Satyajit Das: Personal versus Personalities

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk (2011)

Jonathan Fenby (2012) Tiger Head, Snake Tails: China Today, How It Got There and Where It is Heading

Robert Frank (2011) Who Repo’d My Jet: the manic millionaires, and why they’ll lead us to the next boom and bust

John Coates (2012) The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust

Personal – relating to an individual or what serves the interest of that individual. Personality – distinctive assemblage of qualities which defines an individual, frequently in modern life conflated with celebrity. These three books deal with the ‘personal’ and ‘personality’ in the financial world.

In an increasingly crowded list of books purporting to explain China, Jonathan Fenby’s Tiger Head, Snake Tails is a standout, providing very personal insights into the Middle Kingdom rarely found elsewhere.

Mr. Fenby is in an excellent position to write about the subject, having been the Editor of the South China Morning Post in HK for many years. His resistance to the newspaper following an overt pro-China line as demanded by the owner may have been a factor in his contract not being renewed. He continues to be closely involved with China, heading a team at the research service – Trusted Sources. His direct knowledge and immediate experience provides the substance that defines the work.

Most books on China are polemical tracts, rooted in Sino-philia or Sino-phobia, sometimes both simultaneously. Sino-philia believes in the Chinese “model”. For example, The Economist asserts that: [Chinese leaders make] “rational decisions that balance the needs of all citizens over the long term”. Francis Fukuyama and Nancy Birdsell believe that “China can avoid the delays of ‘a messy democratic process’ because the bureaucracy at its upper levels is capable of managing and coordinating sophisticated policies”.

Sino-phobes fear that China is hell-bent on conquering the world, capturing its resources and enslaving its peoples. They hold China accountable for everything, including the unsolved death of Marilyn Monroe and the mysterious forces behind the assassination of an American president in Dallas.

The discussion and binary opinions are driven by the fact that economically and politically China is being called upon to play a central role in the world. The debate is focused on what the world requires rather than what China sees as its own interests and a realistic assessment of its abilities. Treading a nuanced path, Tiger Head, Snake Tails develops the thesis of an emerging country, seeking to deal with complex problems of economic development, social structure, political system and the unshakeable legacy of its history.

Nothing illustrates this better than Chinese income levels. Despite its status as the world’s second largest economy, China ranks 98 out of 181 nations in the World Bank’s ranking of GDP per capita. Based on forecasts, wealth per capita in 2016 will be only equivalent to US$13,700 against $57,300 for the US and US$48,000 for Germany. This does not take into account the massive income inequalities in China, where a large portion of the population lives on less than US$1.25 a day.

Mr. Fenby outlines China’s challenges, giving detailed examples and evidence. For example, to test the sustainability of its debt fuelled investment model, Mr. Fenby examines the Chinese Railway system, now one of the most extensive in the world.

The Ministry of Railways employs 2 million people, has its own 70,000 strong police force and a court system employing 7,000 staff which includes judges with no legal training. It leader –Liu Zhijun- was a cadre, whose major qualification was that he was Deng Xiaping’s bridge partner.

The very fast trains are based on design by Kawasaki of Japan. The Chinese have “indigenously re-innovated” the technology and now compete with Kawasaki to build high speed trains throughout the world.

The route structure is erratic. The first super-fast train route puzzlingly connected Guangzhou and Wuhan (where Liu hailed from) rather than one in the more obvious North East. The trains were found to be faulty and their speed (rated at 300 KPH) has been throttled back in the interest of safety. A large number of faults have been discovered, including bridges built of gravel and garbage rather than cement. Liu himself and his deputy were dismissed for corruption and bribery. During this period, Chinese Railways debt tripled to around US$300 billion.

The example is not isolated. Mr. Fenby painstakingly documents the endemic inefficiency, environmental abuse, lack of intellectual property rights, weak economic and managerial foundations of the economy, lack of rule of law, absence of rights, injustice, corruption and social problems.

Mr. Fenby’s analysis highlight that any view of China through the prism of Western constructs is flawed. Central to China is the role of the Chinese Communist Party (“CCP”), which Mr. Fenby compares to the secretive, insular world of imperial rule that dominated China throughout much of its history. As Richard McGregor documented in his work The Party, the CCP plays a vital part in every aspect of Chinese life. CCP cells make most important decisions in all enterprises, even those that are publicly owned and have significant foreign shareholders.

China’s economic, social and political systems are the product of its own history, as interpreted by the CCP. The central belief is that the fate of the CCP and China are intrinsically the same. Fear of instability and uncertainty form the background to every decision of a leadership that despite its outward appearance is deeply insecure.

Comprehensive and provocative, some readers may find the organisation of the book idiosyncratic. Some may find its density challenging. But the book’s detail and richness is its strength, eschewing pat simplistic explanations. The text will reward carefully reading and re-reading.

