Positive Innovation or Creative Destruction

I took some units of MS Financial Engineering back in 2005. The Philippines back then has no derivatives market yet, unlike those of the already sophisticated ones in the US and Europe.

By December of the same year, I was hired by the Bank and because of the demanding schedule required by the management training program, I had to defer my post-graduate studies. The classes were held at the main Taft campus, unlike MBA which holds classes at RCBC Plaza. This meant an hour or so before I get to class which by then half of the lecture is through and I would be scratching my head clueless for the next hour and a half.

Had I continued my studies, I would be a Master now. I would have become one of what they call ‘quants’, math geniuses (or in my case, maybe just almost genius) that the Wall Street began hiring in the 1980s precisely to invent exotic new financial products like credit default swaps, collateralized debt obligations or mortgage backed securities.

If I took the program earlier hence finishing earlier, I would have been hired as a financial engineer, rose in ranks to have become perhaps a country manager of a local subsidiary of an investment bank here in Makati, only to resign later on precisely because the products we ‘quants’ would have engineered are the very same culprits of today’s financial turmoil, causing erosion of trillions of shareholders’ wealth across the globe.

In other words, I would have been jobless today. A bum genius, or genius bum or just a bum. Great.

The derivatives market is estimated to be roughly around $668 trillion dollars. That is approximately 12 times the entire planet’s GDP. However, only a fraction of that market involves the highly risky credit default swaps. And while its notional value is at $55 trillion, the real money involved is much less. Yet, the havoc it is wreaking across the globe’s financial system is tremendous.

If the bubble burst later, when the market is much larger considering it doubles every two years, then my BPI Equity Fund placement would be wiped out entirely. If that were possible…

This leads me to think if too much knowledge becomes dangerous at some point. Consequently, so could too much technology. The fluidity of today’s markets can be attributed mainly to the seamless interconnectivity of information across the world, the internet. In a click of a button, gigabytes of information can be downloaded onto your workstation, millions worth of stocks can be bought or sold, real-time movements of stock markets are tracked and billions of dollars can be wiped out in a few hours of trading.

That’s just what happened and what is happening. I posed a question in one of my recent articles and I’ll ask it again. Until what point will technology bring convenience to us? And when will it begin causing us more misery than good? I believe the backlash has already begun.

It must be qualified however that it is not knowledge per se that becomes dangerous. It is the absence of regulation of knowledge translated into practice. The derivatives market would not have imploded had it been regulated. In fact, it would continue to create wealth and my BPI Equity Fund placement would still be in the green and everyone would be happy. However, too much liberalization, compounded with knowledge and reckless innovation proved perilous for the likes of Lehman Brothers, Fannie Mae, Freddie Mac, AIG, Wachovia, and countries Iceland, Korea and Pakistan. This list may get longer in the days ahead.

Let’s make an analogy of what happened and what can further happen.

Greedy financial engineers +
Lack of regulation of a derivatives governing body +
Knowledge and technology =
Financial meltdown resulting to losses in the trillions.

Not so grim, yet. Then comes the next possibility.

Power hungry terrorist-funded nuclear physicists +
Weak IAEA (International Atomic Energy Agency) oversight powers +
Weapons-grade plutonium =
Nuclear fallout leading to lives lost in the millions.

So, when do we draw the line between positive innovation and creative destruction?




P.S.: I was going to write about the ill-effects of melamine. However, as I learned that even Chinese eggs, ridiculously as it may sound, were found to be tainted with the chemical, I realized that it could already be in any food we eat. After all, Chinese goods are practically everywhere. Maybe when I already have kidney stones I’d write about it. For the mean time, mooncakes anyone?

The Prisoner of War

There is a looming danger that is faced by the biggest economy and (used to be?) most powerful nation of the world.

The United States is about to elect a next president ill-prepared for the job at hand.

Barack Obama may be the next president of the United States at a time when the best and unquestionably most qualified must be seated in the Oval Office. Unfortunately, there are only 5 choices (3 independents), and of the five choices, only two are really in a position to capture the presidency. Of the two, only one has been tested.

Better McCain than risk America’s and other nations’ future with Obama.

I was a democrat and a Hillary supporter during the democratic primaries. At least had I been born an American. However, as the recent events unfolded, I saw myself lean towards the Republican ticket. Which is to say, I am for the experience they bring. And Obama, a first-term Senator, lacks significant exposure. Think foreign policy, national security and economy. Experience in these three critical aspects must be taken into account in electing the next president.

Barack Obama has yet to prove himself as senator and yet he aspires to be president. His track record is alarmingly insufficient.

Unfortunately, it is charisma, collected demeanor and oratory that have given Obama the lead in the recent polls. Yes, he is intelligent being Harvard Law educated. But intelligence does not necessarily translate to capacity. Whether Obama has the capacity or not, is yet to be known. But do they really want to know only when it’s too late? Too risky.

Obama’s running mate, Joe Biden himself acknowledges…no…ascertains that Obama lacks experience in a frighteningly manner.

“Mark my words it will not be six months before the world tests Barack Obama like they did John Kennedy. The world is looking. We’re about to elect a brilliant 47-year-old senator president of the United States of America. Remember I said it standing here if you don’t remember anything else I said. Watch, we’re gonna have an international crisis, a generated crisis, to test the mettle of this guy.” Joe Biden said during one of his fundraisers.

This should scare the hell out of those voting for the “brilliant 47-year-old senator”.

Brilliance is just not enough. Remember the Berlin Wall and the Cuban missile crisis during Kennedy? They just can not risk anything of the sort, when, consider this fact, the number of nations capable of manufacturing weapons-grade plutonium has increased. The United States has long been an advocate of the Nuclear Non-Proliferation Treaty. However, what with the financial crisis proving that the US is not as mighty as it used to be, the US’ role and global clout has significantly shrunk. A nuclear war is very possible and an arms race is already happening.

Now, the world is already on the verge of a financial meltdown. Trillions of dollars in shareholders’ wealth have been wiped out in the recent weeks. The US is likely in a recession. Japan already is. The United Nations projected 20 million job losses in 2009. These are difficult times. To elaborate further is no longer necessary.

And the United States seems to want a guy, who promises “change” through rhetoric, to handle these problems whose repercussions resonate across the entire globe.

It is important that the voting population must realize that the alternative, Sen. John McCain is not President George W. Bush. The incumbent had mistakes, and McCain, I believe, intends to correct them.

His experience as a war veteran, having been a POW, mentally and physically tortured, does not automatically qualify him for the presidency. However, this adds up to his character and sense of duty.

Therefore, I am endorsing Senator John McCain for president of the United States…

Only, I wish it matters.