America's Financial Illiteracy
Thomas F. Cooley, 01.13.10, 12:01 AM EST
Protecting consumers in the confusing world of modern finance.
One of the common elements of the regulatory reform proposals being crafted by the House and Senate is that both propose to create a Consumer Financial Protection Agency (CFPA). Although there has been concerted opposition to the creation of a new bureaucracy, there is certainly some logic to the idea of consolidating existing consumer protection functions in one agency. Currently, responsibility for consumer protection is scattered across several existing regulatory bodies, and as a consequence the task has fallen between the cracks. Authority for enforcement is in the hands of at least 11 agencies. Each one has responsibility for only a subgroup of financial firms, and their mandates partly conflict. Among the agencies, the Federal Trade Commission (FTC) is unique in having consumer protection on the list of its primary mandates.
There can be no doubt that many consumers have been battered by bad decisions that they made about mortgages, credit card debt, auto loans and so on. And there is no doubt that some of these bad decisions were driven by unscrupulous business practices and that alarms should have been raised about certain lending practices that drove the increase in household leverage.
Our recent experience raises a legitimate and interesting question--what exactly is the role of the government in protecting people from their own bad decisions? It is important to bear in mind that for 30 years we have been in the midst of a major social transformation in which responsibility for risk management has shifted to individuals. In the past, the government and employers often made financial decisions for households, for example by providing health insurance, defined benefit retirement plans and social security; now households are on their own more than ever. We can't just shrug off the problem because if many individuals make bad financial decisions, it creates a negative externality.
Many of the most important decisions consumers make in their lifetimes involve financial products: a mortgage to purchase a home, a loan to purchase an automobile, credit to make a large durable purchase, investments for retirement and insurance to keep one's family secure. All of these financial products have become increasingly complex over time and there is a much wider range of product options offered by different providers, making decision-making more complicated. Consumers need to be financially literate in order to make well-informed choices about such complex products. A growing body of evidence suggests that many consumers lack the knowledge they need to evaluate and make decisions about financial instruments.
So, what should we do and how should the CFPA address this? We don't want a CFPA that limits innovation in financial products--it shouldn't be modeled after the FDA, which requires that products be safe and effective before being allowed into the marketplace. We certainly want the CFPA to monitor abusive practices and raise warnings when they occur. Although as I noted in an earlier column, lobbyists have been hard at work limiting the impact of the CFPA. One result is that House bill H.R. 3126 exempts all of the following entities from regulation by the CFPA: automobile dealers who provide financing; any person regulated by the Securities and Exchange Commission; any person regulated by a state insurance regulator; smaller banks and credit unions (those with $10 billion or less in assets); brokers and agents for mortgage, title and credit insurance; real estate brokers and agents; attorneys; and most retailers. The Senate proposal has fewer carve-outs but does exclude from CFPA regulation small banks and credit unions, merchants, retailers and other nonfinancial institutions that extend credit to consumers.
That suggests that the most important role for a CFPA may be to increase the public's financial literacy. The level of financial knowledge among U.S. households is shockingly low, and that fact is at odds with the trend of shifting risk management to households.
How bad is it? Two economists, Annamaria Lusardi and Olivia Mitchell, have been studying financial literacy and the effectiveness of efforts to promote it for many years. The results are not at all encouraging. To take just a few of their examples, they asked the following questions of a representative sample of Americans over the age of fifty:
1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years how much do you think you would have in the account if you left the money to grow: more than $102, exactly $102, less than $102?
2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year would you be able to buy more than, exactly the same as or less than today with the money in this account?
3. Do you think that the following statement is true or false? "Buying a single company stock usually provides a safer return than a stock mutual fund."
Only 50% of respondents were able to answer the first two questions correctly and less than a third were able to answer all three. In a related study less than 18% of people surveyed were able to answer a simple two-period compound interest problem. This is pretty discouraging. Not surprisingly the extent of financial illiteracy differs with education, gender, race and age. Most efforts to improve financial literacy are not effective.
So what is to be done? One view is that we can improve welfare through the judicious choice of "default" options. For example, in the choice of mortgages or consumer credit plans, the default option could require financial service providers to include a "plain vanilla" product in their menu. This offering should be easy to understand even for the inexperienced customer. It would also serve as a point of reference in comparison to other products. Default options have to be prudently chosen, since consumers, especially those who are inexperienced, are likely to refrain from active choices.
There are a lot of unanswered questions about default options. Sweden, Mexico and Chile have accumulated experience with the use of default investment portfolios in retirement plans. So far the evidence suggests that the choice of default option can have a tremendous effect on retirement savings, but not always to good effect.
Clearly the best way to protect consumers is to educate them. As a society we don't seem to have figured out how to do that. It's time we did.
Thomas F. Cooley, the Paganelli-Bull professor of economics and the former dean of the NYU Stern School of Business, writes a weekly column for Forbes.
Wednesday, January 13, 2010
Google Docs Becomes Google ‘Any File’ as Cloud Wars Heat Up
Google Docs Becomes Google ‘Any File’ as Cloud Wars Heat Up
Google is now offering a small virtual hard drive in the cloud so you can access all sorts of files anywhere — the latest salvo in an arms race to become the dominant player in cloud services.
As with many Google initiatives, this one may be deceptively modest: When it is completely rolled out, Google Docs will accept uploads of any kind of file — not just text and spreadsheets. That move heightens their competition with Microsoft, and takes on Apple and a number of small startups in the business of creating backup and storage space on remote servers.
This business is suddenly becoming viable with the ubiquity of broadband connectivity (which makes things almost as accessible as they’d be on your hard drive) and the popularity of netbooks (which are usually light on internal storage). Cloud computing also makes it possible never to lose data when you drop your beloved laptop, or when you don’t have it with you.
It’s already a crowded field, with all of the usual suspects: Microsoft’s cloud-based platform, Azure, is already available in a fully a la carte pricing scheme geared toward their core enterprise customers, and it offers a 25-GB online Skydrive for home users through its Microsoft Live services. Apple’s Mobile Me (once known as iDisk) has a 20-GB floor for $100 a year and a family plan in keeping with their mainly consumer focus.
For now, Google is portraying the initiative less dramatically, as a USB key rather than as a hard-drive replacement.
Instead of e-mailing files to yourself, which is particularly difficult with large files, you can upload to Google Docs any file up to 250 MB…. This makes it easy to back up more of your key files online, from large graphics and raw photos to unedited home videos taken on your smartphone. You might even be able to replace the USB drive you reserved for those files that are too big to send over e-mail.
While text documents and spreadsheets don’t count toward the total, the offering is actually quite underwhelming in terms of capacity: 1 GB, with extra storage available for $0.25 per GB/year. By contrast, Gmail now offers more than 7 GB of storage for e-mails and attachments, while Google’s Picasa lets you store 10 GB of photos.
But perhaps this is just a beginning of the famed Google Drive, a full-on hard drive in the sky. It’s one more step to make the free Google Docs into a compelling alternative to Microsoft Word — another attempt to break the hold Microsoft has on the desktop to transition users to using the internet even more (because that’s where Google makes its money).
If this is the precursor to something larger — say a giant Google drive that combines Gmail and Picassa, etc., Google ought to get themselves and their checkbook over to Dropbox, the little startup that offers a fabulous service that turns a folder on your PC or Mac into a shared storage drive. And if I were at Yahoo or Microsoft, I’d hope to get to Dropbox ahead of Google.
Google is now offering a small virtual hard drive in the cloud so you can access all sorts of files anywhere — the latest salvo in an arms race to become the dominant player in cloud services.
As with many Google initiatives, this one may be deceptively modest: When it is completely rolled out, Google Docs will accept uploads of any kind of file — not just text and spreadsheets. That move heightens their competition with Microsoft, and takes on Apple and a number of small startups in the business of creating backup and storage space on remote servers.
This business is suddenly becoming viable with the ubiquity of broadband connectivity (which makes things almost as accessible as they’d be on your hard drive) and the popularity of netbooks (which are usually light on internal storage). Cloud computing also makes it possible never to lose data when you drop your beloved laptop, or when you don’t have it with you.
It’s already a crowded field, with all of the usual suspects: Microsoft’s cloud-based platform, Azure, is already available in a fully a la carte pricing scheme geared toward their core enterprise customers, and it offers a 25-GB online Skydrive for home users through its Microsoft Live services. Apple’s Mobile Me (once known as iDisk) has a 20-GB floor for $100 a year and a family plan in keeping with their mainly consumer focus.
For now, Google is portraying the initiative less dramatically, as a USB key rather than as a hard-drive replacement.
Instead of e-mailing files to yourself, which is particularly difficult with large files, you can upload to Google Docs any file up to 250 MB…. This makes it easy to back up more of your key files online, from large graphics and raw photos to unedited home videos taken on your smartphone. You might even be able to replace the USB drive you reserved for those files that are too big to send over e-mail.