Tiger Head, Snake Tails is an antidote to the shallow narratives about China found in airport shops, which frequently form the basis of policy debates at least on TV chat shows and in business circles.

Robert Frank, a journalist for the Wall Street Journal and author of the Richistan, takes the personality route. Who Repo’d My Jet is a slim volume of stories about people who belong to the nouveau rich whose wealth –mansions, cars, private jets etc- was eviscerated by the events of 2008.

Mr. Frank has compiled a well written, breezy set of tales whose dominant theme seems to be: got rich, mainly through luck and a generous dose of borrowed money, mistook the source of success as genius, spent too much money on various toys mainly to impress who knows whom, became overextended in business, investments, personal lifestyle or all of the above, then the bank called the loans in causing the entire pack of cards to collapse.

While diverting and at time entertaining (the description of Aspen’s annual Gatsby Party and phrases like seasonal homes which are “cruise ships on land”), Who Repo’d My Jet suffers from the shallowness of its analysis, paralleling the people portrayed.

Mr. Frank’s attempt to develop an over-arching theme –that the rich are important because they manically create wealth, booms and busts- is not convincing and the evidence he relies on does not support the conclusions.

The book lacks the power of the apocryphal short exchange between F. Scott Fitzgerald and Ernest Hemingway. Included in The Crack-Up, compiled by Edmund Wilson. as entries from his notebooks, Fitzgerald is quoted as saying: “The rich are different from you and me”; to which, Hemingway responds: “Yes, they have more money.” Who Repo’d My Jet is Schadenfreude stretched thin.

The Hour Between Dog and Wolf is about explaining the trader’s personality via his biology. It wades into the “nurture versus nature” debate, trying to relate risk taking behaviour in financial markets to neurobiology, in particular to testosterone levels of traders.

The author John Coates is a former trader at Goldman Sachs, Merrill Lynch, and Deutsche Bank who has earned a doctorate in neuroscience from the University of Cambridge. His thesis is simple. Male traders perform better when they have elevated testosterone levels. As prices increase and decrease, traders experience chemical changes. Euphoria caused by boosted testosterone levels from successful trades drives higher risk taking. Losses or reversals increase levels of the defensive steroid cortisol leading to risk-aversion.

While a provocative and well argued thesis, Dr. Coates’ arguments are thin as the experimental data relied on is limited at this stage. Dr. Coates also draws a distinction between the masculine world of risk-taking traders and the more feminised world of asset managers. The evidence presented is less than convincing. Most importantly, the analysis disregards environmental and cultural factors, documented by ethnographers such as Dr. Karen Ho in Liquidated. This includes matters such as incentive structures, risk control systems and peer performance pressures.

Dr. Coates’ thesis is not all encompassing. For example, cautious investors and traders also make and lose money, suggesting that biology cannot be the only driver. John Maynard Keynes’s “animal spirits” may not be so easily reduced to a series of simple chemicals and their effects on humans.

The book proposes positive steps that banks and fund managers can take to manage risk. Some of the proposals are well known – changing bonus systems and implementing mandatory cooling-off periods. Dr. Coates proposed hiring more women and older men. But Dr. Coates is coy about the potential for artificially manipulating the biology of traders and investment managers to improve performance.

It is not hard to imagine a future where traders will need to have their supplements –uppers and downers (in the old parlance)- at hand to improve trading, similar to the experience of competitive sports where drugs have become relatively commonplace to improve performance. It is also not hard to imagine internal risk mangers and regulators insisting on regular monitoring of hormone levels as part of the compliance regime, with attendant cheating.

This is not far fetched. Already, organisations are adopting unusual initiatives to gain a critical edge. A trader at Steve Cohen’s SAC Capital was allegedly forced by his boss to take female hormones and wear articles of women’s clothing at work, leading to a sexual relationship between the men, one of whom was married. The bizarre behaviour was to eliminate the trader’s aggressive male attitude, making him a more obedient and detail-oriented trader.

One suspects that neurobiology of the business cycle and all things financial and economic will become a burgeoning field. Like Freakonomics, the quack application of a discipline or cognitive construct to everything and everybody may be entertaining but it may be too simple to provide a complete explanation. However, it does offer a convincing excuse to losses akin to the dog ate my homework – “it was beyond my control, it was my hormone levels!”

Whether personal or personality driven, these books share complicated titles.

Tiger Head, Snake Tails refers to a Chinese saying with complex multiple meanings. The “tiger head” is the popular views of China but the “snake tail” details of how the country operates on the ground, which will shape its future. The Hour Between Dog and Wolf refers to a French expression that denotes twilight: “entre chien et loup”. It is an ambiguous light, in which it is difficult to distinguish between a dog and a wolf. In Dr. Coates’ interpretation, it is the time when it is difficult to distinguish whether a trader has become over confident and is taking unreasonable risks. At least, Who Repo’d My Jet does not need any explanation.