27 January, 2017

Quora Answer: If Interest is Haram in Islam, How do Islamic Banks Make Money to Operate?

The following question was asked on Quora and answered on the 28th November, 2015.


Answer: Firstly, it is not interest that is haram, but riba’.  Depending on the opinion of the scholar and the understanding of banking, interest may or may not be riba’.  For something to be considered riba’, usury, there has to be an element of zhulm, oppression.  And one of the forms of zhulm is creating wealth from nothing though systematic advantage.

If you deposit money in the bank, and the bank uses it and grows its value, and grants you a return in the form of interest, it may not necessarily be haram.  Some would argue that the fact that the bank guarantees a fixed return on something that is not fixed is itself haram.  But we must consider that the bank has already factored in its projections and return on investment.  Whatever the bank pays out in interest is miniscule compared to its returns.  It can be argued then, that this interest is no necessarily riba’, but this is an issue of ikhtilaf.

Here is an example of real riba’ that people do not realise.  If, for example, I were to ask you to lend me $100, and you only had $70, you cannot possibly lend me $100.  That money simply does not exist and you cannot lend beyond what you possess.  The bank has no such limitation.  Depending on the Basel II or III regulatory framework, a bank need only have 11 to 17% of the money it lends out.  That means, to ‘lend’ you $100, the bank need only have $17.  The money is just numbers on a programme.  It does not physically exist.  That is riba’ on a massive scale.

Coming to Islamic banks, or shari’ah compliant banks, the brutal truth is that they are not truly Islamic.  Which ‘Islamic’ bank can afford, in the current economic climate and regulatory framework, to back 100% of its loans?  The entire idea of Basel III is to eventually move towards that, but we are far away from that.  So the actual question should be: are ‘Islamic’ banks actually Islamic?  And the answer is no.

On the second part of the question, banks do not make the bulk of their money from charging interest.  Whatever they earn from their loan portfolio is negligible compared to other sources of income.  The primary source of income for most banks is their core deposits and their wholesale deposits.  Banks may negligible interest for this ‘capital’ which they then lend out, use in transactions and manipulate LIBOR and other interest rates to generate income.  The breadth of activity the banks can do with deposits to generate income alone would stagger the average person who is not involved in the financial sector.

Banks also earn through their investment arm.  There are entire books on different strategies, hedges and fact that the international regulatory framework is entirely inadequate in policing what goes on.  This also includes services that banks never advertise but they all engage in to an extent, either wilfully or by pretending they do not know: fund transfers for tax avoidance and money laundering.

And finally, banks raise capital through share placements.  Shareholder equity is an extremely important part of the equation.  Share issuance is relatively cheap and all the costs can be kept internally if required.  Also, banks can issue bonds, corporate papers if they do not want to dilute existing holdings.

So, do ‘Islamic’ banks do this?  Absolutely.  ‘Islamic’ banks are no different from normal banks.  They engage in the same activities but put a veneer of being shari’ah compliant by calling these same things by different names and using fancy jurisprudential terms such as mudarabah and mashirkah.  ‘Islamic’ banking and finance is an exercise in corporate imaging and branding.  It is not real.


26 January, 2017

Subsidising the GIC

Singapore needs to relook and adjust its economic model because what we have neither sustainable nor conducive for future growth.  I took data from here Singapore Average Monthly Wages from 1989-2017, Labour, Employment, Wages and Productivity and Singapore Statistics: Employment and Labour.

Assuming an average wage from the period of 1980 to 2010, a period of 30 years, which is one generation.  And assuming a CPF contribution of 4%, instead of 2.5% because I am assuming that, like most Singaporeans, the Ordinary Account is used for housing, leaving the Special Account.  Thus, I am being conservative here, and assuming a best-case scenario, disregarding a weighted average.  This means the average Singaporean worker earned just over $800,000 in wages, and contributed just over $270,000 in CPF.  With the accumulated interest on the CPF, that is a total just shy of $500,000.

In this scenario, the CPF functions as a forced savings mechanism.  Even at 4%, it does not keep pace with inflation, meaning that the average Singaporean, keeping his money in the CPF, is actually making a loss in the long-term.

