global pharmaceutical corporations GlaxoSmithKline and Novartis, for example,

chose such partners in 2009 for their joint ventures in the vaccine market.

Thanks to partnerships along with smaller local companies —

Shenzhen Neptunus Interlong Bio-Technique Company

and Zhejiang Tianyuan Bio-Pharmaceutical, respectively —

both joint ventures had the actual access they needed to government vaccine-procurement programs,

as well as a talent pool, R&D know-how, and an entrepreneurial management mind-set for further rapid growth.

One disadvantage that foreign companies may not have encountered in China before:

as Chinese executives grow more and more confident, many of these smaller gamers themselves hope to become nationwide, regional, or even global players,

a factor that, again, we have analyzed in some detail.

That aspiration can make it difficult to agree on the scope of the partnership if it’s to become limited to China or to particular products.

One approach is to outline the extent of co-operation both domestically and globally—for instance, whether it includes

• access to overseas sales channels,
• noncompete clauses for specific marketplaces, and
• agreement in principle on the possible evolution of the partnership into additional product lines.

MNCs still find it difficult to protect their intellectual property within China, and joint ventures are particularly vulnerable.

Protection in most developed markets occurs mainly through legally binding agreements enforced in courts of law.

But the concept of intellectual-property protection continues to be new in China,

and option to the legal system can be lengthy and inadequate.

Companies have had some success with more pragmatic, operational efforts, including the following:

• Bringing only older technology to China. This approach works for products that may have been available in developed markets for a while but are still competitive in China’s market. It also works in industries—such as bacteria channels for fermentation, vaccines, and particular motor engines—where innovation cycles are short.
• Leaving the plans at home. Multinationals can protect their ip by delivering equipment or technology ready to be installed, without detailed design specifications. Negotiating agreements to do so can signal a lack of trust in the local partners, however, and can increase costs if spare parts as well as maintenance must be provided from overseas.
• Keeping critical intellectual property totally out of a joint venture. Some companies have set up joint ventures that are restricted to individuals steps in the value chain that involve limited intellectual property, like putting together, packaging, or tailoring. This kind of approach is feasible only when local innovation lags behind global standards and, obviously, when the critical intellectual-property component can easily be separated into a step of the value chain.
• Charging with regard to intellectual property up front. Some multinationals have chosen to sell their intellectual property in order to joint ventures, either through up-front cash payments or licensing fees. This approach can be challenging to execute, with regard to while it resonates well with nearby companies, they generally are willing to purchase technology up front only at a significant discount.

In the past, foreign companies agreed to invest in joint endeavors as minority or equivalent stakeholders,

often failing to secure management positions that were meaningful enough to steer the development of the joint organization.

Such companies often found on their own relegated to providing know-how and capital, with little impact other than board voting rights.

In one extreme case, a global multinational had set up multiple joint ventures with leading nationwide players in China.

The organization was unable to exercise sufficient operational control over, for example, decisions around roll-out plans or product development.

Ultimately, it had to sell off its stakes in these ventures.

The capability to influence the course of a joint venture in China depends largely on the partners’ ability to build trust-based relationships

• at the working level,
• the joint-venture board level,
• and even outside the joint venture,
• with the federal government or other industry players.

Successful multinationals map out critical stakeholders in and around the partnership —

from local management to main regulatory bodies —

and assign relationship responsibilities at multiple quantity of a organization.

This approach requires creating interaction protocols—

the composition of any delegation, the amount of visits, the specific topics to be discussed, and so on,

depending on the relative importance of the stakeholders and their particular agendas.

The CEO of a leading global insurer, for example, often teaches management practices at the Central Party School.

His readiness to do so gives him trustworthiness with joint-venture partners

by allowing him to have interaction with current and long term decision makers

who directly and not directly influence the course of business within China.

Most leading multinationals learned from the first round of joint ventures in China

that obtaining the right managers in place had been critical.

Many of these companies had simply dispatched available executives—

often not top performers but rather average executives searching for new problems.

