Dear L,

Call me weird, but I actually LIKE the fact that clerics are meddling in the economy (or at least try to) and get corrupted in the process. It proves that they're (oh so) fallible humans and takes away quite a bit of their ability to maintain a holier-than-thou image.

--MSK*

Do anyone have any experience with Feng Shui in finance?

Well, for the traders who do the deal, no worries,

And there, you've put your finger on it.

The nasty truth is that much investing is like fashion. Banks think up the flavor of the quarter and then push it out to their clients. You've always got to be on top of the Next Big Thing. Sure, there's reputational risk to the bank in pushing nonsensical crap but not to the traders and product guys. By the time the stuff blows up/melts down, assuming it does, they may not even be in banking anymore. They certainly won't be carrying the can for some deal whose revenue got booked three years ago.

I mean, seriously, how many pension funds call up banks desperately seeking Egyptian Pound Callable Snowballs or whatever? None. The banks push this stuff out and the investors take it. Most of the time, the investors don't really understand what they're buying. Hell, most of the time, the banks don't really understand what they're selling. Nor do they care because, once the revenue is booked, they can go on to the next must-have fashion investment and do it again.

Nobody is spontaneously says, "Wow! Look at Egypt. I've got to get me a piece of that!" I doubt if most investors could find Egypt on the bloody map, much less have a sufficiently intimate knowledge of the Egyptian political, social and economic scene to take a lengthy flier on their currency. They only know what whoever is pushing the paper tells them -- and that's nothing they don't want to hear.

MSK

All well and fine in theory, mate, but the near and medium term results are not what you think, in my opinion.

L,

Agreed. Short- and medium-term, the involvement will fuck things up. But hey, I'm not invested in the regional economy & I arrogate myself the luxury of long-term thinking.

Maybe "Islamic" investors need to learn the hard way to separate the fuul from the pebbles, just as the Khalijis had to learn the hard way that stock markets don't surge forever ...

--MSK*

Afraid mate that with the fuzzy thinking that goes into such things, that the right people shall not pay the piper, but rather that the inevitable blow-ups in the Islamic finance bubble will be placed on evil World Bank or other convenient scape goats. And as you have seen recently in comments here, self-reflexion is not a wide spread skill.

I would also add that unless there's a clearly demonstrable long term benefit that compensates for short and mid term costs, then bets on long term at the expense of short-mid term are almost always losing. In this case, chances that all what those illiterate "ulemas" would do on the long term is put us at the point where we are today, a few steps back even. We'll have achieved what? Extended Muslim middle age for some more time, while other nations advanced?

Ya Shaheen,

I don't think that ulama meddling in finance could ever reach a level significant enough to stop economic prosperity in a serious way so as to "move things a few steps back."

What I'm talking about in terms of long-term development is to rip the masks of piety off the political ulama's faces. Iran already is a good example.

--MSK*

MSK

It's never just finance. Look at the IPO article - that is fundamentally talking about a faqih talking about business decisions.

Ulema meddling in economic policy can indeed have blocking influences where finance opens the door to religious meddling in management, in economic policy, etc. Finance is but one part of economics, but it is the fuel, and choking off the fuel to sectors/activities etc. you don't like for whatever reasons, well, that is power.

As for ripping of a mask... Iran a good example? Is the mask actually ripped off?

By the way, Anon the non-Anon, made an astute if sad observation here:

None. The banks push this stuff out and the investors take it. Most of the time, the investors don't really understand what they're buying. Hell, most of the time, the banks don't really understand what they're selling. Nor do they care because, once the revenue is booked, they can go on to the next must-have fashion investment and do it again.

The emerging melt-down in mortgage based securities comes right from that: no one really truly knows how robust much of the fancy-schmancy financial modelling is. Castles in the air, in my opinion really. I personally eschew fancy things - in emerging markets back to basics works best, and too fancy financial modelling and game playing merely lays a faux-certain facade over what is in the end gut judgement calls; although to be fair, I am not claiming financial modelling is useless - quite the contrary, if one recalls that values and probabilities thus generated are uncertain estimates although hopefully more rationally data based than pure gut, then it's useful.... but black swans and all that as Nassim puts it.

