Josh Reviews Everything

In the eighties, it was Aussie farmers. In 1998, it was Indonesian noodle makers. In 2008, it was Icelandic car-buyers and Chinese steelmakers. In 2010, it was Hungarian homeowners. In 2011-12, it’s Indian car-makers. Yep, foreign currency loan explosions are back.

In not-unrelated news, here’s a rather good IMF paper on the spate of leveraged-FX-hedging EM corporate blowups in 2008, and what could be done to prevent them in future. (The most alarming is the inverse leveraged snowball AUDJPY CCS – look on page 14 – that ended up locking in an AUDJPY spot rate of 600. Not a typo: six hundred.)

The buried lede in today’s news seems to be the rapid collapse of the Iranian rial. The official central bank peg is currently USDIRR 11,240, but the black-market rate has been slowly ticking higher for months – and in the last few days, the collapse has accelerated.

The black-market rate was already north of 17,000 a couple of weeks ago, according to Reuters, and reports from inside Iran are saying that the rate has skyrocketed from 18,000 last Wednesday to 20,000 on Saturday and 23,000 on Monday. (This may ring some bells for long-time readers.)

I wouldn’t be entirely surprised to find that Mahmoud Ahmadinejad is running the printing presses Gideon-Gono-style – and I think the reason Iran’s ratcheting up the anti-sanctions rhetoric is that their economy is imploding.

This could get quite interesting.

“…and then in October, it all suddenly… died.”

The Aussie retail sector has been in dire straits lately. The economy is chugging along nicely – GDP growth is running in the mid-to-high 2s, inflation is in the mid-3s, and terms of trade are at an all-time high – but you wouldn’t know it if you looked at the shopping streets of Melbourne.

The strip of Little Collins Street between Russell and Swanston has always been the best place in Melbourne for quality Australian-designed menswear. It’s never been cheap – AUD $100-200 for a shirt, that sort of thing – but it’s the sort of clothing that appeals to younger buyers with plenty of disposable income, and it’s always been a thriving strip of shops… or it was, until three months ago.

Since then, the entire strip has abruptly imploded.

Satch (one of the biggest and best-known names) and Genae have collapsed into administration. Verve and Aquila are posting “going-out-of-business” signs. Every other shop is advertising discounts of anywhere from 25-80%, but they were all completely empty – and this on a Thursday afternoon after work, with the Australian Open in full swing just half a mile down the road.

I asked a shop assistant what was going on.

“Well, things were going well for us earlier this year – and then in October, it all suddenly… died. After Satch collapsed, nobody’s been coming in, and everyone’s struggling. A year ago, people would’ve been like ‘I’ll go in, pick out five things, and I’ll just buy them’. But now everyone’s scared: it’s not that they don’t want to spend $150 on a shirt, it’s that they don’t want to spend anything at all.

“We’re doing okay, because we’re just new and we’re starting to build up some customer loyalty. But the other guys, the bigger guys – they’re really in trouble.”

The problems in Australian retail aren’t just limited to the mass-affluent crowd. JB Hi-Fi, Australia’s most successful electrical retailer, dropped a surprise profit warning just nine days before Christmas. Big department-store chain Myer has been struggling for months.

But the collapse of established groups like Satch indicates that the trouble in Australia’s retail sector is getting worse. Combine this with the dubious employment numbers – the big takeaway from today’s number is that job growth in Australia has dropped from +300,000 in 2010 to zero in 2011 – and it’s hard to escape the conclusion that the Aussie economy is starting to struggle.

Unless you read the Straits Times (and my deepest sympathies if you do), Sunshine Empire might be the biggest ponzi scheme you’ve never heard of.

Between 2003 and late 2007, the company took in more than $180 million from investors in return for “lifestyle packages” and cash rebates. Of the $180 million, $115 million was paid back to investors, $40 million was handed out to directors as “interest-free loans”, and the rest – $25 million – just… disappeared.

Last week, James Phang Wah – the former CEO of Sunshine Empire - turned himself in at Singapore’s District Court to begin a nine-year jail sentence for fraud.

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Sunshine Empire’s main product offering – inasmuch as a Ponzi scheme can have a product offering – was what they called “lifestyle packages”. This article from 2009 explains:

In 2007, Singaporean bus driver Vincent Leo Teng Fong mortgaged his property in Malaysia for about RM250,000 ($102,475) and invested the money in more than 10 Sunshine Empire Gold Prime packages, according to a report in The New Paper.
[…] he only received one rebate of RM26,000 from the company after his initial investment.