Most of these executives therefore had limited credibility with the corporate parent

and were ill-prepared to manage demanding joint-venture companions.

Today, experienced multinationals recognize that a successful joint venture

requires credible, high-performing executives supported by powerful local teams.

Yet with so many companies competing for the best local candidates,

those men and women can afford to be choosy,

and they understandably prefer leading companies that have a strong image and offer good prospects for career progression.

So today, joint ventures must not only invest in their corporate brands

but additionally partner with top colleges to sponsor undergraduate as well as graduate students

and to establish a training platform for current employees.

CEIBS, a number one business school in China, and itself a joint venture, has more than 80 company sponsors,

which provide funding as well as in return can recruit upon campus and send their executives on advanced training courses.

Finally, companies must continue their own commitment even after candidates are hired.

This means

• sending some of a multinational’s best people to the joint venture to create a strong team,
• compensating employees at or above relevant market rates, and
• fast-tracking the advancement of high performers—
• even breaking away from more tenure-based development systems.

Regardless of where a partnership is located, companies often invest too little time building a shared understanding

• of its future business,
• the marketplaces it will compete in, and
• how it will evolve over time.

Differences of opinion that are deeply rooted within competing expectations of long term performance

can affect the joint venture’utes strategy and focus and eventually result in its failure.

Take, for example, 4 life insurance joint ventures that failed in China in the last 18 months,

after an average of four to five years of unsatisfactory business development and shareholder disputes.

Chinese life insurance partners have been nonfinancial companies

accustomed to short breakeven periods of three years or less,

with an emphasis on top-line growth and earnings.

Foreign insurers, on the other hand, take a longer-term view

and emphasize sustainable growth in the value of the insurance coverage policies underwritten rather than accounting profits.

In the four failed joint ventures, the inevitable tension over strategic priorities led to disagreements about,

for example, the right channels for pursuing lower-profitability volume

or whether to scale up an agency workforce faster,

but with a lower level of abilities, or more deliberately, with a higher-quality labor force.

These failures might have been avoided when the CEOs of the parent businesses and the joint ventures’ future management teams

had spent time collectively developing business plans and preparing for changes in market dynamics.

In contrast, at one of the three most successful international life insurers in The far east,

a standing business-development group, and a part of the future management team,

went through multiple iterations with its joint-venture partner

to agree on key business priorities, such as

• volume versus value,
• channels,
• products, and
• target client segments.

Once a joint venture is up and running, multinationals should aspire to manage it as if it were their own,

putting in place short lines of reporting from the joint venture back to the parent company.

This move is important in any joint venture, to provide senior managers the well-timed information they need to assess it’s performance.

But it’s especially true within China, where the fast speed in many sectors requires each partner

to react quickly to changes in the marketplace or the regulatory environment.

In this respect, multinationals can be in a disadvantage.

Decision-making processes for Chinese mother or father companies might include more people,

but once decisions are made, managers execute them quickly.

In contrast, foreign companies are slower to respond,

often encumbered by layers associated with country and regional administration.

It is not uncommon for the foreign executives of a joint venture in order to report back to the MNC’s The far east head,

who reports to the mind of the international unit,

who then eventually reports back to the actual CEO.

Some of the more successful multinationals provide for direct reporting lines to their CEOs.

Others have assigned obligation for China to a person in their management boards,

sometimes having a dual-reporting line into the regional business.

When a European transportation company made China its second home market, for example,

it elevated its China president to the worldwide management board and

sent its global CEO to China a minimum of six times a year to meet with the joint-venture partners.

The result had been improved cooperation with government bodies and therefore faster approvals,

more regular interactions and deeper relationships between the senior management of the parent companies,

and closer alignment within the joint ventures’ mixed management groups.

Even in developed markets, joint ventures are often restructured within a decade of being set up.

But in a market as dynamic because China’s,

partnership terms negotiated today might be ineffective in a few years,

and actually strong partners may find it difficult to survive.

This dynamism and uncertainty mean that the partners in a joint venture

must include provisions for restructuring its contract when the competitive landscape changes.

