Oct 27, 2008

The Astrologer Plays Ball

It must be fun being a politician. You can make rather meaningless statements and the media will report them quite seriously, as if you really knew what you were talking about.
MM Lee predicts a turnaround from the recession in as little as three to five years
October 25, 2008

THE current economic slowdown could last three to five years — if the banking system does not malfunction. This is the assessment given by Minister Mentor Lee Kuan Yew at the Singapore Human Capital Summit on Friday.

MM Lee was speaking at a dialogue with summit participants facilitated by Insead’s Dean of Executive Education, Professor Narayan Pant.

“Nobody can say how long or how deep this recession will be,” said MM Lee. “... My own guess is, if the banking system does not malfunction, then in three, four or five years, the world economy will be restored.

If the banking system malfunctions, then I don’t know. It would be a very difficult process.”
What on earth does MM Lee mean by a "malfunction" in the banking system?

The bankruptcy of banks? Huge leaps in LIBOR? A global liquidity crisis? Governments stepping in to guarantee bank deposits? The death of financial engineering? Widespread retrenchments and redundancies in the banking industry?

All of the above have already happened. But from the way that MM Lee spoke, he doesn't seem to regard these events as constituting a "malfunction", LOL.

Which only leaves us to wonder what exactly MM Lee means by "malfunction". A mystery hedge word. I bet MM Lee himself doesn't know, haha. You are always right, if you just can't be wrong.

23 comments:

Fighting fit said...

The word "malfunction" was used in a rather unusual style about four years ago at the Superbowl half-time show. It was called a "wardrobe malfunction."

I think "Bank malfunction" is quite similar. Suddenly something comes apart, thus exposing what was hidden earlier about the banks. Everyone's heart skips a beat. Some jaws drop open. Some eyes double in size. What was hidden must have been quite substantial in size.

"The Astrologer Plays Ball". An apt title.

Fighting fit said...

The word "malfunction" was used in a rather unusual style about four years ago at the Superbowl half-time show. It was called a "wardrobe malfunction."

I think "Bank malfunction" is quite similar. Suddenly something comes apart, thus exposing what was hidden earlier about the banks. Everyone's heart skips a beat. Some jaws drop open. Some eyes double in size. What was hidden must have been quite substantial in size.

"The Astrologer Plays Ball". An apt title.

HaveAHacks said...

Well, I suppose we could fix the problem by throwing more money at the bankers (and the lawyers who serve them).

David said...

MM Lee even said that he take a long term view of 30 years for investments. Most will not be alive to witness it.
Also his "golden period" is only one over years and all of us have witnessed it!!

SR said...

Perhaps he's referring to bank runs?

geriatric_eunuch said...

He's a master of the weasel word. Deliberately vague, obfuscatory, set in an uncertain shadowy future time, nothing you can quite hold his feet to the fire on. Good examples are 'freak result', 'golden period', 'incompetent government' and of course 'malfunction'.

The fine art of plausible deniability, that's the way to do it.

a beautiful lie said...

Mr. Wang.


You rock.

Marquis_De_Sade said...

I have the impression that his age, he would be actively leaving valuable linguistic traces for the recreational pleasures of struggling historians or academics alike.

If they capture the moment correctly, it might open up an opportunity to vest themselves in a whole new monopoly to a section of the ever vibrant literature market at large.

hojiber said...

Aiyah Wang, I also got crystal ball you know.

In 3-5 years, USA economy will recover.

In 3-5 years there will be a new US President.

In 3-5 years, oil price will go up at least 20%.

In 3-5 years, there will be new car designs.

3-5 years is "long term" in some investment definition. In the long term everything will be ok one! Nabeh, so simple thing where got need MM to say? Which donkey sabo MM say these small things one? SACK HIM!

win said...

The financial system is going for a revamp, where no malfunction? Banking system is tied to financial system. I have a better prediction: If everything does not malfunction, LKY die in next 10 years. how?

Mockingbird said...

Malfunction could possibly mean the banks are unable to let its customers take back the capital which they deposited with the banks.

chanmalichan said...

You comment on MM's use of "malfunction" as though it is some obscure word, when it demonstrates that you have not appreciated the greater problem that the banks (and its counterparties) are currently facing. Have you heard of OTC derivatives?

Mr Wang Says So said...

LOL, yes. I also sit on various ISDA committees.

chanmalichan said...

Do you know how much is currently outstanding, whether that would have an impact on the international banking system if it triggered a systemic collapse of financial institutions (sub-prime style), and that the central banks have not figured out a way to deal with this? BTW this is not ISDA level it is BIS.

