Breakingviews

Review: The danger of trading machines

By Martin Hutchinson

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It’s a quarter-century since computerized program trading led to Black Monday on the U.S. stock market. A new and more advanced generation of arcane algorithms now threatens capital markets. That is the lesson of “Dark Pools,” a new book on machine-based equity trading by the Wall Street Journal’s Scott Patterson. The book is a great read – and raises an important question: could the trading machines destroy the capital markets?

Review: Bairing the strain of failed regulation

By Antony Currie The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

There is one clear and simple message from “Bull by the Horns,” Sheila Bair’s account of her five years in charge of the U.S. Federal Deposit Insurance Corp: financial regulators still need a good kick up the backside. Bair is not one to pull her punches – she delivers her poor opinion of several financial CEOs in the first couple of pages of her tell-all, and doesn’t stop there in her critiques of America’s banking system.

Review: The real way HBOS gave us extra

By George Hay The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Anyone watching British TV in 2002 will probably remember Howard from the Sheldon branch. The bald, bespectacled bank teller at a new bank called HBOS tried to attract deposits by singing clumsily adapted pop songs. The nadir of this allegedly amusing commercial effort was undoubtedly “Who gives you extra?”, a parody of the Baha Men’s “Who let the dogs out?”. Like Howard, who rapidly became a star, HBOS was trying to be something it was not. “Hubris: How HBOS Wrecked the Best Bank in Britain”, Ray Perman’s timely guide to the bank’s spectacular 2008 demise, gives a comprehensive insight into what HBOS “extra” ended up being: an extremely unamusing forced takeover, and an 11.5 billion pound state recapitalisation.

HBOS should have succeeded. At its core was the venerable, 300-year-old Bank of Scotland, which used to conduct its affairs according to two simple rules. First, back loans with deposits of even longer maturity. Second, evaluate credit risk on whether a borrower could actually keep up payments, not on the value of his collateral. These principles served BoS well. Under former bosses Bruce Pattullo and Peter Burt in the 1980s and 1990s, the bank seemed to inhabit the promised land of retail banking: firm control of costs, strong capital, and returns on equity in excess of 20 percent. It didn’t last. BoS wanted to grow more without relying on flighty and sometimes expensive wholesale funding. The search for deposits led Burt into discussions with NatWest (where he lost out to Edinburgh rival Royal Bank of Scotland), Abbey National and, finally, Halifax.

Review: Pragmatic management wisdom from the East

By Edward Hadas The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The industrial economy was developed in the West, but it is increasingly global. The same can be said of management studies. Starting with the “scientific management” of Frederick Taylor in the 1880s, the field has been dominated by writers trained in the rationalist tradition of the European Enlightenment. Ikujiro Nonaka and Zhichang Zhu think that Eastern philosophical traditions, in particular the teachings identified as Confucian, offer an alternative perspective.

The two professors, one Japanese and the other Chinese but long established in the UK, make their case in “Pragmatic Strategy: Eastern Wisdom, Global Success”. The book offers a blend of case histories, cross-cultural philosophical analysis and suggestions for managers. The mix works nicely.

Review: “Bond Girl” goes for broke, ends up short

By Megan Miller The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Erin Duffy’s “Bond Girl” does little to shed light on the mechanisms behind the financial collapse in 2008, although it does uphold the copious clichés about the years of excess leading to the downfall. Snapshots of sexual harassment, over-indulgence and trigger-happy traders are all par for the course in this oft-told “Devil Wears Prada” version of a female analyst’s first years on Wall Street.

While at first glorifying the world of Cromwell Pierce, the imagined mega-bank where the protagonist, Alex, is lucky enough to land a job as an analyst in her first year out of college, the young ingénue quickly becomes disillusioned by the demands of her job, even as rewards in the form of cash bonuses come in quickly. At the office Christmas party, after getting in a spat with a managing director over whether she is desirable enough for a bathroom quickie, she quickly learns the fastest way to the top for women who are at the bottom of the Wall Street pecking order.