While text documents and spreadsheets don’t count toward the total, the offering is actually quite underwhelming in terms of capacity: 1 GB, with extra storage available for $0.25 per GB/year. By contrast, Gmail now offers more than 7 GB of storage for e-mails and attachments, while Google’s Picasa lets you store 10 GB of photos.
But perhaps this is just a beginning of the famed Google Drive, a full-on hard drive in the sky. It’s one more step to make the free Google Docs into a compelling alternative to Microsoft Word — another attempt to break the hold Microsoft has on the desktop to transition users to using the internet even more (because that’s where Google makes its money).
If this is the precursor to something larger — say a giant Google drive that combines Gmail and Picassa, etc., Google ought to get themselves and their checkbook over to Dropbox, the little startup that offers a fabulous service that turns a folder on your PC or Mac into a shared storage drive. And if I were at Yahoo or Microsoft, I’d hope to get to Dropbox ahead of Google.
New York seeks millions of USD in unpaid taxes from Nigeria
New York seeks millions of USD in unpaid taxes from Nigeria
www.chinaview.cn 2010-01-13 08:33:13
NEW YORK, Jan. 12 (Xinhua) -- New York City announced on Tuesday that it would sue Nigeria over millions of U.S. dollars in unpaid taxes.
"The Nigerian government has failed to pay real estate taxes, interest and other charges for commercial offices and other non-tax exempt spaces in the 22-story building," the mayor's office said.
The city is seeking between 4.1 million U.S. dollars and upwards of 16 million dollars in unpaid taxes for the Manhattan tower at 822 Second Avenue. The precise amount owned is unknown "because of the refusal of the Nigerian government to supply documentation."
A Xinhua request for comment from the Nigerian Mission to the United Nations went unanswered before deadline.
"Especially in these tough economic times, we will go after every dollar that is owed to city taxpayers," said Mayor Michael Bloomberg in a statement.
The building, known as "Nigeria House," is used partially for tax-exempt purposes, including as offices for the Nigerian consulate and the Nigerian Mission to the UN.
However, at least since 2002, and the city believes possibly as far back as 1993, portions of the building have also been used for commercial and other non-tax exempt purposes. A Nigeria Airways office, for example, formerly occupied space in the building's lobby.
"Nigeria was given many opportunities to settle this debt to the city, but it declined to do so," said Commissioner Tiven. "The city seeks to be a good neighbor to foreign governments that own property in the city, but we also expect these governments to do their part and pay their taxes."
www.chinaview.cn 2010-01-13 08:33:13
NEW YORK, Jan. 12 (Xinhua) -- New York City announced on Tuesday that it would sue Nigeria over millions of U.S. dollars in unpaid taxes.
"The Nigerian government has failed to pay real estate taxes, interest and other charges for commercial offices and other non-tax exempt spaces in the 22-story building," the mayor's office said.
The city is seeking between 4.1 million U.S. dollars and upwards of 16 million dollars in unpaid taxes for the Manhattan tower at 822 Second Avenue. The precise amount owned is unknown "because of the refusal of the Nigerian government to supply documentation."
A Xinhua request for comment from the Nigerian Mission to the United Nations went unanswered before deadline.
"Especially in these tough economic times, we will go after every dollar that is owed to city taxpayers," said Mayor Michael Bloomberg in a statement.
The building, known as "Nigeria House," is used partially for tax-exempt purposes, including as offices for the Nigerian consulate and the Nigerian Mission to the UN.
However, at least since 2002, and the city believes possibly as far back as 1993, portions of the building have also been used for commercial and other non-tax exempt purposes. A Nigeria Airways office, for example, formerly occupied space in the building's lobby.
"Nigeria was given many opportunities to settle this debt to the city, but it declined to do so," said Commissioner Tiven. "The city seeks to be a good neighbor to foreign governments that own property in the city, but we also expect these governments to do their part and pay their taxes."
Tuesday, January 12, 2010
America's largest state is broken and looking for fixes in the wrong places.
America's largest state is broken and looking for fixes in the wrong places.
In my last column I tackled the not-so-secret implosion of state governments across the land. A question, however, still lingers: What ought to be done? On this score there are two, and only two, general approaches. The first is structural and concerns the division of political authority within the states. The second deals with the conception of individual rights and duties of state citizens. As Americans, we should stress the second and ditch the first. But true to form, California seems to be moving in the opposite direction.
Right now many groups are getting ready to put new measures in November's referendum process, which lets voters have the word on reform. These exercises in direct democracy consciously bypass the state legislature, in which public confidence has fallen to 14%--which is quite generous in light of its dismal performance.
Naturally, many of these proposals take aim at the legislature itself. Some try to slash legislative salaries in half, which won't do much good since most people who crave their seats spend far more than they earn to obtain them. What drives them to office is the prospect of power--influence that will ultimately pay them far more than the gobs of cash they need to get elected in the first place.
Other proposals address how legislative gerrymandering of local districts has been a source of public malaise and discontent. True enough, but given the current mind-set the only thing that redistricting will accomplish is a shift in power of the various interest groups that now vie for influence. It will do little or nothing to raise the overall level of legislative performance.
Still other programs aim to alter the balance between state and local governments in ways that shift more education and public safety responsibilities to the local levels. This is a form of mini-federalism; while it will likely do some good in education, when it comes to issues like land-use regulation and labor reform some local communities are as bad as the state.
Worse still are efforts to organize a new constitutional convention to start matters over from scratch. Put that august assembly together and every interest group in town will find ways to entrench their own pet projects. A constitutional mishmash is no better than a legislative one.
The theoretical mistake in these reforms needs emphasis. Structural remedies have one vital function: The diffusion of power in different branches of government is a key bulwark against tyranny, even at the cost of gridlock and paralysis. On balance that trade-off is worth making.
Yet tinkering with this balance will do little to cure today's entitlement malaise. Whatever the importance of some division of power among political actors, no theory tells which division of power is likely to work better than the others. Look around the world and ask whether presidential systems of government, like that in the United States, work better than parliamentary systems of government, like that in Great Britain. We can't be sure. Nations under stress often oscillate between the two, without any clear direction.
On the other hand, getting the basic set of substantive entitlements right does make a huge difference in the success or failure of government. It is only by taking on that unfashionable issue that real progress can be made in places like California. The first order of business should be to rationalize the tax structure. Low, flat taxes on income will draw in capital, not drive it away.
More to the point, none of these proposals take dead aim at entitlements. The impulse is to find out ways to add back dental benefits to Medicaid, often by asking the federal government (i.e., citizens in other states) to foot the bill. It's a mug's game that forces sensible states to subsidize the follies of profligate ones. We need to find a way to shrink the program nationwide.
Dugg on Forbes.com
Closer to home, I have not seen one proposal that works to relax the restrictions on land use now exercised at both the state and the local level. No proposal wants to take on the bloated pensions of public unions or the state protection of private unions. The truth is California is failing because its aspirations have grown so rapidly that they have choked off the productive base needed to fund them. The current set of reform proposals won't stop the state from putting an ever greater set of entitlements onto a shrinking tax base.
What we need is a sharp change in direction--a deep commitment to a smaller government along classic liberal lines. While some of these ballot initiatives will be approved, the underlying situation will get only worse. All the money and effort might be better spent rearranging deck chairs on the Titanic.
Richard A. Epstein is the James Parker Hall Distinguished Service Professor of Law, The University of Chicago; the Peter and Kirsten Bedford Senior Fellow, the Hoover Institution; and a visiting professor at New York University Law School. He writes a weekly column for Forbes.com.
In my last column I tackled the not-so-secret implosion of state governments across the land. A question, however, still lingers: What ought to be done? On this score there are two, and only two, general approaches. The first is structural and concerns the division of political authority within the states. The second deals with the conception of individual rights and duties of state citizens. As Americans, we should stress the second and ditch the first. But true to form, California seems to be moving in the opposite direction.
Right now many groups are getting ready to put new measures in November's referendum process, which lets voters have the word on reform. These exercises in direct democracy consciously bypass the state legislature, in which public confidence has fallen to 14%--which is quite generous in light of its dismal performance.
Naturally, many of these proposals take aim at the legislature itself. Some try to slash legislative salaries in half, which won't do much good since most people who crave their seats spend far more than they earn to obtain them. What drives them to office is the prospect of power--influence that will ultimately pay them far more than the gobs of cash they need to get elected in the first place.
Other proposals address how legislative gerrymandering of local districts has been a source of public malaise and discontent. True enough, but given the current mind-set the only thing that redistricting will accomplish is a shift in power of the various interest groups that now vie for influence. It will do little or nothing to raise the overall level of legislative performance.