Odd thing I run into in emerging market "best in class" banks is excessive certainty over valuations. Actually that's everywhere, but here where we know the data is not only dirty, but positively dodgey, how in your right mind can you think your valuation is anything more than a very rough approx?

My wishful thinking would have it that either the cromagnons don't meddle with economics - which won't happen - or that, since they're going to anyway, that they're made a little bit more literate economics wise - but that's counting on the existing dysfunctional educational structures which can't deliver what escapes them too anyway. Still haven't found the implementable idea that would counter them.

Economically illiterate theologians with a caveman mentality pimping their version of "economics" is one of the biggest threats to Muslims today given the gullible lemmings they're rallying imo. It's second only to the innovation-killing individual-fading "Islam is about obligations and everything is forbidden unless very explicitely stated otherwise" approach that prevails among so many Muslims today (including those tortured consciences who adhere to it but won't practice it because it makes it too constraining) - as opposed to putting the emphasis on rights and freedoms.

Castles in the air, in my opinion really. I personally eschew fancy things - in emerging markets back to basics works best, and too fancy financial modelling and game playing merely lays a faux-certain facade over what is in the end gut judgement calls

Worse, modelling is too often used as a sort of anti-analysis. "If you explain this thing in a way that people can understand what's going on, it's an unsellable dog. Better crank up the model and break out the unreadable Power Point presentation with those equations we cribbed out of that General Relativity textbook."

As an example, about six months or so ago, I had a discussion with someone who had put together a dollar-denominated mortgage debt issue. This guy went on at great length about the different pieces of the deal, how great (and complicated) their modelling was and how solid the Class A notes were.

Sounds pretty vanilla, except that, it turns out, all the propery collateralizing the deal was in Russia. I pressed him about details one-on-one and, eventually, he admitted that 1) While the notes were denominated in dollars, they were subject to Russian law, 2) Evicting someone under Russian law is an extremely difficult and lenthy process -- in fact, up until about a year ago, it was impossible to evict someone under Russian law. 3) If you did manage to evict someone under Russian law, the property would be auctioned off in rubles.

In other words, this super-secured dollar-denominated, asset-backed security was actually a play on the USD/ruble exchange rate with a touch of speculation on the Russian housing market thrown in. Since all the borrowers were in Russia but paying in USD, the deal would go into massive default if the ruble were to take a dive. If you were, eventually, able to make your way through the foreclosure process, you'd end up with a bunch of rubles. As we're assuming that the ruble tanked, you'd still lose a big chunk of capital even if local housing prices hadn't tanked as well.

Now maybe, properly understood, these notes still had an acceptable risk/reward ratio. But they were definitely not the "safe-as-houses" collateralized notes they were being pitched as. You can coat a pig with feathers but that won't make it halal.

Ah brilliant example, absolutely brilliant. Highly dodgey assumptions wrapped up in nice "safe as houses" marketing rubbish.

Hidden risk piled onto hidden risk, all coated up in assumptions from developed markets that rather seem dubious even there.

One of the few genuinely business-helpful facts one can learn from legal field experience, not necessarily theoretical legal training but actual experience, is that the most important question to ask in anything involving a pursuit of wealth is "how easy will it be to implement and carry through collection in each possible scenario for the endeavor"?

Interesting. The issue of the potential for corruption is one that I raised in a recent interview with an Islamic finance expert. He admitted that it could happen, but that it never had (to his knowledge).

A couple of years ago the head of one particular Islamic bank told me, sadly off the record, that Islamic finance was a "temporary fad" that he expected (and to my judgement, hoped,) would pass in a few more years or so.

The fact that there are only a handful of cleric-types properly qualified to sit on these shariah boards doesn't help matters.

I do like your take on "islamic minded investors" though.

potential for corruption is one that I raised in a recent interview with an Islamic finance expert. He admitted that it could happen, but that it never had (to his knowledge).

Amusing.

Given the people who are the ones sitting on the evaluation boards are the same ones that are on approval boards.... who is going to call spade a spade?

Gulf practices in this area are utterly without the slightest real standards on corporate governance.

"If you explain this thing in a way that people can understand what's going on, it's an unsellable dog. Better crank up the model..."

That's the Tom Friedman strategy.