The accumulated funds in the CPF, the CPF monies, are invested by the CPF Board in Special Singapore Government Securities, SSGS11, that are issued and guaranteed by the Singapore Government.  As per Government Investment Corporation of Singapore FAQ, GIC, along with MAS, manages the proceeds from the Special Singapore Government Securities (SSGS) that are issued and guaranteed by the government which CPF board has invested in with the CPF monies.  So, while the CPF monies are not directly transferred to GIC for management, one of the sources of funds that goes into the government's assets managed by GIC is the proceeds from SSGS.  The coupon rate of this is between 2 to 3%.  I am doubtful that all our CPF is invested in these bonds; the numbers, even assuming 2.5%, do not add up.  There is a lot of secrecy here, much of it for good reason, but I believe it is safe to assume that all our CPF monies are invested through GIC.

Now, I have no doubt that GIC is competently run.  The average long-term investment has a return of between 6.5 to 8% cumulative.  If we take it at about 7%, converting the GIC reported numbers from USD to SGD, the average Singaporean would have earned about $800,000.  That is $300,000 more than what he saved in that period through the CPF.  So, all these average Singaporeans are now in deficit of $300,000.  They saved $500,000 in that 30-year period, and GIC invested that money and earned $800,000 from each of them.  If we take it as “management fees” for accumulating and investing that money on behalf of us, that is 37.5%.  Hedge funds do not charge that.

A system has been created here where the average Singapore worker is effectively subsidising government investments.  The worker is the commodity, a source of cheap capital.  This structure is inefficient.  The problem with this cheap capital is that it is not cheap in the long-term.  A lot of money has been locked away in a lower yield investment that did not keep up with inflation, impoverishing a generation.  Over time, these funds have been siphoned up, creating a wealth gap.  Perhaps it is time to consider scrapping the CPF as we know it, and allowing Singaporeans to be direct shareholders of the GIC.  This would effectively remove one layer of management cost, put more liquidity into the system, and create greater flexibility in how Singaporeans manage their money.  If the government expects us to trust them, they should also trust us.


25 January, 2017

Quora Answer: The Best Way to Invest $500k

The following question was asked on Quora and answered on the 27th October, 2015.


Answer: There is no real “best” way.  “Best” depends on your investment horizon, risk appetite and investment goals.  Also, it is dependent on your geographic location and how you want to spend the money you earn, the liquidity of the securities.  Assuming that you want to put all that money in, there are several types of investments that you can consider depending also on their availability.

The most conventional, and everyone is some form of an “expert”, would be to put that money in the market.  These include various types of funds, and both asset and debt securities, including derivatives.  Whilst there is a tremendous potential for returns, there is also a good chance you can lose everything, particularly if you get involved in leveraged products such various forms of derivatives and CDOs.  The safest way is to put the money in funds instead of directly putting it in any security.  This allows you to spread the risk so that a sudden turn in the market in one area will not result in substantial losses on your part.

Some people would recommend property or land.  However, you must note that unless this is REITs, and even with them, liquidity is an issue; you do not have the option of unscheduled withdrawals without the risk of substantial loss.  Also, unless you know property and have experience transacting deals, I would recommend that you avoid it.

There are investment banks that specialise in HNW products and with $500,000, you would qualify.  In general, however, we must remember that the banks are not to make you money; the banks are there to make themselves money – with your money.  The returns on the first two will substantially outperform any product a bank offers for the $500,000 bracket.  Even if the bank manages your funds and puts it in a fund or an investment-linked product, they charge a substantial management fee.  You would be better off dealing directly with the fund managers or the insurance company.

Insurance companies have special products for HNW clients that offer substantially better returns than what they offer other clients.  A single premium of $500,000 for example, creates an immediate estate of approximately 4 times that, and is still liquid in and off itself since you can leverage off the policy loan and put the money elsewhere to earn from two sources.  The money in that single premium is also guaranteed an annual return of between 4 to 5%, and a non-guaranteed of substantially more.  Essentially, it will always make money.  This is as close to capital guaranteed as you can get.

Pulling off such an investment feat, however, is not easy.  Not every financial adviser or insurance agent can structure such a product, since it requires experience and knowledge of different categories of financial products.  But if done properly, you have a relatively low risk investment than returns above market.  It will not be spectacular since “spectacular” means high risk, but it will be comfortable.

Another form of investment that you can only do if you know the people who have those sorts of contacts would be fine art.  This allows you an opportunity for guaranteed high gains in a short investment horizon.  Based on “minimum” value gains presented by international appraisers, such art can go up by at least 65% in a quarter.  For those investors able to hold it for a longer investment horizon, they can expect to see increases in value of 200 or 300% in 12 to 18 months.

