Court to hear Arch Cru case

This article was originally published in The Financial Times

Court to hear Arch Cru case

By Tanjil Rashid

The High Court has agreed to hear a £16m claim against Capita Financial Managers by 550 investors in Arch Cru funds.

The Arch Cru fund range was suspended in March 2009 by the Financial Services Authority. Capita was publicly censured by the FSA for its failures in managing the fund, and in 2012 the FSA brokered a corporate redress scheme, where investors could recoup about 60 per cent of their investment from Capita.

The legal action is being brought by investors who refused to sign up to the redress scheme. Those who intend to accept it have until December 31 to do so, and waive the right to further legal claims.

At the time, it had as many as 15,000 investors and was worth £364m. After the fund’s suspension, most of its assets were sold at a heavy discount, and the rump of the fund now valued at only £66m. Arch Cru investments were marketed as being safe and low-risk, but in fact investors’ money had gone into highly illiquid venture capital and private equity assets.

The FSA judged that Capita had no responsibility for the fund’s underlying investments, but the investors are now arguing that Capita owed them a common law duty of care to safeguard their money. The Financial Conduct Authority, the successor to the FSA, is forcing advisers who recommended Arch Cru investments to contact investors and inform them of the litigation action.

Should the claim prove successful, it may pave the way for further claims on behalf of investors who lost their money in investment funds that were similarly mis-sold.


The Solution Revolution

This article was originally published in The Financial Times

‘The Solution Revolution’, by William Eggers and Paul Macmillan

Review by Tanjil Rashid

The Solution Revolution: How business, government and social enterprises are teaming up to solve society’s toughest problems, by William Eggers and Paul Macmillan, Harvard Business Review Press $26/£17.99

Like many revolutionary manifestos, The Solution Revolution seeks the overthrow of government as we know it. But for authors William Eggers and Paul Macmillan – both of whom work for the public sector practice at Deloitte – this is a revolution very much in the interests of business, not against it.

The book is a compendium of case studies of entrepreneurial individuals and organisations taking on some of the most intractable social problems. Its authors argue that “private enterprise for public gain no longer need be an oxymoron” and that social enterprises can “backfill public services”.

We meet “social entrepreneurs” and “venture philanthropists” such as Muhammad Yunus, the microlending pioneer, and Pierre Omidyar, the founder of eBay, who both adopt a businesslike ap­proach to social problems; Yunus’s Grameen Bank provides loans to poor Bangladeshis, while the Omid­yar Network (ON) invests in products such as d.light, a cheaper, solar-powered alternative to the carcinogenic kerosene lamp. By seeing the poor as a market rather than a receptacle for aid, Grameen and ON have built profitable enterprises that solve social problems.

These markets are worth a startling amount. Ashoka, the social enterprise network, values the market for healthcare that serves the poor at $202bn and for food at $3.6tn. In the education market, entrepreneurs have been wise to the savings from “disruptive technologies” such as the internet.

Khan Academy, for example, uses its analytics engine to tailor online learning to students that might otherwise be taught by unmotivated teachers in overcrowded classrooms with outdated textbooks. The profitability of these enterprises makes them sustainable and attractive to donors, but ultimately “they measure their bottom line in social value”.

The authors contend that this social value should be seen as a form of capital, with philanthropists investing in “the trillion dollar market for public good”.

Although the authors have given it a new name, “the solution economy”, the idea is hardly new. The annual Social Capital Markets Conference has been a fixture of the philanthropy scene for years.

Most of the examples in The Solution Revolution are well known from David Bornstein’s landmark study of social entrepreneurs, How To Change The World.Meanwhile, Matthew Bishop and Michael Green introduced the idea of the “venture philanthropist” – as engaged, target-driven and professional as any venture capitalist – in Philanthrocapitalism .