HSBC, for example, in its credit card partnership along with China’s Bank of Communications,

agreed to very specific actions if a change in regulation managed to get possible

to convert the partnership into an independent credit card company.

These detailed steps included the resulting board structure and the consideration to become paid to the partners.

Lacking such provisions, some multinationals have had to enter into tough negotiations with their Chinese partners to reach agreement on exit conditions.

Some that haven’t done so, according to McKinsey, have languished in joint ventures

which continued as formal relationships while either partner went after other avenues for growth.

None of these guidelines, however useful both in general and China particularly, guarantee success.

However the centrality of China in the world economic climate, both today and in the near future, means an MNC can disregard them only at its own peril.

David Caploe PhD
Chief Political Economist
EconomyWatch.com

 

In 2008, the National General Administration of Quality Supervision, Inspection and Quarantine raised the flags when a pediatric urologist noticed a boost in the number of children afflicted with renal system stones, a rare condition. Mounting fears and inquiries causally traced the source to then-popular Chinese infant milk powder, Sanlu, which was discovered laced with melamine.

Sanlu Group, a Chinese dairy produce company, based in Shijiazhuang in Hebei province, was found guilty and was ordered bankrupt after an estimated 300,000 infants fell ill – and at least 6 died from the tainted milk scandal.

This episode captivated what was perhaps the first wave of widespread international problem and skepticism over quality assurances in the “Made in China” label.

Headlines in the recent weeks have once again refocused the spotlight upon bad practices in Chinese brands and companies.

Just last week, Chinese officials uncovered five fake Apple stores in the north western city of Kunming, and suspended two faux outfits as research are underway, a local government website reported on Monday.

The investigation follows a blog publish by an American living in Kunming in Yunnan province who spotted the bogus Apple stores decorated, designed and modeled to the tee as the genuine Apple stores.

The proliferation of these kind of commercial fraud and insufficient quality audits highlights the sluggish progress the Chinese government is making in countering a system of rampant piracy and shoddy management practices. Much to the dismay and frustration of its trading partners and investors.

Equity markets are not spared from allegations of false accounting practices from Chinese companies either. Sino-Forest Corporation is the latest company from China to characterize what is quickly becoming a truism: for Chinese businesses listed abroad through change takeovers, short selling can prove to be enormously profitable.

Instead of attracting investors the conventional way, which is via initial public offerings, numerous Chinese companies listed on North American stock exchanges have opted for the backdoor route by buying over near-defunct shell companies.

Known as change takeovers, or RTO, this strategy provides Chinese language companies a comparatively easier use of financial markets, without the strict analysis and filing requirements which initial public offerings tend to be subjected to.  

In the case of Sino-Forest, experts are split over regardless of whether Sino-Forest is a fraud. After a statement by little known advisory firm Dull Waters, sensational accusations were raised that Sino-Forest allegedly higher its earnings and property, and Sino-Forest saw its stock price fall by almost 75% from a high of $25.85 in March, wiping off more than $3 billion in paper value.

When it comes to reverse takeovers, it is difficult to evaluate if companies are well-intentioned or unscrupulous businesses aiming for a quick shot at stock exchange listings.

According to a Bloomberg monitor, Chinese reverse takeovers more than tripled from March 2009 in order to January 2010. But the numbers do not reveal the list of Chinese companies suspended with regard to securities fraud.

A study carried out by GovernanceMetrics International Inc. discovered that 60 per cent of North American listed Chinese companies had poor accounting practices. And the numbers simply do not accumulate.

“There has been a huge explosion of cases in the last quarter,” says Andrei Rado, plaintiff layer at Milberg LLP. Milberg suing Chinese companies Puda Coal and The far east Integrated Energy.

“The scams that Enron and WorldCom committed in the 90s and early 2000s had been more sophisticated. These guys are much bolder in what they do. Some of these information mill a complete sham,” Rado said.

Chinese authorities are also starting to get concerned. “I hate these scandals, everybody hates them … the scandals are very damaging for the reputation of all Chinese companies in the US,” said Liu Qingsong, deputy director of the study centre of the China Securities Regulatory Commission.