This is an excellent opportunity for HNW clients to invest for various reasons.  The appreciation in value is guaranteed and over 50% in 6 months.  The certification is provided and tradeable as securities.  There is a ready secondary market.  There is tax exemption for donations to public institutions in many countries up to 300%.  This make the investment liquid.

One final aspect of investments that many people forget is taxation.  Depending on where you are, capital gains may not be taxed, so it is important to know your tax liability wherever you are before putting your money in something.  It is also important to know about that there are different levels of management fees, and it is important to understand where you can cut your costs there.  For example, a bank adds a layer of management fee as opposed to going direct to a fund.  Or an insurance plan, whilst very attractive, has a mortality charge that increases with age.  To get around this, you can consider buying the plan for a younger person of insurable interest and make yourself a member, for example.


24 January, 2017

Singapore's Public Debt: Asking the Right Question

Public debt is defined as the debt that the government owes.  As of end 2016, our public debt is approximately 105% of GDP.  A significant portion of that public debt issued by the Central Provident Fund, guaranteed by the Singapore government.  The question that should be asked, however, is not who holds the debt, which is the question most people ask.  Even if almost 30% is owed to CPF, CPF is a captive investor and still part of the government.  The question that should be asked is what happened to the money that was borrowed?

Public debt issued results in funds available that must now be spent or invested.  That money has to go somewhere.  We know that since 1990, the government realised cash flow from increasing borrowing to about $250 billion.  This is in addition to a public surplus of $260 billion.  Between 1990 to 2010, this additional public debt and surplus was about 16% of GDP.  The interest on this is also revenue, and we have not even factored that in.  So how much are we talking about?  This is, at least, half a trillion Singapore Dollars.  As per Singapore GDP Data, our GDP was worth USD 292.74 billion in 2015.  That is still less than half a trillion Singapore Dollars.


If we calculate the accumulated realised free cash on the claimed average annual GIC growth of 7% from 1990, we would arrive at just over a trillion Singapore Dollars, more than double the half a trillion Singapore Dollars.  Even a 1% accumulated growth is more than that half a trillion Singapore Dollars.  Properly managed, a 10% ROI is very much achievable, leaving us with $1.5 trillion.

Coming back to that $500 billion, however, people should ask where it is.  Either that money was lost in bad investments, which I am inclined to believe, or there are assets under government control that are off public records, which I do not believe because it is extremely difficult to keep that level of funds hidden away for so long.  There are no such additional assets under Temasek Holdings or GIC that come close to that valuation.


23 January, 2017

How a Gangster Rapper Hustled a Corporation & Became a Billionaire

Beats Electronics LLC is the subsidiary of Apple Inc. that produces audio products.  The company was founded as Beats by Dr. Dre was formally established as a company in 2006.  It was founded by well-known music producer and rapper, Dr. Dre and former Interscope Geffen A&M Records chairman Jimmy Iovine.  Beats Electronics LLC has a US market share of at least 60% for headphones priced over US$100., and an estimated market valuation of US$1.5 billion.

The story of how Beats by Dr. Dre became Beats Electronics LLC is the story of how a gangster from the streets outmanoeuvred two major corporations for market domination.  In short, Dre hustled and succeeded.

The official story on Wikipedia and the company web site is that Dr. Dre and Jimmy Iovine thought Apple’s earbuds were inadequate.  They said that if their music was going to be pirated, then people should, at least, listen to it with the best equipment possible.  Allegedly, Dre said to Iovine, “Man, it’s one thing that people steal my music; it’s another thing to destroy the feeling of what I’ve worked on.”  This is the publicity spiel.

The story of the rise of Beats Electronics LLC is the story of the demise of Monster Cable.  Monster Cable was founded by Noel Lee in the late 1970s, and made its name in overpriced cables and litigation.  The company was a corporate bully.  Monster sued everybody that had “Monster” in its name.  According to the US Patent and Trademark Office and court records, Monster Cable has gone after a mini-golf course, a thrift shop, a used clothes shop, Walt Disney Co. and Pixar Animation for their film, “Monsters, Inc.,” Bally Gaming International Inc. for its Monster Slots, Hansen Beverage Co. for a Monster Energy drink and even the Chicago Bears, whose nickname is “Monsters of the Midway.”  This aggressive legal strategy did not make them any friends.  And people who have no friends, no matter how big, are vulnerable.