Still other programs aim to alter the balance between state and local governments in ways that shift more education and public safety responsibilities to the local levels. This is a form of mini-federalism; while it will likely do some good in education, when it comes to issues like land-use regulation and labor reform some local communities are as bad as the state.
Worse still are efforts to organize a new constitutional convention to start matters over from scratch. Put that august assembly together and every interest group in town will find ways to entrench their own pet projects. A constitutional mishmash is no better than a legislative one.
The theoretical mistake in these reforms needs emphasis. Structural remedies have one vital function: The diffusion of power in different branches of government is a key bulwark against tyranny, even at the cost of gridlock and paralysis. On balance that trade-off is worth making.
Yet tinkering with this balance will do little to cure today's entitlement malaise. Whatever the importance of some division of power among political actors, no theory tells which division of power is likely to work better than the others. Look around the world and ask whether presidential systems of government, like that in the United States, work better than parliamentary systems of government, like that in Great Britain. We can't be sure. Nations under stress often oscillate between the two, without any clear direction.
On the other hand, getting the basic set of substantive entitlements right does make a huge difference in the success or failure of government. It is only by taking on that unfashionable issue that real progress can be made in places like California. The first order of business should be to rationalize the tax structure. Low, flat taxes on income will draw in capital, not drive it away.
More to the point, none of these proposals take dead aim at entitlements. The impulse is to find out ways to add back dental benefits to Medicaid, often by asking the federal government (i.e., citizens in other states) to foot the bill. It's a mug's game that forces sensible states to subsidize the follies of profligate ones. We need to find a way to shrink the program nationwide.
Dugg on Forbes.com
Closer to home, I have not seen one proposal that works to relax the restrictions on land use now exercised at both the state and the local level. No proposal wants to take on the bloated pensions of public unions or the state protection of private unions. The truth is California is failing because its aspirations have grown so rapidly that they have choked off the productive base needed to fund them. The current set of reform proposals won't stop the state from putting an ever greater set of entitlements onto a shrinking tax base.
What we need is a sharp change in direction--a deep commitment to a smaller government along classic liberal lines. While some of these ballot initiatives will be approved, the underlying situation will get only worse. All the money and effort might be better spent rearranging deck chairs on the Titanic.
Richard A. Epstein is the James Parker Hall Distinguished Service Professor of Law, The University of Chicago; the Peter and Kirsten Bedford Senior Fellow, the Hoover Institution; and a visiting professor at New York University Law School. He writes a weekly column for Forbes.com.
(1) Dubai’s First Foreclosure May Open Floodgates in Worst Market, (2) The Dubai crisis: A case of the inevitable
(1) Dubai’s First Foreclosure May Open Floodgates in Worst Market
Property market went from world's best in 2008 to the worst
By Zainab Fattah
Jan. 11 (Bloomberg) -- Dubai’s housing rout sent prices down 52 percent in the past year, prompting some homeowners to abandon their cars and mortgage payments and flee the country. Not one received a foreclosure notice.
Barclays Plc won the sheikdom’s first foreclosure cases in court, clearing the way for lenders holding about $16 billion of Dubai home loans to take action when borrowers don’t pay. Islamic lender Tamweel PJSC, the emirate’s biggest mortgage bank, has several of its own foreclosure claims pending and estimates about 3 percent of its mortgages are in default.
“Banks will be more aggressive in pursuing legal action if they see the process is efficient,” said Dubai-based Antoine Yacoub, a banking analyst at Moody’s Investors Service Inc. “They were trying to avoid the courts and restructure most of their loans, but once they see a precedent has been set, they will be encouraged to push more cases through.”
The successful foreclosures by London-based Barclays may open the floodgates in Dubai’s property market, which went from the world’s best in 2008 to the worst after credit dried up and speculators who had fueled price increases left the market, according to Deutsche Bank AG. Moody’s estimated in September that 12 percent of the 27,000 residential mortgages in the sheikdom would default within 12 to 18 months.
Banks and developers until now have avoided the process of reclaiming homes through the courts, barred by tradition and an arcane legal process that few understood. The Barclays and Tamweel cases may change that, because they show that a 2008 mortgage law -- setting out rules for default, foreclosure and repossession -- is working.
Mortgage Law
The law requires lenders to give homeowners 30-day notice of their intent to pursue a foreclosure, said Jody Waugh, a partner at law firm Al Tamimi & Co. in Dubai. Courts then review the case and can issue a debt judgment that turns the property over to Dubai’s Land Department for auction. Waugh estimates the process may take two to four months.
Barclays, Britain’s second-largest bank, said in an e- mailed reply to questions that it won the foreclosure orders, without providing details of the cases. The ruling shows that Dubai’s market is “evolving and is poised to come at par with other mature markets of the world,” the bank said.
Both lenders and developers in the United Arab Emirates have tried to stem rising defaults through out-of-court settlements with distressed customers after falling prices left buyers with mortgages worth more than their properties. That has helped minimize the amount of bad debt on their balance sheets and kept repossessed houses off a market that’s already suffering from too much supply. Provisions for bad loans in the U.A.E. surged 68 percent to 32 billion dirhams ($8.7 billion) as of November, compared with a year earlier.
Abandoned Homes
Before the mortgage law was passed, lenders and builders could resort to the courts to enforce contracts, though they didn’t have the right to foreclose.
Tamweel’s pending cases, filed almost two months ago, involve homes abandoned by owners who left Dubai at the onset of the global financial crisis, Chief Executive Officer Wasim Saifi said. Tamweel’s default rate has been “hovering between 2.5 percent and 4 percent for the past six months,” he said.
As alternatives to foreclosures, lenders in Dubai have extended payment periods and developers allowed customers with several properties to return some of them. The absence of mortgage securitization makes it easier for U.A.E. lenders to restructure loans than for their counterparts in the U.S., where mortgage debt was often sold on to investors.
Foreign Banks
U.K.-based Standard Chartered Plc and HSBC Holdings Plc top the list of foreign banks providing mortgages in the U.A.E., according to Deepak Tolani, senior research associate at Al Mal Capital PSC.
“While it is not Standard Chartered’s preferred approach, foreclosure is a legitimate course of action should a borrower not meet their obligations,” the bank said in a statement. HSBC declined to comment on the issue when contacted by Bloomberg, while Islamic mortgage lender Amlak Finance PJSC didn’t respond to e-mailed questions.
Banks are unlikely to head to the courts to foreclose on properties en masse because of concerns that large numbers of repossessed properties on the market will drive prices lower, said Saud Masud, a Dubai-based real estate analyst at UBS.
While auctioning a few properties “will be easy,” hundreds or even thousands of foreclosure sales may draw buyers away from new and secondhand properties, Masud said.
‘Slippery Slope’
“It’s a slippery slope,” Masud said. “Mass auctions may reprice the property market in a meaningful way as investors prefer to pick real bargains in auctions.”
A cultural stigma attached to forcing people out of their homes has also deterred foreclosures. That may not protect speculative investors who helped drive prices up by buying several properties with the aim of selling at a profit soon after.
“The mortgage law has given clarity and certainty to the exact process that must be followed by anyone wishing to enforce a mortgage,” said Waugh, whose firm is currently handling fewer than 10 repossession cases.
Foreigner Population
Dubai’s population, which is about 90 percent expatriate, may drop by 8 percent in 2009 and another 2 percent in 2010, UBS AG estimated in March. Dubai’s immigration department doesn’t provide regular statistics on visas.
Citizens make up only about 20 percent of the overall U.A.E. population, which largely consists of workers from countries including Pakistan, the U.K. and Lebanon. Workers have one month to leave the country after their work visas are canceled.
Dubai first allowed foreigners to own property in 2002. That led real estate prices to quadruple in the following six years, helped by a growing expatriate workforce and speculation fueled by borrowing.
The U.A.E. last year scrapped a rule that automatically qualified homeowners in Dubai for a permanent residency visa. Owners of properties valued at 1 million dirhams or more are now required to renew residency visas every six months.
About 65,000 residential units will be completed in Dubai by 2011 and the emirate needs to create a minimum of 100,000 white-collar jobs to satisfy oncoming supply, Nomura said on Oct 15. Deutshe Bank estimates that 30,000 units may be delivered by the end of 2010.
Faster Process
“When people talk about litigation in the Middle East, they’re concerned over the possible time it would take to obtain a judgment,” Waugh said. “The speed at which it appears judgments may be obtained under the mortgage law is a real, positive sign for banks.” The Barclays cases were filed in November, he said.
The U.A.E.’s central bank in October proposed reducing the time it takes for a loan to be classified as non-performing by half to 90 days. Banks “most probably” will be asked to comply during the first quarter of this year, said Sofia El Boury, a banking analyst at Shuaa Capital PSC.
So far, no properties have been auctioned, according to Mohammed Sultan Thani, assistant director general at the Dubai Land Department. Requests may start pouring in this year as banks give up on other alternatives, he said.