Mr Wang Says So said...

You're probably referring to the aggregate notional amount of credit derivative contracts.

Your reference to OTC derivatives was too broad, because that would include FX; equity; commodity and interest rate derivatives ...

... not to mention less-common species like weather derivatives; fund derivatives; inflation derivatives.

Aggregate notional amount of CDS contracts is probably shrinking very rapidly. (Along with a whole lot of other financial things, such as market capitalisation of the world's stock markets).

chanmalichan said...

I am referring to the total outstanding notional amount of OTC derivatives, which (according to BIS as of December 2007) is US$596 trillion.

http://en.wikipedia.org/wiki/Derivative_security

My guess is MM has been briefed about the situation. "Malfunction" my friend, it probably will.

Mr Wang Says So said...

This is probably not the best place to discuss the technical details of OTC derivatives. So I will confine myself to making a few brief points:

1. Notional amount of a derivative contract generally does not reflect actual exposure under that contract. Actual exposure is a small fraction of the notional amount.

"Notional" by the way means "imaginary". :)

For example, suppose we have a plain vanilla fixed-to-floating interest rate swap on a notional amount of USD 100 million. The actual exposure is NOT USD 100 million, but only:

(the difference between the fixed rate and floating rate) x USD 100 million.

2. Secondly, OTC derivatives are internationally traded under the ISDA Master Agreement, and two of its key features are close-out netting and the "single agreement" concept.

It means that the agreement works to minimise exposure, by ensuring that the exposures under different derivative trades are netted against each other.

So please do not think that when BIS says "USD 576 trillion", this actually represents the amount that banks owe each other and other parties. It would be a much smaller amount, actually.

chanmalichan said...

Thanks for sparing us a lecture on derivatives because the real issue here is whether MM had incorrectly used the word "malfunction".

Of course we know it is not very likely that all OTC derivatives in the world will go bust at the same time. However, if there were only a 5% loss – not so impossible these days – the derivative counterparties would still be on the hook for $28 trillion. Taking into account netting, let's arrive at a different number, say 2%, and we arrive at a bill of $11 trillion.

How do you settle a $11 trillion bill?

Mr Wang Says So said...

I think you do not really understand the topic ... Never mind.

Just remember - the next time you change money with your moneychanger before you go on a holiday, you've just done an OTC derivative. It's called a "cross-currency spot foreign exchange contract".

And actually, if today you order a Christmas turkey from a restaurant, for collection on 24 December, you've also just done an OTC derivative. It's called a "forward purchase of a Christmas turkey".

If you had told your bank, at the time of applying for a mortgage loan, that you prefer to have a locked-in fixed interest rate of X% for the first Y years, an OTC interest rate derivative is also involved.

Well, let's hope you don't cause the world economy to collapse, with your holidays, Christmas turkeys and mortgage loans.

chanmalichan said...

Let's stick to the topic. The word here is not "collapse", it's "malfunction" and it is interesting that you continue to demonstrate your knowledge of derivative terminology at every opportunity.

Now when I exchange money with a money changer, I am exposed to the credit risk of the money changer, which may be greater or less than the initial currency risk depending on market conditions and my ability to deal with that risk.

You are probably aware of Lehman Minibonds, and the amounts the investors will get back from their investments.
http://seekingalpha.com/article/95413-lehman-the-counterparty-risk
http://seekingalpha.com/article/58780-counterparty-risk-and-the-subprime-fiasco

And we are not talking about retail transactions, the BIS does not count turkeys.

Mr Wang Says So said...

"You are probably aware of Lehman Minibonds ... And we are not talking about retail transactions."

LOL .... You're funny, even if unintentionally.

Btw, do refer again to my comment at November 7, 2008 8:08 PM. Lehman Minibonds illustrate credit derivatives at work. Which is why I suggested to you that your reference to OTC derivatives in general is too broad.

By the way, OTC derivatives is one of my main areas of work, so my apologies if I slip too easily into the technical jargon.

Mr Wang Says So said...

"Now when I exchange money with a money changer, I am exposed to the credit risk of the money changer ..."

You're not, because those transactions happen immediately. Your credit risk is maybe for about five seconds, during that space of time between you handing money to the moneychanger and he handling it back to you.

Your credit risk in ordering a Christmas turkey is for a much longer tenor.

Mr Wang Says So said...

And by the way, exposure to Lehman Minibonds would not constitute OTC derivative exposure.