Monster Cable did the actual engineering of the headphones for Beats by dr. Dre.  Monster Cable had built its market domination more on marketing than product quality.  Its market share was built on the uncertain foundations of brand familiarity.

As an extension of their aggressive litigation strategy, Monster Cable was notorious for claiming patents on basic technological concepts.  An example can be seen in the response from Blue Jeans Cable, from the 28th March, 2008: “Monster Cable recently wrote to us claiming that we had infringed various design patents and trademarks owned by it or by its intellectual property holding company in Bermuda, Monster Cable International, Ltd.  We reviewed the patent and trademark filings submitted by Monster Cable, and found that Monster’s claims were completely frivolous - so frivolous, in fact, that there was something amusingly appropriate about the fact that Monster's letter had arrived in our mailbox on April Fools’ Day.”

In all this, Monster Cable’s products were notoriously no better at doing their jobs than coat hangers, as can be found in this example: Audiophile Deathmatch: Monster Cables vs. a Coat Hanger.  And when there are articles like these, all the litigation in the world is not going to protect the brand.  The cables were copper wires sheathed in plastic.  There is only so much that can be done to make them work better.  The best marketing does not change basic physics.  But that marketing cost was passed on to the consumer, raising the price of a mediocre product exorbitantly.

Thus, Monster Cables had painted themselves into a corner and needed Beats by Dr. Dre more than the latter needed it.  Monster Cables thought that the hype of a celebrity endorsement and the promise of further celebrity endorsements by contacts in the entertainment industry would overcomes the negative image it was beginning to develop.  Unfortunately for Monster Cables, Dre and Iovine know exactly who held the cards here.  I would not be surprised that these two had identified this weakness and played Monster Cables from the beginning.

The Beats headphones were terrible.  To quote a passage in How Dr. Dre’s Headphones Company Became a Billion-Dollar Business, Burt Helm wrote that Iovine said, “We got dumped on by audiophiles on Day One.”  He continued, “We wanted to recreate that excitement of being in the studio.  That’s why people listen.”

The story here is a that Beats headphones “were not tuned evenly, like the usual high-end headphones.  They were tuned to make the music sound more dramatic.”  “More dramatic” is an euphemism for “they cranked up the bass.”

It was a rubbish product, but consumers fell for the hype, and from its launch in 2008, the company grew exponentially.  In 2010, Taiwanese consumer electronics manufacturer, HTC, bought out Beats by Dr. Dre for USS309 million.  This buy out is noteworthy because, under its terms, Dre and Iovine eventually actually gained executive control of the company from Monster Cables: After HTC Sale, Dr. Dre & Jimmy Iovine Gain Control of Beats Headphones.

By the 23rd July, 2012, HTC sold half its position to Dre and Iovine, allowing them to control 75% of Beats by Dr. Dre, leaving HTC with the remaining 25%.  Not only that, HTC revealed that it had lent Beats by Dr. Dre US$225 million.  In effect, Dre and Iovine bought those shares from HTC with money they borrowed from HTC through Beats by Dr. Dre, and then loaded the liability on the company they now controlled.

With HTC, themselves a manufacturer, invested into Beats by Dr. Dre with a combined stake of almost half a billion in both equity and debt, Monster Cables were no longer needed.  Monster were understandably unhappy with this and agitated for a better return on their investment – greater market visibility and a substantial payout.  In response, Beats by Dr. Dre ended their partnership with Monster Cables: Monster Will No Longer Make Beats Headphones.

On the surface, it looked counterintuitive, but it was a calculated move.  Monster Cables did not own the rights to a single drawing, idea or even the diagrams for the plastic parts: The Exclusive Inside Story of How Monster Lost the World.  From the very beginning, Monster Cables were outmatched.  When Kevin Lee, son of founder, Noel Lee, went to Los Angeles to negotiate, he had only a bachelor’s degree, no business experience outside of working for his father and no legal support.  He went into a meeting alone, against two men and an entire corporate team.  And in their desperation to enter a new market before their old one collapsed, got into a partnership where they built a business for a rival for free and never realised it until it was too late.