“Amicable solutions are hard to reach when a buyer lost his job,” or when a property is worth less than the amount owed on it, Thani said.
Lending Swelled
Mortgage loans totaled 137.6 billion dirhams in July 2009, central bank data shows. About 25,000 to 30,000 mortgages have been taken in the U.A.E. with more than 95 percent of them in Dubai, analysts say.
The central bank estimates that real estate accounts for about 13 percent of total loans in the U.A.E. Shuaa’s El Boury said the real figure is “much higher” and official numbers aren’t realistic “given the financing contributions to real estate construction and development in the U.A.E.”
The new mortgage law applies to only some kinds of Islamic lending, Waugh said. Shuaa estimates about 25,000 mortgages were extended by Tamweel and its competitor Amlak alone. The two lenders, which control more than half of the U.A.E’s mortgage market, are set to merge this year. Shares of both companies have been suspended since November, 2008.
Negative Equity
The biggest risks to banks come from loans underwritten after 2007, which are “most probably in deep negative equity by now,” Moody’s Yacoub said. Also at risk are Islamic Istisna’ mortgages where a buyer doesn’t make any payments until the property is delivered, he said.
Barclays said the court’s decisions will renew lenders’ faith in Dubai’s legal system, “which could result in bigger lending mandates specifically for mortgage business.”
Judging by the first cases, the process seems to be working, Al Tamimi’s Waugh said. “Like anything, there are a few teething problems that are being resolved, but the fact that we have obtained judgments so quickly is positive.”
To contact the reporter on this story: Zainab Fattah in Dubai on zfattah@bloomberg.net
Last Updated: January 10, 2010 15:00 EST
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(2)The Dubai crisis: A case of the inevitable
BIZ NEWS@UM
Following recent headlines on Dubai’s billion-dollar debt problem, there has been a spate of analyses.
Some were very detailed and contained a list of lessons to be learnt by other countries.
One recent and notable analysis emphasises the need for predictable, sustainable, clear and certain policies and argued that it is because of the lack of all those factors that Dubai is currently facing problems.
In other words, the writer is saying that not only is it possible for countries to avoid financial crises, it is also very simple since what is needed is to make sure that the countries’ policies are not unpredictable, not unsustainable, not unclear and not uncertain.
The question that springs to mind will then be: How come all those brilliant Ivy League-educated policy makers in countries that have experienced debt-related financial crises in the past such as Iceland, Britain, south Korea, Indonesia, Thailand, Argentina, Brazil and of course the United States itself (which boasts of having top universities in the world and the most number of Nobel laureates in the field of economics and finance) have not figured out these simple rules in the past?
And come to think of it, if the avoidance of financial crisis is so simple, why do people bother so much in carrying out detailed research in order to prevent their recurrence?
Maybe we should also not be too agonized with the fact that Malaysia has not produced any Nobel Prize winner in the field of economics or finance.
The experience of the US has shown that having the best economics brains in the world is not going to help a country avoid the occurrence of financial crises.
Coming back to Dubai, it is worth pondering why financial crises continue to occur even though there had been so many crises in recent years which ought to have yielded important lessons.
These include the 1987 Black Monday Crash, the 1994 Mexican Financial Crisis, the 1997 Asian Financial Crisis, the 1999 Brazilian Financial Crisis, the 2001 Argentina Financial Crisis and the 2007 US Sub-prime Financial Crisis.
Surely policy makers have had enough data, facts and information at their disposal to help them prevent the occurrence of a financial crisis, especially if it as simple as coming up with policies which are predictable, sustainable, clear and certain.
To be sure, financial crises are not a new phenomenon.
They have been taking place for hundreds of years.
One of the most famous was the Tulip Crisis in Holland which took place in the 1630s.
What happened was that many highly indebted people could not repay their debts, enough to cause a crisis in the Dutch economy.
While the Tulip Crisis was caused by over-speculation in tulip bulbs, in the case of Dubai, the cause is over-speculation in the property sector.
But the essence of the two stories is the same: people got excited with the booming price in a particular sector.
They then borrowed heavily to engage in speculative transactions causing further increase in the size of the speculative ‘bubbles’.
Eventually the bubbles burst and many people became financially unstuck causing a downward spiral of price and more trouble to the economy which eventually led to financial and economic crises.
Strangely enough, however, it seems that this simple lesson on the importance of having predictable, sustainable, clear and certain policies was not easily learnt because well after that episode, financial crises continued to erupt in Europe and the United States.
The most famous ones include the 1720 South Sea financial crisis in London, the US panic of 1873, and the Great Depression of the 1930s.
They all have one thing in common.
Many people borrowed money in order to engage in speculative transactions in a variety of assets such as properties and stocks.
These activities led to asset bubbles which eventually burst, resulting in widespread financial insolvencies and, thereby, economic crises.
One notable fact is that these financial crises during the 17th, 18th and 19th centuries took place mostly in Europe or America and not in places such as the Middle East or Southeast Asia.
So a question worth asking is whether in these regions, predictable, sustainable, clear and certain policies were in place to regulate their financial sectors?
Well, obviously that is not true for the simple fact that in these regions, in those eras, had no financial sector to regulate.
In other words, the main reason they did not experience any financial crisis was simply that they did not have any significant financial sector to start with.
Of course eventually they began to develop their own financial sectors and soon they too experienced financial crises.
The most serious one for Southeast Asian countries was the 1997 financial meltdown and just as in the case of other financial crises, it was also a story of debts, speculations and the bursting of asset bubbles.
Truth be told, once a country developed a lending-for-profit sector of its own, there is no avoidance of a financial crisis even if predictable, sustainable, clear and certain policies are in place.
Britain and America are the best examples of this.
As is well known to many, these are two countries which are models to others in terms of financial regulations and supervision.
Nevertheless the fact remains that the same two also happen to be among the ones which are experiencing the worst financial crises in the world.
One very important, maybe the most important, lesson we should learn is that the occurrence of financial and debt crisis is an inevitable outcome of the existence of a lending-for-profit sector.
And the more developed, sophisticated and advanced the sector is, the bigger and more serious will the crisis inevitably be.
●Dr Mohd Nazari Ismail is a professor at the Faculty of Business and Accounting, University of Malaya
Property market went from world's best in 2008 to the worst
By Zainab Fattah
Jan. 11 (Bloomberg) -- Dubai’s housing rout sent prices down 52 percent in the past year, prompting some homeowners to abandon their cars and mortgage payments and flee the country. Not one received a foreclosure notice.
Barclays Plc won the sheikdom’s first foreclosure cases in court, clearing the way for lenders holding about $16 billion of Dubai home loans to take action when borrowers don’t pay. Islamic lender Tamweel PJSC, the emirate’s biggest mortgage bank, has several of its own foreclosure claims pending and estimates about 3 percent of its mortgages are in default.
“Banks will be more aggressive in pursuing legal action if they see the process is efficient,” said Dubai-based Antoine Yacoub, a banking analyst at Moody’s Investors Service Inc. “They were trying to avoid the courts and restructure most of their loans, but once they see a precedent has been set, they will be encouraged to push more cases through.”
The successful foreclosures by London-based Barclays may open the floodgates in Dubai’s property market, which went from the world’s best in 2008 to the worst after credit dried up and speculators who had fueled price increases left the market, according to Deutsche Bank AG. Moody’s estimated in September that 12 percent of the 27,000 residential mortgages in the sheikdom would default within 12 to 18 months.
Banks and developers until now have avoided the process of reclaiming homes through the courts, barred by tradition and an arcane legal process that few understood. The Barclays and Tamweel cases may change that, because they show that a 2008 mortgage law -- setting out rules for default, foreclosure and repossession -- is working.
Mortgage Law
The law requires lenders to give homeowners 30-day notice of their intent to pursue a foreclosure, said Jody Waugh, a partner at law firm Al Tamimi & Co. in Dubai. Courts then review the case and can issue a debt judgment that turns the property over to Dubai’s Land Department for auction. Waugh estimates the process may take two to four months.
Barclays, Britain’s second-largest bank, said in an e- mailed reply to questions that it won the foreclosure orders, without providing details of the cases. The ruling shows that Dubai’s market is “evolving and is poised to come at par with other mature markets of the world,” the bank said.
Both lenders and developers in the United Arab Emirates have tried to stem rising defaults through out-of-court settlements with distressed customers after falling prices left buyers with mortgages worth more than their properties. That has helped minimize the amount of bad debt on their balance sheets and kept repossessed houses off a market that’s already suffering from too much supply. Provisions for bad loans in the U.A.E. surged 68 percent to 32 billion dirhams ($8.7 billion) as of November, compared with a year earlier.