Vincent Leo testified in court on Oct 7 that he got to know about Sunshine Empire through a friend named Sze Li. […] Sze Li and her husband, Mr Jacky Neo, said that if he bought the most expensive Gold Prime package, he could get rebates of US$700 ($981.19) to US$800 every month, and he will recoup his investment in 10 months.

Once you do all the currency conversions, that works out to about a 10% interest rate per month – nice work if you can get it, sure, but also completely impossible short of running to the casino and putting it all on zero. That didn’t stop them selling the packages to tens of thousands of gullible investors in Singapore and Malaysia.

The CEO and his wife certainly acted the part of successful businesspeople. In a remarkably uncritical interview with the Straits Times in 2007, he called himself “a legend – better than Warren Buffett” and that he “acquires companies like you go to market buying beancurd”.

The ST piece mentioned – again, uncritically, which really makes you wonder about the quality of their editing – that “Mr Phang’s vast business empire” was involved in “network marketing, entertainment, energy, real estate, telecommunications, health and beauty, insurance, and finance”.

None of it existed, though – not the Taiwanese telco business, not the 30-storey medical centre in Kuala Lumpur, and not the underwater hotel in Malacca. The only real business was the ponzi, which mostly funded an opulent office in suburban Toa Payoh and Phang’s fleet of Mercs and BMWs.

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The sun set on the Sunshine Empire in mid-November 2007. On the 14th, the Commercial Affairs Department of Singapore’s police force announced that it was investigating Sunshine Empire’s business practices. That afternoon, a reporter for The New Paper went to the company’s head office and found people boxing up files and cleaning the place out, despite the queue of investors already forming outside the office demanding their money back.

Charges were laid fifteen months later, in February 2009, and an appeal to the High Court meant Phang and his wife remained free until November 2011.

The eventual recovery from Sunshine Empire was about $21 million – roughly 25 cents on the dollar for people who hadn’t pulled their money out already – and the CAD hasn’t yet determined how the funds should be distributed to creditors.

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Sunshine Empire was the largest Ponzi in Singapore, but it wasn’t the first, and it was by no means the last. Singapore’s retail financial regulatory system is explicitly run on the principle of caveat emptor, and consumers are expected to be able to make their own judgments about investments. (This, incidentally, is why Singapore is one of only two countries where retail customers were allowed to invest in credit-linked structured products – and also why Singapore, unlike Hong Kong, never forced banks to collectively negotiate with investors when those credit-linked structured products blew up spectacularly in 2008.)

Since then, we’ve seen multiple fairly sizeable Ponzis come and go. The most recent large implosion was Profitable Group, which shot to fame with a farcical GBP 100mio takeover bid for Newcastle United football club in 2009 and then evaporated a year later, leaving behind $23 million worth of missing investments and a $4 million bill for advertising on ESPN/Star Sports.

The Profitable Group investigation is still in progress – and two directors have fled the country despite having had their passports confiscated.

The CAD does a fine job prosecuting this sort of fraud in Singapore, but the wheels of justice turn slowly. When the Astarra/Trio Capital fraud was discovered in Australia, securities regulator ASIC slammed down the shutters within three weeks.

Singapore’s caveat emptor regulatory regime implies that the CAD doesn’t need to be as proactive as ASIC. Even so, when firms like Sunshine Empire and Profitable Group can steal tens of millions of dollars from tens of thousands of investors over a period of years, perhaps CAD needs to be more proactive investigating potential frauds. Perhaps the MAS – which, on top of its central-banking duties, regulates markets in Singapore – needs to be empowered to do more than just publish an alert list.

Or perhaps it’s time for a root-and-branch overhaul of the entire idea of caveat emptor financial regulation. Caveat emptor does a fine job of protecting people smart enough to spot frauds, but it does a lousy job of protecting small investors, young investors, less educated investors; it doesn’t protect the people who most need protection.

“The economy,” says Charlie Brooker in his year-in-review column for Vegan Socialist Daily, “is just a series of satirically huge numbers scrolling across the screen while a voiceover recites the words ‘brink … precipice … abyss … void … ‘ over and over again”.

As his open-source communard Wikileaky colleagues on the Grauniad’s crossword blog note, “you can’t spell GLOBAL ECONOMY without GLOOMY”, but this comes from the same people who think “Old number 35 London bus we drove home to Scunthorpe, so luggage is all over the place! (4,4,7,3,4,3,7,2,3,7,9)” is a legitimate cryptic crossword clue rather than, say, a coded message to their KGB handlers.

On a totally unrelated note: Scunthorpe has a clbuttic Problem.