A few months later, Dre and Iovine took advantage of HTC’s financial struggles and bought the remaining 25% from them for US150 million.  Considering the market share and the actual value of Beats by Dr. Dre, this was a bargain.  Dre and Iovine had full control of the company now, which was the next part of the plan.

Ending the agreement with Monster Cables cost them hundreds of millions, and they did not take it kindly.  Considering their litigation history, they predictably tried to sue.  Before the case could go to court, in January 2014, Beats by Dr. Dre revealed its streaming music service.  This was the business they actually set out to build, instead of questionable headphones.  It was a hit with critics, and its success brought a bigger fish to the table: Apple.  Before June 2014, Apple agreed to buy Beats by Dr. Dre for US$3.2 billion, making Dre and Iovine billionaires, and changing the company name to Beats Electronics LLC.

Monster Cables filed a suit, claiming, among other things, that Beats by Dr. Dre stole proprietary headphone technology, that Beats by Dr. Dre unilaterally ending their partnership was illegal, and that Monster Cables were entitled to a portion of the billion-dollar Apple deal.

Here, Monster Cables had not considered the consequences of its actions.  It was outplayed, and still refused to accept that it was outplayed.  Apple was brutal.  Monster Cables had its rights to manufacturing Apple’s products revoked: Apple Revokes Monster’s Authority to Make Licensed Accessories.  How bad is this?  Consider this: Apple Revokes Monster's 'Made for iPhone' License Following Beats Lawsuit, where “According to Monster, 900 of its more than 4,000 products produced since 2008 have been made under the MFi program, and the company has paid out more than $12 million in licensing fees since that date.  Monster lawyer David Tognotti says the move is excessive and ‘shows a side of Apple that consumers don’t see very often.’

David Tognotti, the man who justified Monster Cable’s litigation excesses against smaller businesses, finally said, “Apple can be a bully.”

On the 30th August 2016, not only did Monster Cables lose its suit against Beats Electronics, Beats Electronics countersued for legal costs.  And this is how a hustle works on a massive scale.


22 January, 2017

Quora Answer: Do Companies Have to Show Who Owns Their Stock?

The following question was asked on Quora and answered on the 22nd January, 2016.


Answer: This depends on many factors.  Firstly, is the company listed since this is likely a listing requirement.  Not all companies are listed, and not all listings require this.  Mainboard listings certainly require some form of disclosure, perhaps the top twenty main shareholders, or if there is a potential conflict of interest.

This also depends on the local registration laws.  If it is simply limited liability, this is not a factor.  Even if not, there may develop a situation where a company needs to disclose the identity of their major share owners, such as when required by a court of law, or when there is a merger, for example.  Aside from these, no, a company is not particularly required to show who owns their stock.


19 January, 2017

Quora Answer: Where Can I Get 20%+ ROI on $200,000

The following question was asked on Quora and answered on the 29th November, 2015.


Answer: To earn such a massive return, you will need substantially more than $200,000.  $200,000 is a pittance in investment.  And there is no such thing as a high return with minimal risk.  There is no free lunch.  Being an accredited investor is not a requirement.  If you have enough money and you are willing to invest, there are many people out there who are willing to work for you.

If you have $200,000, and if you have the contacts, you can consider buying modern art.  They allow a guaranteed high gains in a short investment horizon.  Based on ‘minimum’ value gains presented by international appraisers, properly executed, the art will appreciate by at least 65% in three months.   There is a 25% increase in a week.  For those investors willing to hold on slightly longer, the art increases in value of 200 or 300% in 12 to 18 months.

You do not even need to take delivery of the piece.  What you really want is the documentation certifying authenticity, and the appraiser’s report.  Keep the piece with the gallery for it to be exhibited.  This generates interest and provides a ready secondary market.  Sell when you have a suitable offer and move on to the next piece.  This is an excellent opportunity for HNW clients to invest for various reasons.  The appreciation in value is guaranteed and over 50% in 6 months.  The certification is provided and tradeable as securities.  There is a ready secondary market.  The tax exemption for donations to public institutions in Singapore and elsewhere is up to 300%.  The prices are locked in at the time of sale.  The buyer can put in 50% of the sale price and cover the rest later.

This is not something I offer most of my clients since they must fit a certain profile.  This is only for sophisticated investors with funds to spare, who are already diversified.  If you are interested in this, you need to find someone who has direct contact with the artist or his network.