Abandoned Homes
Before the mortgage law was passed, lenders and builders could resort to the courts to enforce contracts, though they didn’t have the right to foreclose.
Tamweel’s pending cases, filed almost two months ago, involve homes abandoned by owners who left Dubai at the onset of the global financial crisis, Chief Executive Officer Wasim Saifi said. Tamweel’s default rate has been “hovering between 2.5 percent and 4 percent for the past six months,” he said.
As alternatives to foreclosures, lenders in Dubai have extended payment periods and developers allowed customers with several properties to return some of them. The absence of mortgage securitization makes it easier for U.A.E. lenders to restructure loans than for their counterparts in the U.S., where mortgage debt was often sold on to investors.
Foreign Banks
U.K.-based Standard Chartered Plc and HSBC Holdings Plc top the list of foreign banks providing mortgages in the U.A.E., according to Deepak Tolani, senior research associate at Al Mal Capital PSC.
“While it is not Standard Chartered’s preferred approach, foreclosure is a legitimate course of action should a borrower not meet their obligations,” the bank said in a statement. HSBC declined to comment on the issue when contacted by Bloomberg, while Islamic mortgage lender Amlak Finance PJSC didn’t respond to e-mailed questions.
Banks are unlikely to head to the courts to foreclose on properties en masse because of concerns that large numbers of repossessed properties on the market will drive prices lower, said Saud Masud, a Dubai-based real estate analyst at UBS.
While auctioning a few properties “will be easy,” hundreds or even thousands of foreclosure sales may draw buyers away from new and secondhand properties, Masud said.
‘Slippery Slope’
“It’s a slippery slope,” Masud said. “Mass auctions may reprice the property market in a meaningful way as investors prefer to pick real bargains in auctions.”
A cultural stigma attached to forcing people out of their homes has also deterred foreclosures. That may not protect speculative investors who helped drive prices up by buying several properties with the aim of selling at a profit soon after.
“The mortgage law has given clarity and certainty to the exact process that must be followed by anyone wishing to enforce a mortgage,” said Waugh, whose firm is currently handling fewer than 10 repossession cases.
Foreigner Population
Dubai’s population, which is about 90 percent expatriate, may drop by 8 percent in 2009 and another 2 percent in 2010, UBS AG estimated in March. Dubai’s immigration department doesn’t provide regular statistics on visas.
Citizens make up only about 20 percent of the overall U.A.E. population, which largely consists of workers from countries including Pakistan, the U.K. and Lebanon. Workers have one month to leave the country after their work visas are canceled.
Dubai first allowed foreigners to own property in 2002. That led real estate prices to quadruple in the following six years, helped by a growing expatriate workforce and speculation fueled by borrowing.
The U.A.E. last year scrapped a rule that automatically qualified homeowners in Dubai for a permanent residency visa. Owners of properties valued at 1 million dirhams or more are now required to renew residency visas every six months.
About 65,000 residential units will be completed in Dubai by 2011 and the emirate needs to create a minimum of 100,000 white-collar jobs to satisfy oncoming supply, Nomura said on Oct 15. Deutshe Bank estimates that 30,000 units may be delivered by the end of 2010.
Faster Process
“When people talk about litigation in the Middle East, they’re concerned over the possible time it would take to obtain a judgment,” Waugh said. “The speed at which it appears judgments may be obtained under the mortgage law is a real, positive sign for banks.” The Barclays cases were filed in November, he said.
The U.A.E.’s central bank in October proposed reducing the time it takes for a loan to be classified as non-performing by half to 90 days. Banks “most probably” will be asked to comply during the first quarter of this year, said Sofia El Boury, a banking analyst at Shuaa Capital PSC.
So far, no properties have been auctioned, according to Mohammed Sultan Thani, assistant director general at the Dubai Land Department. Requests may start pouring in this year as banks give up on other alternatives, he said.
“Amicable solutions are hard to reach when a buyer lost his job,” or when a property is worth less than the amount owed on it, Thani said.
Lending Swelled
Mortgage loans totaled 137.6 billion dirhams in July 2009, central bank data shows. About 25,000 to 30,000 mortgages have been taken in the U.A.E. with more than 95 percent of them in Dubai, analysts say.
The central bank estimates that real estate accounts for about 13 percent of total loans in the U.A.E. Shuaa’s El Boury said the real figure is “much higher” and official numbers aren’t realistic “given the financing contributions to real estate construction and development in the U.A.E.”
The new mortgage law applies to only some kinds of Islamic lending, Waugh said. Shuaa estimates about 25,000 mortgages were extended by Tamweel and its competitor Amlak alone. The two lenders, which control more than half of the U.A.E’s mortgage market, are set to merge this year. Shares of both companies have been suspended since November, 2008.
Negative Equity
The biggest risks to banks come from loans underwritten after 2007, which are “most probably in deep negative equity by now,” Moody’s Yacoub said. Also at risk are Islamic Istisna’ mortgages where a buyer doesn’t make any payments until the property is delivered, he said.
Barclays said the court’s decisions will renew lenders’ faith in Dubai’s legal system, “which could result in bigger lending mandates specifically for mortgage business.”
Judging by the first cases, the process seems to be working, Al Tamimi’s Waugh said. “Like anything, there are a few teething problems that are being resolved, but the fact that we have obtained judgments so quickly is positive.”
To contact the reporter on this story: Zainab Fattah in Dubai on zfattah@bloomberg.net
Last Updated: January 10, 2010 15:00 EST
-------------------------------------------------------------------------------
(2)The Dubai crisis: A case of the inevitable
BIZ NEWS@UM
Following recent headlines on Dubai’s billion-dollar debt problem, there has been a spate of analyses.
Some were very detailed and contained a list of lessons to be learnt by other countries.
One recent and notable analysis emphasises the need for predictable, sustainable, clear and certain policies and argued that it is because of the lack of all those factors that Dubai is currently facing problems.
In other words, the writer is saying that not only is it possible for countries to avoid financial crises, it is also very simple since what is needed is to make sure that the countries’ policies are not unpredictable, not unsustainable, not unclear and not uncertain.
The question that springs to mind will then be: How come all those brilliant Ivy League-educated policy makers in countries that have experienced debt-related financial crises in the past such as Iceland, Britain, south Korea, Indonesia, Thailand, Argentina, Brazil and of course the United States itself (which boasts of having top universities in the world and the most number of Nobel laureates in the field of economics and finance) have not figured out these simple rules in the past?
And come to think of it, if the avoidance of financial crisis is so simple, why do people bother so much in carrying out detailed research in order to prevent their recurrence?
Maybe we should also not be too agonized with the fact that Malaysia has not produced any Nobel Prize winner in the field of economics or finance.
The experience of the US has shown that having the best economics brains in the world is not going to help a country avoid the occurrence of financial crises.
Coming back to Dubai, it is worth pondering why financial crises continue to occur even though there had been so many crises in recent years which ought to have yielded important lessons.
These include the 1987 Black Monday Crash, the 1994 Mexican Financial Crisis, the 1997 Asian Financial Crisis, the 1999 Brazilian Financial Crisis, the 2001 Argentina Financial Crisis and the 2007 US Sub-prime Financial Crisis.
Surely policy makers have had enough data, facts and information at their disposal to help them prevent the occurrence of a financial crisis, especially if it as simple as coming up with policies which are predictable, sustainable, clear and certain.
To be sure, financial crises are not a new phenomenon.
They have been taking place for hundreds of years.
One of the most famous was the Tulip Crisis in Holland which took place in the 1630s.
What happened was that many highly indebted people could not repay their debts, enough to cause a crisis in the Dutch economy.
While the Tulip Crisis was caused by over-speculation in tulip bulbs, in the case of Dubai, the cause is over-speculation in the property sector.
But the essence of the two stories is the same: people got excited with the booming price in a particular sector.
They then borrowed heavily to engage in speculative transactions causing further increase in the size of the speculative ‘bubbles’.
Eventually the bubbles burst and many people became financially unstuck causing a downward spiral of price and more trouble to the economy which eventually led to financial and economic crises.
Strangely enough, however, it seems that this simple lesson on the importance of having predictable, sustainable, clear and certain policies was not easily learnt because well after that episode, financial crises continued to erupt in Europe and the United States.
The most famous ones include the 1720 South Sea financial crisis in London, the US panic of 1873, and the Great Depression of the 1930s.
They all have one thing in common.
Many people borrowed money in order to engage in speculative transactions in a variety of assets such as properties and stocks.
These activities led to asset bubbles which eventually burst, resulting in widespread financial insolvencies and, thereby, economic crises.
One notable fact is that these financial crises during the 17th, 18th and 19th centuries took place mostly in Europe or America and not in places such as the Middle East or Southeast Asia.
So a question worth asking is whether in these regions, predictable, sustainable, clear and certain policies were in place to regulate their financial sectors?