The key query then is whether investorsshould, or can, believe the numbers from Chinese companies.

As a major globe economy today, Chinese regulators know fully well which haphazard and flippant accounting practices will no longer be tolerated as auditors move towards adopting worldwide recognized accounting standards.

At the risk of coming across as a quasi Ponzi scheme, bad play and fraud committed by companies bearing the Chinese emblem potentially damages investor confidence.

But ultimately, the ethical of the story is as Paul Dietrich, chairman of Foxhall Capital Management, aptly concludes;

“The account issue is not a new problem. I have been investing in China because the 80s and we would see five different sets of audits. You have to do your due diligence. If you think you can rely on audits, you’re fooling yourself.”

The US dollar is trading heavier against most of the major and emerging market currencies. The euro and sterling remain within the ranges seen prior to the weekend while dollar slipped to JPY107 in a Tokyo-less Asian program. 

Unanticipated strong Chinese imports helped underpin the actual Australian dollar. Most Oriental equities followed the US reduce, though the recovery in Europe may have helped lift Indian shares in late dealing. European shares gapped lower but were able to recover by mid-morning. Bond markets were firmer in Asian countries and weaker in European countries, though UK gilts are significant exception, slipping to new lows (since June The year 2013) below 2.20%.

Neither French nor Finnish bonds show much response to the pre-weekend announcement by S&P.  It took Finland’s AAA standing away and cut France’s perspective to negative from stable.  France’s 10-year is flat at One.25%, and Finland’s yield is up not even half a basis point.  Greece’s government survived the vote of confidence just before the weekend, but this has not removed the pressure upon Greek bonds, where the 10-year deliver is up 8 bp to a different three-month high near 6.55%.  

The main news today appears to be about China.  First, it reported strong rise in imports and exports, along with a substantial trade surplus that a quarter smaller than expected.  Exports flower 15.3% in September from a year ago.  This follows the 9.4% increase in August, as well as expectations for a 12.0% increase.  This is the strongest since Feb 2013, when there was still much suspicion of Chinese language companies using exaggerated exports to cover capital flows.  Imports unexpected rose 7% in September.  The consensus was for a 2% decline after a 2.4% decline in July.  Details were sketchy, but electronic imports appeared strong while commodity imports and autos had been soft. 

Second, the ECB indicated that it had been considering adding Chinese yuan to its reserves.  We have been skeptical from the talk of the internationalization of the yuan.  In the end recognize its increased make use of, we find much of the reports grossly exaggerated.  For example, Hong Kong is part of China, as the Hong Kong people understand full well, yet when the trade is conducted in yuan, many observers count that included in the internationalization of the yuan, but is it truly?  The network of exchange lines it has established is actually interesting, but they have not been utilized.  It is as if it is not valued the logic of the buck swap lines and the part of dollar funding within this (we are told) G-Zero world. 

Yet, main banks holding yuan as reserves is indeed the internationalization of the yuan.  Nevertheless, we caution here as well that the exaggerations distort the real advancements.  First, there are simply insufficient yuan assets, which are what supplies are kept in, available for the yuan to be a major currency.  Second, a small amount of yuan in reserves is consistent with the broad pattern of some diversification into "other currencies".  Third, it is not a zero-sum game.  As reserve holdings overall increase, the yuan can be covered without the sale of another currency.  This also means that an increase in the yuan may come at the expensive of other currencies, but not always the dollar.  In the ECB’s situation, maybe the yen or sterling, for example. 

In any event, recall that China is working to establish a few financial centers, such as London and Frankfurt, to clear yuan deals.  The UK recently indicated it’ll sell its first yuan bond for reserves, and the ECB’s intend to explore the issue seems broadly consistent with this.  It is not worrying, nor does it signal the actual imminent demise of the dollar.  