Review: the two-sidedness of a richer China

By Wei Gu The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

For multinationals, “The End of Cheap China” is a mixed blessing. Shaun Rein, an American marketing consultant based in Shanghai, has written an interesting book with that title. The good news is that customers can afford to pay more. The bad news is that they’re increasingly reluctant to spend their higher incomes on anything multinationals have to offer.

Rein, who has advised Apple and restaurant operator Yum on their China strategies, has some useful advice. To start, China should be treated as a top trend-setting market. Apple inadvertently encouraged a grey market in its products by delaying the Chinese roll-out of new products. Porsche did that, launching its Panamera sedan in China before the United States. China is now the luxury carmaker’s second-largest market.

Review: Why Uncle Sam fails to fix his finances

By Rob Cox The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

To understand the current state of the U.S. federal budget – and the policies the next president will be forced to pursue from day one – there are two pieces of required reading. The first is a two-year old wonky white paper entitled “The Moment of Truth,” by the National Commission on Fiscal Responsibility and Reform. The second is “Red Ink,” David Wessel’s handy new guide to understanding the politics of the federal budget.

If the race between President Barack Obama and former Massachusetts Governor Mitt Romney is going to be about anything substantial, it should be a technocratic debate over how to fix the troubled balance sheet of the American republic. “The Moment of Truth,” otherwise known as the Bowles-Simpson plan for the names of its lead co-authors, and Wessel’s book offer two sides to the same coin. The first presents the danger to American power and prosperity from failure to address fiscal issues and proposes specific policy solutions. Wessel’s book explains why even the simplest and least painful of these will be so incredibly difficult to pursue.

Review: How the West both lost and won Asian minds

By Edward Hadas The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

“What is the cause of the poverty, indigence, helplessness and distress of the Muslims, and is there a cure for this important phenomenon and great misfortune?”

The question was asked in 1880 by the Persian intellectual and activist Jamal al-Din al-Afghani. Around that time, thinkers from India, China and other lands which had been literally or metaphorically colonised by the industrial nation-states of Europe were asking similar questions about their own degraded peoples. In “From the Ruins of Empire”, Indian-British writer Pankaj Mishra provides a lively narrative of the discussion about how to respond to “the West”. As he points out, the debate continues today.

Review: Not another BRIC in the wall

By Katrina Hamlin The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

BRICs is by no means an obsolete tag. The acronym coined by Goldman Sachs economist Jim O’Neill in 2001 continues to operate as both a useful shortcut and a fertile provocation to compare and contrast the world’s four biggest developing economies: Brazil, Russia, India and China. But like all neat catchphrases, there is a danger that one day it will veer into cliché. It’s already easy to over-associate the term with all emerging markets.

Ruchir Sharma is anxious to prevent jargon freezing into unassailable truths. Individual countries are distinct and diverse, even at comparable stages in their economic evolution. This very simple idea informs Sharma’s approach in his new book “Breakout Nations: In Pursuit of the Next Economic Miracles,” in which he identifies which developing countries have the potential for stable growth worthy of investor attention.

Review: Banks bet their lives on neurochemistry

By Martin Hutchinson The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Trading is mostly about neurochemistry. That is the persuasive argument of former trader and current neuroscientist John Coates in his book “The Hour Between Dog and Wolf”. The implication is clear: men have too many of the wrong hormones to be trusted.

Coates believes traders have similar neurochemistry to elite athletes. Like these sportsmen, true short-term traders do not make great use of cognitive abilities, because those reactions are too slow; instead their responses are guided by subconscious fast reactions. In less scientific terminology, they follow carefully honed instincts rather than methodical reasoning. Instincts, though, are influenced by hormones. In particular, successful traders have higher levels of testosterone than their unsuccessful peers. Coates found that both risks and returns were higher for traders with high testosterone levels.