Well, obviously that is not true for the simple fact that in these regions, in those eras, had no financial sector to regulate.
In other words, the main reason they did not experience any financial crisis was simply that they did not have any significant financial sector to start with.
Of course eventually they began to develop their own financial sectors and soon they too experienced financial crises.
The most serious one for Southeast Asian countries was the 1997 financial meltdown and just as in the case of other financial crises, it was also a story of debts, speculations and the bursting of asset bubbles.
Truth be told, once a country developed a lending-for-profit sector of its own, there is no avoidance of a financial crisis even if predictable, sustainable, clear and certain policies are in place.
Britain and America are the best examples of this.
As is well known to many, these are two countries which are models to others in terms of financial regulations and supervision.
Nevertheless the fact remains that the same two also happen to be among the ones which are experiencing the worst financial crises in the world.
One very important, maybe the most important, lesson we should learn is that the occurrence of financial and debt crisis is an inevitable outcome of the existence of a lending-for-profit sector.
And the more developed, sophisticated and advanced the sector is, the bigger and more serious will the crisis inevitably be.
●Dr Mohd Nazari Ismail is a professor at the Faculty of Business and Accounting, University of Malaya
China's High-Speed-Rail Revolution
China's High-Speed-Rail Revolution
Dedicated lines are the key to record-breaking speeds.
By Peter Fairley
Monday, January 11, 2010
China has begun operating what is, by several measures, the world's fastest rail line: a dedicated 968-kilometer line linking Wuhan, in the heart of central China, to Guangzhou, on the southeastern coast. In trials, the "WuGuang" line trains (locally built variants of Japan's Shinkansen and Germany's InterCity Express high-speed trains) clocked peak speeds of up to 394 kilometers per hour (or 245 miles per hour). They have also recorded an average speed of 312 kph in nonstop runs four times daily since the WuGuang's December 26 launch, slashing travel time from Wuhan to Guangzhou from 10.5 hours to less than three.
China's Shinkansen: China’s WuGuang rail line employs locally-manufactured variants of Japan’s Shinkansen (pictured) and Siemens’ Velaro high speed trains. However, it is the line’s physical and digital infrastructure that enables the trains to beat world speed records.
Credit: China South Locomotive & Rolling Stock.
WuGuang's speed blows away the reigning champion: France's TGV, which runs from Lorraine to Champagne and averages 272 kph. It also bests China's first high-speed train, the Beijing-to-Tianjin trains that average 230 kph, as well as Shanghai's magnetically levitated airport shuttle trains that can hit 430 kph but average less than 251 kph.
Rail experts say the builders of the new WuGuang line deserve more bragging rights than the trains' European and Japanese designers.
"The high-speed rail technology implemented in China is not that much different from the TGV, Germany's ICE, and the Shinkansen," says Rongfang Liu, a rail expert at the New Jersey Institute of Technology in Newark. What is notable, she and others say, is that unlike many high-speed lines that repurpose older tracks, this one was designed from the ground up for very high-speed operation over hundreds of kilometers. Bridges and tunnels, as well as the concrete bed beneath the track, have been designed to safely rocket passengers around, through, or over the natural and man-made obstacles that would otherwise force the trains to slow down.
Plenty more speedy lines are coming in China under an ambitious build-out initiated in 2006 by China's Ministry of Railways, and accelerated with government stimulus funds. A two-trillion-yuan ($293 billion) plan envisions 16,000 kilometers of dedicated high-speed rail lines connecting all of China's major cities by 2020. The first East-West segment--a link from Xi'an to Zhengzhou--could begin operating as early as this month, and work is underway to extend the Beijing-Tianjin line southward to Shanghai by 2012. WuGuang, meanwhile, is expected to expand northward to Beijing and South to Hong Kong by 2013. "Over the next five years there'll be more high-speed rail added in China than the rest of the world combined," says Keith Dierkx, director of IBM's Beijing-based Global Rail Innovation Center.
High-speed rail is seen as a clean way to boost the expansion of China's transportation system, according to Dierkx. Dedicated lines will help meet rail demand, which is expected to more than triple to five billion passengers per year by 2020. And building these lines is seen as preferable to further expanding reliance on imported oil for automobiles and airplanes. Dierkx says dedicated high-speed rail should also improve freight transportation by easing congestion on conventional rail lines.
Building fast lines requires civil engineering works on a massive scale. WuGuang has 625 bridges with a combined length of 362 kilometers, and 221 tunnels with a combined length of 177 kilometers, contributing to a total construction cost of 116 billion yuan ($17 billion). The 1,300-kilometer Beijing-to-Shanghai line will cost an estimated 221 billion yuan--more than the Three Gorges Dam hydroelectric project.
However, experts say part of the high cost will be paid back through lower operating costs. Rather than laying rail on wood or concrete sleepers set into crushed rock, the Chinese rails are almost exclusively set into beds of concrete slabs designed by German rail engineering firms RAIL.ONE and Max Bögl. This eliminates damage to the track and rolling stock caused by flying stones lifted by turbulence from the high-speed trains. It also reduces wear on the wheels from shifting tracks.
Monitoring and control systems are another up-front investment that is both a precondition to high-speed operation and a cost-saver, providing the confidence in safety needed to drive trains fast. "If a train is going 300 to 350 kph, the consequences of safety failures become very critical," says Dierkx.
Dierkx says that systems under development by his Beijing-based center include train-mounted laser scanners to observe track conditions; real-time systems to predict failures; sensors on bridges and tunnels; and dynamic scheduling systems to ensure that trains are available when needed and have a free path to operate at top speeds.
Dierkx, Liu, and others say the U.S. could ultimately benefit from China's investment in high-speed rail, because it should bring down the cost of creating the type of dedicated high-speed rail lines that the U.S. still lacks. "The U.S. is going to be able to capture the advantage of a lot of the innovation taking place globally," says Dierkx.
It increasingly looks as though the U.S. will do just that. The California High Speed Rail Authority is using $10 billion in funding from a bond issue approved by voters last winter to begin detailed design work on a 790-mile system linking Los Angeles, San Francisco, and Sacramento. Rod Diridon, executive director of San Diego State University's Mineta Transportation Institute and former chair of California's authority, says the system will reduce California's greenhouse gas emissions by nine million tons by 2050, since high-speed rail is three times more efficient than flying, and five times more efficient than driving per passenger mile.
Diridon says California's bond vote broke the political "dam" holding back high-speed rail. Within months, President Obama proposed a high-speed rail plan and Congress approved $8 billion in stimulus funds that the Federal Railroad Administration is expected to award this month. "All of a sudden the funding is there," says Diridon.
Diridon says even Amtrak could get the dedicated lines it needs to unleash its Acela Express service from Boston to New York City--an idea that was all but unthinkable just a few years ago. Amtrak's Canadian-designed trains are capable of traveling at over 200 kph, but their average speed is less than half that because they share the rails with freight. "We're looking very hard at how to get the Acela off the freight lines," says Diridon.
Dedicated lines are the key to record-breaking speeds.
By Peter Fairley
Monday, January 11, 2010
China has begun operating what is, by several measures, the world's fastest rail line: a dedicated 968-kilometer line linking Wuhan, in the heart of central China, to Guangzhou, on the southeastern coast. In trials, the "WuGuang" line trains (locally built variants of Japan's Shinkansen and Germany's InterCity Express high-speed trains) clocked peak speeds of up to 394 kilometers per hour (or 245 miles per hour). They have also recorded an average speed of 312 kph in nonstop runs four times daily since the WuGuang's December 26 launch, slashing travel time from Wuhan to Guangzhou from 10.5 hours to less than three.
China's Shinkansen: China’s WuGuang rail line employs locally-manufactured variants of Japan’s Shinkansen (pictured) and Siemens’ Velaro high speed trains. However, it is the line’s physical and digital infrastructure that enables the trains to beat world speed records.
Credit: China South Locomotive & Rolling Stock.
WuGuang's speed blows away the reigning champion: France's TGV, which runs from Lorraine to Champagne and averages 272 kph. It also bests China's first high-speed train, the Beijing-to-Tianjin trains that average 230 kph, as well as Shanghai's magnetically levitated airport shuttle trains that can hit 430 kph but average less than 251 kph.
Rail experts say the builders of the new WuGuang line deserve more bragging rights than the trains' European and Japanese designers.
"The high-speed rail technology implemented in China is not that much different from the TGV, Germany's ICE, and the Shinkansen," says Rongfang Liu, a rail expert at the New Jersey Institute of Technology in Newark. What is notable, she and others say, is that unlike many high-speed lines that repurpose older tracks, this one was designed from the ground up for very high-speed operation over hundreds of kilometers. Bridges and tunnels, as well as the concrete bed beneath the track, have been designed to safely rocket passengers around, through, or over the natural and man-made obstacles that would otherwise force the trains to slow down.