Brent oil continues to trade heavily.  The Saudis and the Iranians have reduce prices for Asia.  Essential oil from Africa, like Nigeria, which was once one of the top five suppliers to the US, has diverted supplies to Asia when confronted with weakening US imports.  Kuwaiti officials indicated over the weekend that OPEC was not likely to agree to cut output to support prices at next month’s OPEC meeting.  Note that OPEC’s agreement is perfect for 30 mln barrels a day.  Estimates suggest it produced Thirty.474 mln bpd.  Kuwait’s oil minister was cited suggesting that $76 a gun barrel may be the new floor with regard to prices.

Dollar Heavier to Start Week is republished with permission from Marc to Market

Goldman Sachs is the bank everyone loves to hate. In the first of the two-part investigation into the bank, all of us ask why they become the biggest winners in the economic crisis. We also look at how they lobbied the US Government to reduce banking regulations, the way they acquired massive fortunes by selling sub-prime mortgages, and how they deceived their clients by betting against the products they offered.

Don't Forget To Read The Second Part Of Our Feature: Into The Belly Of The Beast (Component II – Goldman Sachs & The European Crisis)

Goldman Sachs wasn’t always the investment bank everyone affects to despise. It’s bankers were once named “billionaire boy scouts” because of their expertise for making fortunes while maintaining a guilt-free, cherubic image.

But Goldman’s bankers are actually far more likely to be compared to squids compared to boy scouts and have become the favourite target of anti-bank protestors. A week before Christmas, 300 protesters in the Occupy Movement dressed up in squid costumes and carried a giant puppet squid on the march to Goldman Sachs’ offices within New York.

The action was influenced by a Rolling Stone article which in comparison Goldman Sachs to: “a great vampire squid, wrapped round the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”. The protesters shouted: “We fry calamari”, as well as “everyone pays their taxes. Everyone, but Goldman Sachs.”

Related: Is Take up Wall Street Bringing Back “Real” Capitalism?

Related: Getting out of bed From The Nightmare On Walls Street

Related: A Global Transcendence of Change – Exactly what the 99% Really Want: Joseph Stiglitz

Public hatred of Goldman, fuelled by modern media, has intensified, but it could be naive to believe the banks’ personality has fundamentally changed. Although there was nothing on the same scale as its nefarious role within the 2007 Financial Crisis, Goldman has been involved in controversy ever since it was founded by the German-born Jew Marcus Goldman in 1869. In 1929 for example, Goldman backed a pyramid scheme concealed as a mutual fund, which collapsed causing 42,000 investors to lose US$300 million. Then, within 1970, came the Penn Central catastrophe in which a default upon short-term paper marketed by Goldman created damage claims exceeding the actual bank’s net worth. In the late 1980s, Goldman’s head of risk arbitrage, Robert Freeman, was delivered to jail for insider buying and selling. And during the same period, Goldman was implicated in an illegal plan to prop up insolvent companies operated by the corrupt Czech-born newspaper tycoon Robert Maxwell.

“The reality is the firm has been in and out of trouble throughout its whole existence and has constantly been pushing the edge of the envelope,” said William D. Cohan, an old investment banker and the writer of Money and Power: How Goldman Sachs Came to Rule The World.

Cohan marvels at the hypocrisy embedded in Goldman Sachs’ 14 Company Principles, which were codified in the 1970s and are still being drummed into programmed employees’ heads today.

“They make everyone think they believe in them, however the most important principle is ‘placing the client first’, whereas the reality is they are in business to make money and will get it done any way they have to,” he said.

Cohan thinks the 14 principles are at the heart of what he calls Goldman’s ‘holier-than-thou attitude’.

“At Merrill Lynch, we had principles scratched into the wall, however never gave them a moment’s thought. But from Goldman they write them down, distribute them and reinforce them regularly. There’s some ‘drinking the Kool-Aid’ when you sign up for Goldman and most of them fall for the brainwashing. They get people youthful so they can mould their thinking. “

“To give an example of the Goldman mindset, I was giving a speak recently to 250 New Yorkers and a Goldman Sachs banker stood upward and loudly berated me with regard to daring to suggest they were not all saints.”