Plenty more speedy lines are coming in China under an ambitious build-out initiated in 2006 by China's Ministry of Railways, and accelerated with government stimulus funds. A two-trillion-yuan ($293 billion) plan envisions 16,000 kilometers of dedicated high-speed rail lines connecting all of China's major cities by 2020. The first East-West segment--a link from Xi'an to Zhengzhou--could begin operating as early as this month, and work is underway to extend the Beijing-Tianjin line southward to Shanghai by 2012. WuGuang, meanwhile, is expected to expand northward to Beijing and South to Hong Kong by 2013. "Over the next five years there'll be more high-speed rail added in China than the rest of the world combined," says Keith Dierkx, director of IBM's Beijing-based Global Rail Innovation Center.
High-speed rail is seen as a clean way to boost the expansion of China's transportation system, according to Dierkx. Dedicated lines will help meet rail demand, which is expected to more than triple to five billion passengers per year by 2020. And building these lines is seen as preferable to further expanding reliance on imported oil for automobiles and airplanes. Dierkx says dedicated high-speed rail should also improve freight transportation by easing congestion on conventional rail lines.
Building fast lines requires civil engineering works on a massive scale. WuGuang has 625 bridges with a combined length of 362 kilometers, and 221 tunnels with a combined length of 177 kilometers, contributing to a total construction cost of 116 billion yuan ($17 billion). The 1,300-kilometer Beijing-to-Shanghai line will cost an estimated 221 billion yuan--more than the Three Gorges Dam hydroelectric project.
However, experts say part of the high cost will be paid back through lower operating costs. Rather than laying rail on wood or concrete sleepers set into crushed rock, the Chinese rails are almost exclusively set into beds of concrete slabs designed by German rail engineering firms RAIL.ONE and Max Bögl. This eliminates damage to the track and rolling stock caused by flying stones lifted by turbulence from the high-speed trains. It also reduces wear on the wheels from shifting tracks.
Monitoring and control systems are another up-front investment that is both a precondition to high-speed operation and a cost-saver, providing the confidence in safety needed to drive trains fast. "If a train is going 300 to 350 kph, the consequences of safety failures become very critical," says Dierkx.
Dierkx says that systems under development by his Beijing-based center include train-mounted laser scanners to observe track conditions; real-time systems to predict failures; sensors on bridges and tunnels; and dynamic scheduling systems to ensure that trains are available when needed and have a free path to operate at top speeds.
Dierkx, Liu, and others say the U.S. could ultimately benefit from China's investment in high-speed rail, because it should bring down the cost of creating the type of dedicated high-speed rail lines that the U.S. still lacks. "The U.S. is going to be able to capture the advantage of a lot of the innovation taking place globally," says Dierkx.
It increasingly looks as though the U.S. will do just that. The California High Speed Rail Authority is using $10 billion in funding from a bond issue approved by voters last winter to begin detailed design work on a 790-mile system linking Los Angeles, San Francisco, and Sacramento. Rod Diridon, executive director of San Diego State University's Mineta Transportation Institute and former chair of California's authority, says the system will reduce California's greenhouse gas emissions by nine million tons by 2050, since high-speed rail is three times more efficient than flying, and five times more efficient than driving per passenger mile.
Diridon says California's bond vote broke the political "dam" holding back high-speed rail. Within months, President Obama proposed a high-speed rail plan and Congress approved $8 billion in stimulus funds that the Federal Railroad Administration is expected to award this month. "All of a sudden the funding is there," says Diridon.
Diridon says even Amtrak could get the dedicated lines it needs to unleash its Acela Express service from Boston to New York City--an idea that was all but unthinkable just a few years ago. Amtrak's Canadian-designed trains are capable of traveling at over 200 kph, but their average speed is less than half that because they share the rails with freight. "We're looking very hard at how to get the Acela off the freight lines," says Diridon.
Monday, January 11, 2010
China banks eclipse US rivals
China banks eclipse US rivals
By Patrick Jenkins in London
Published: January 10 2010 22:32 | Last updated: January 10 2010 22:32
Chinese banks have cemented their position as the most highly valued financial institutions, taking four of the top five slots in a ranking of banks’ share prices as a multiple of their book values.
China Merchants Bank, China Citic, ICBC and China Construction Bank lead the table, followed by Itaú Unibanco of Brazil, all with a price-to-book multiple of more than three.
Over the past six years, the average price-to-book value of the biggest 50 banks has halved from two to one.
This means that investors believe the average bank is worth no more than the value of its balance sheet. Most western banks are trading at well below their book value.
But investors are attaching a growing premium to emerging markets banks, led by China Merchants, the most highly rated of the biggest 50 banks by market capitalisation, on a multiple of 4.3, according to Bloomberg data.
At the start of the last decade, the US dominated the rankings. The top five were Bank of New York Mellon , Lloyds of the UK, Morgan Stanley, Citigroup and Wells Fargo.
Only last year US Bancorp topped the table and Wells Fargo was in the top 10.
The changes, which have seen the top-rated Chinese banks double in valuation over the past year as western rivals have been derated, reflect growing confidence in emerging markets, particularly China and Brazil.
They indicate concerns about the profitability of western institutions stemming from toxic assets and the drive to force banks to increase capital and liquid funds.
Even western investment banks that have thrived over the past year have been left behind in the price-to-book league table. Goldman Sachs is ranked 22nd and JPMorgan 31st.
“Western markets generally are experiencing their worst prospects for 20 years, and that’s in the valuations,” Robert Law, banks analyst at Nomura, said.
“China in particular is a region that is perceived as less vulnerable to global downturn.”
Although Chinese bank valuations were hit by investor nervousness in 2008, the limited fallout they suffered – combined with positively received government stimulus measures – have allowed them to bounce back.
Some fringe developed economies with a reputation for tough regulatory controls and limited direct or indirect exposure to the subprime problem at the root of the crisis have benefited.
Canadian and Australian banks in particular climbed the price-to-book rankings.
Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.
By Patrick Jenkins in London
Published: January 10 2010 22:32 | Last updated: January 10 2010 22:32
Chinese banks have cemented their position as the most highly valued financial institutions, taking four of the top five slots in a ranking of banks’ share prices as a multiple of their book values.
China Merchants Bank, China Citic, ICBC and China Construction Bank lead the table, followed by Itaú Unibanco of Brazil, all with a price-to-book multiple of more than three.
Over the past six years, the average price-to-book value of the biggest 50 banks has halved from two to one.
This means that investors believe the average bank is worth no more than the value of its balance sheet. Most western banks are trading at well below their book value.
But investors are attaching a growing premium to emerging markets banks, led by China Merchants, the most highly rated of the biggest 50 banks by market capitalisation, on a multiple of 4.3, according to Bloomberg data.
At the start of the last decade, the US dominated the rankings. The top five were Bank of New York Mellon , Lloyds of the UK, Morgan Stanley, Citigroup and Wells Fargo.
Only last year US Bancorp topped the table and Wells Fargo was in the top 10.
The changes, which have seen the top-rated Chinese banks double in valuation over the past year as western rivals have been derated, reflect growing confidence in emerging markets, particularly China and Brazil.
They indicate concerns about the profitability of western institutions stemming from toxic assets and the drive to force banks to increase capital and liquid funds.
Even western investment banks that have thrived over the past year have been left behind in the price-to-book league table. Goldman Sachs is ranked 22nd and JPMorgan 31st.
“Western markets generally are experiencing their worst prospects for 20 years, and that’s in the valuations,” Robert Law, banks analyst at Nomura, said.
“China in particular is a region that is perceived as less vulnerable to global downturn.”
Although Chinese bank valuations were hit by investor nervousness in 2008, the limited fallout they suffered – combined with positively received government stimulus measures – have allowed them to bounce back.
Some fringe developed economies with a reputation for tough regulatory controls and limited direct or indirect exposure to the subprime problem at the root of the crisis have benefited.
Canadian and Australian banks in particular climbed the price-to-book rankings.
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Saturday, January 9, 2010
The process of innovation
The process of innovation
THINK ASIAN
By ANDREW SHENG
Thomas Edison used to say that invention is 99% perspiration and 1% inspiration. What he really meant was that the 99% perspiration was spent on the process of innovation and perhaps only at the last minute could he have a mental breakthrough to create something new.
We are truly living in the age of innovation, where technology has created new ways of living and communicating that we could not have envisaged. Thirty years ago, when the TV series Star Trek began, we saw Captain Kirk flip his communicator and speak to the Starship Enterprise. Travelling in the Moluccas in the Spice Islands this Christmas, I was amazed how in the most remote islands of Indonesia, young people were communicating with their friends using the latest Blackberrys.
Yet, at Saumlaki airport, two bikers had to go out to the runway first to chase away the cows before our plane could take off. How do we create something new? The management guru Peter Drucker said that he had to learn a new craft every three years to obtain new insights into old problems. For example, he studied Japanese literature to gain understanding of how Japanese thought about problems. According to him, every innovation comes from the cross-fertilization of ideas from different fields.
INSEAD professors Kim and Mauborgne put it very elegantly by saying that you need to move out of traditional, heavily competitive areas like the Red Sea to explore Blue Oceans where there are few competitors. This is easier said than done, because breaking out of old mindsets is very painful. We would all like to play tennis like Roger Federer, but I don’t have the patience or the willpower to diet, exercise rigorously, practice and compete day in, day out.
Innovation is a process, a cycle of steps that must be rigorously followed to achieve what you set out to achieve. First you must have a Strategy or goal what you want to achieve. This is the search and browse function. It is like shopping in a supermarket. Some people begin with very clear ideas of what they want. Others browse by looking to see what attracts them.
Genghis Khan mausoleum in Inner Mongolia, China. The ancient ruler must be one of the greatest of institutional innovators, because he created innovative teams of warriors out of individualistic nomad rabble.
The second step is to Prioritise, because we must narrow down our choices. Many people have difficulty making up their minds, because they want everything and end up doing nothing. Success comes from having focus.
The third is to Incentivise. If you set a goal, you must create the incentives to achieve that, either to reward yourself or your colleagues. Incentives mean both the rewards and the punishments. People tend to forget that we fail mostly because the incentives are wrong. If you reward failure, you will get failure.
The fourth is to set the Standards. Success or failure must have benchmarks. Are you aiming for the Olympics or just the Asian Games, the local market or the global market? A small country like the Danes can create badminton champions because they start their children young and train them through competitive leagues, using world champion trainers.
The fifth is the Structure. People think that innovation comes from individual genius, forgetting that genius can only create if the ecology is right. Michelangelo grew up in an age of great artistic creativity. He learnt from great masters and had inspired pupils, as well as rich patrons. If he was Robinson Crusoe on a lonely island, no one would appreciate or discover his genius.
It also takes passion and leadership to create the right ecology for genius and originality to thrive. Most bureaucracies stifle creativity because they want everyone to think alike. The greatest universities encourage their professors and students to think out of the box.
Sixth, you have to have Process. The word ‘process’ is so boring, whereas Innovation is so sexy. This is because most people associate Innovation with Product innovation, whereas the greatest achievements have been in Process Innovation and Institutional Innovation. Henry Ford did not create the motorcar, but he revolutionised manufacturing by inventing the assembly line process of production. The Japanese improved on this by creating the Just-in-Time assembly process, without famous engineers but through workers on the shop floor.
In my view, Genghis Khan must be one of the greatest of institutional innovators, because he created innovative teams of warriors out of individualistic nomad rabble. His teams invented new methods of mobile warfare and siege techniques. He destroyed the old order and conquered all the way to Europe, forcing the Europeans to respond through their cultural and scientific Renaissance.
Seventh, you have to execute or implement what you want to achieve. Most of us make New Year wishes, but by the middle of the year, we would have forgotten to execute that wish, because it was too difficult, inconvenient or we got distracted by something more exciting. Execution is tough, because it creates what Schumpeter called “creative destruction”.
There is no gain without pain. No wonder most of us do not achieve what we desire. The “last mile” problem is the most difficult and painful. We all want to be Olympic Marathon runners, but we cannot finish the last mile. As Napoleon used to say, execution is everything.
Finally, we must Review our achievements, be honest where we went wrong and change for the better. The cycle of innovation begins anew. As a habit, I have always made a year-end review of what I achieved and where I failed. In 2009, I am grateful that my book From Asian to Global Financial Crisis was published. But this year, I failed in spending more time with my family.
My New Year wish for 2010 is to write a new book and spend more time with my family. Time is what we spend like water when we are young and treasure every moment when we are old. That is the cycle of change.
Happy 2010, everyone.
● Andrew Sheng is Adjunct Professor at the University of Malaya, Kuala Lumpur and Tsinghua University, Beijing.
THINK ASIAN
By ANDREW SHENG
Thomas Edison used to say that invention is 99% perspiration and 1% inspiration. What he really meant was that the 99% perspiration was spent on the process of innovation and perhaps only at the last minute could he have a mental breakthrough to create something new.
We are truly living in the age of innovation, where technology has created new ways of living and communicating that we could not have envisaged. Thirty years ago, when the TV series Star Trek began, we saw Captain Kirk flip his communicator and speak to the Starship Enterprise. Travelling in the Moluccas in the Spice Islands this Christmas, I was amazed how in the most remote islands of Indonesia, young people were communicating with their friends using the latest Blackberrys.
Yet, at Saumlaki airport, two bikers had to go out to the runway first to chase away the cows before our plane could take off. How do we create something new? The management guru Peter Drucker said that he had to learn a new craft every three years to obtain new insights into old problems. For example, he studied Japanese literature to gain understanding of how Japanese thought about problems. According to him, every innovation comes from the cross-fertilization of ideas from different fields.
INSEAD professors Kim and Mauborgne put it very elegantly by saying that you need to move out of traditional, heavily competitive areas like the Red Sea to explore Blue Oceans where there are few competitors. This is easier said than done, because breaking out of old mindsets is very painful. We would all like to play tennis like Roger Federer, but I don’t have the patience or the willpower to diet, exercise rigorously, practice and compete day in, day out.
Innovation is a process, a cycle of steps that must be rigorously followed to achieve what you set out to achieve. First you must have a Strategy or goal what you want to achieve. This is the search and browse function. It is like shopping in a supermarket. Some people begin with very clear ideas of what they want. Others browse by looking to see what attracts them.
Genghis Khan mausoleum in Inner Mongolia, China. The ancient ruler must be one of the greatest of institutional innovators, because he created innovative teams of warriors out of individualistic nomad rabble.
The second step is to Prioritise, because we must narrow down our choices. Many people have difficulty making up their minds, because they want everything and end up doing nothing. Success comes from having focus.
The third is to Incentivise. If you set a goal, you must create the incentives to achieve that, either to reward yourself or your colleagues. Incentives mean both the rewards and the punishments. People tend to forget that we fail mostly because the incentives are wrong. If you reward failure, you will get failure.
The fourth is to set the Standards. Success or failure must have benchmarks. Are you aiming for the Olympics or just the Asian Games, the local market or the global market? A small country like the Danes can create badminton champions because they start their children young and train them through competitive leagues, using world champion trainers.
The fifth is the Structure. People think that innovation comes from individual genius, forgetting that genius can only create if the ecology is right. Michelangelo grew up in an age of great artistic creativity. He learnt from great masters and had inspired pupils, as well as rich patrons. If he was Robinson Crusoe on a lonely island, no one would appreciate or discover his genius.
It also takes passion and leadership to create the right ecology for genius and originality to thrive. Most bureaucracies stifle creativity because they want everyone to think alike. The greatest universities encourage their professors and students to think out of the box.
Sixth, you have to have Process. The word ‘process’ is so boring, whereas Innovation is so sexy. This is because most people associate Innovation with Product innovation, whereas the greatest achievements have been in Process Innovation and Institutional Innovation. Henry Ford did not create the motorcar, but he revolutionised manufacturing by inventing the assembly line process of production. The Japanese improved on this by creating the Just-in-Time assembly process, without famous engineers but through workers on the shop floor.
In my view, Genghis Khan must be one of the greatest of institutional innovators, because he created innovative teams of warriors out of individualistic nomad rabble. His teams invented new methods of mobile warfare and siege techniques. He destroyed the old order and conquered all the way to Europe, forcing the Europeans to respond through their cultural and scientific Renaissance.
Seventh, you have to execute or implement what you want to achieve. Most of us make New Year wishes, but by the middle of the year, we would have forgotten to execute that wish, because it was too difficult, inconvenient or we got distracted by something more exciting. Execution is tough, because it creates what Schumpeter called “creative destruction”.
There is no gain without pain. No wonder most of us do not achieve what we desire. The “last mile” problem is the most difficult and painful. We all want to be Olympic Marathon runners, but we cannot finish the last mile. As Napoleon used to say, execution is everything.
Finally, we must Review our achievements, be honest where we went wrong and change for the better. The cycle of innovation begins anew. As a habit, I have always made a year-end review of what I achieved and where I failed. In 2009, I am grateful that my book From Asian to Global Financial Crisis was published. But this year, I failed in spending more time with my family.
My New Year wish for 2010 is to write a new book and spend more time with my family. Time is what we spend like water when we are young and treasure every moment when we are old. That is the cycle of change.
Happy 2010, everyone.
● Andrew Sheng is Adjunct Professor at the University of Malaya, Kuala Lumpur and Tsinghua University, Beijing.
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