Suzanne McGee, a journalist as well as author of Chasing Goldman Sachs, believes there was a change in the bank’s standing in the 1970s.

“For most of its 200-year history Goldman wasn’t the pressure it is today. It transformed itself in the 1970s, which was a turbulent period when some firms thrived yet others withered on the vine. Goldman was probably the most innovative banks and by the actual mid-1980s it was positioned to be a energy house,” she said.

“What pursuits me historically is how Goldman altered from being the firm everybody might not like, but admires, to the firm everyone affects to despise. Up to the 1990s, their own reputation was very high. In that period, if an IPO had been underwritten by Goldman Sachs that was akin to Good Housekeeping’s sales approval. They were believed to have the X-factor, which meant they could outperform everyone else in every way. This reputation was so strong that in the late 1990s their bankers were prohibited from carrying bags with Goldman Sachs logos on when they required flights to conferences. The actual bosses were afraid they’deb tip off rival traders.”

“But that mainly good reputation has gone since the economic crisis. Goldman Sachs’ workers still don’t have bags with logos, but now it’s because they might get beers poured on their heads, or someone might pick a fight with them!”

While McGee expresses a grudging admiration for the financial acumen of the Goldman elite, she is under absolutely no illusion that they follow the ‘do what’s best for the client’ theory to the letter.

“Someone from another bank said that when Goldman comes with a deal the first question you ask should not be ‘will they mess me’? It should be ‘in which way can they try to screw me’? Other banking institutions are the same, but Goldman is far better at it than anyone else”.

Just how much better became evident in 07, when the US housing bubble burst and the nation had been plunged into its greatest financial crisis since the Great Depression. The fall-out for America’s financial sector was huge. Lehman Brothers filed for bankruptcy, IndyMac bank flattened, Bear Stearns was acquired through JP Morgan Chase, Merrill Lynch was sold in order to Bank of America, and mortgage giants Fannie Mae and Freddie Mac had been put under government manage. Meanwhile, although Goldman helped to provoke the crisis, it made billions of dollars out of it by taking away huge bets that the mortgage market was about to crash. The firm went on to earn US$11.6 billion in 2007, more than Morgan Stanley, Lehman Brothers, Bear Stearns as well as Citigroup combined. Merrill Lynch lost US$7.8 million that year.

The United States Senate’utes 2011 Levin–Coburn Report found:

“The actual crisis was not a natural catastrophe, but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the marketplace itself to rein in the excesses of Wall Street.”

Goldman Sachs CEO Lloyd Blankfein even apologized in 2008 for his bank’s role. “We participated in stuff that were clearly wrong and also have reason to regret,” he confessed.

But the apology was meaningless, according to William K. Dark, an American lawyer, author as well as former bank regulator, who has testified against the banks. Black believes Goldman knew precisely what it was performing and was operating based on a well-known formula in the financial world. If he had his way, Black says he would send Goldman’s bankers in to the fourth circle of Hell – which is reserved for the avaricious — in Dante’s inferno.

 “Goldman, and other investment banks, behaved fraudulently in order to generate massive amounts of money,” Dark said. “There were four components in their foolproof fraud recipe. 1. Grow like crazy. 2. Help to make really crappy loans confined yield. 3. Have remarkable leverage. 4. Make virtually no allowances for future losses.”

“If you do those four issues, you are virtually guaranteed to statement record off-the-chart short-term profits. We’ve recognized this in economics since a 1993 paper by Akerlof and Rohmer called Looting The Economic Underworld associated with Bankruptcy for Profit. Even if a firm fails, the CEO and all sorts of other folks will walk away wealthy. It’s maths; a certain thing!”

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The first two elements of the actual formula, Black says, are related. A bank grows like crazy by making “crappy loans”. Good financial loans would not work because a financial institution would have to buy market share, reducing its yields.

“But there are tens of millions in the US that cannot afford to repay a loan to purchase a house. Precisely because they can’t, the bankers can charge reasonably limited yield and can grow such as crazy. Into the teeth of this flood, they created the largest bubble in the history of the world.”

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