Eggers and Macmillan’s work succeeds, however, as a guide to new opportunities to profit from “socially impactful” activities once thought unprofitable. But there is no focus on whether these “solutions” are the best for the problems at hand. For example, government outsourcing in 25 of 34 OECD countries is trumpeted without scrutinising its merits, barely acknowledging the evidence that such outsourcing is the preserve of steady suppliers such as G4S, ruling out the competitiveness that drives innovation. Other solutions are limited. On poverty, for example, microcredit has little macro effect.

Eggers, an ex-fellow of the neoconservative Manhattan Institute, has written six books outlining his vision for diminished government. That vision grounds The Solution Revolution too: “All [government] has to do is get out of the way to let these solution markets work.”

But the authors show little awareness of the market failures that have led to the very problems for which they advocate market solutions. That they cite a problem-ridden, minimally governed country such as Bangladesh so frequently in this book is not so much a success story as a cautionary tale.

Financial astrologers gaze at stock markets in the stars

This article was originally published in The Financial Times

In a darkened room under a domed ceiling, glimmers an animated starscape that is also a live representation of global stock markets. Shares float through the night sky according to the market’s currents. Conglomerates form constellations, industries are galaxies – and Lehman Brothers is a black hole.

The Black Shoals Stock Market Planetarium is an art installation devised by Lise Autogena and Joshua Portway that has toured galleries in recent years.

Their inspiration was “the hidden world of financial astrology,” says Ms Autogena, referring to the practice of divining market events by studying the movements of the stars.

Despite the air of pseudoscience, financial astrology has been growing in popularity and complexity. Once limited to the almanack and the horoscopic basics of looking at a company’s date of birth and then examining starcharts, the discipline now apes the mathematical methods of rival financial theories.

Market Analyst, a financial software product, has an inbuilt astro-finance modelling tool. It charts celestial movements through the ages and correlates them with economic data – light years away from the ancient stargazers who advised farmers on crop yields.

“It’s all about number crunching,” explains Christeen Skinner, a financial astrologer in the UK.

The Black Shoals Planetarium is a wry nod to the Black-Scholes formula, one of many mathematical models that reinforce the perception of the market as supremely rational.

Yet the rather less rational realm of financial astrology remains compelling for some investors.

Currency speculators have been consulting astrologers en masse about India’s rupee avalanche, which, India’s leading astro-finance consultancy, says it foretold.

“The launch date of the new Rupee symbol was not a favourable one,” says Dharmesh Joshi on the organisation’s website, which operates a 24-hour helpline. Economists are more inclined to pin the fall on uncertainty over whether the US will taper its asset purchases.

However, a receptiveness to financial astrology is not limited to countries rich in superstition such as India. The discipline also has a following in Britain and the US.

Ray Merriman, for example, says he has 7,000 subscribers to his MMA Cycles astro-finance consultancy in Michigan.

The New York Astrology Center run by Henry Weingarten, a commodity trader, sometimes charges $1,000 per consultation, owing to a reputation for successfully predicting stock market plunges, such as Tokyo’s in 1990.

Grace Morris, another well-known US astrologer, has featured in Forbes magazinefor her record of consistently outperforming the market.

However, Ms Skinner rejects the idea that her discipline can alchemically turn out riches. She insists instead that her methods should be employed only to complement other tools. “You would be a fool to rely solely on financial astrology,” she says.

The mathematisation of financial astrology may have helped improve its credibility in the minds of some investors just as conventional techniques bear the taint of the global financial crisis.

For example, in his book The Black Swan, Nassim Nicholas Taleb attributes to conventional techniques “no better predictive value for assessing the total risks than astrology”.

This would not have surprised the economist John Kenneth Galbraith, of course, who once joked that “the only function of economic forecasting was to make astrology look respectable”.

That is one economist’s forecast which turned out to be correct.

Myths are obscuring the truth about the Indian economy

Published in The Huffington Post

India’s reverence for her cows, considered holy by Hindus, is well-known. But one sacred cow has long had even the Western world genuflecting before it: the belief that since the ‘dismantling of the licence Raj’ in 1991, India has exploited its economic freedom to become what Foreign Affairs once declared on its cover “A Roaring Capitalist Success Story”. A narrative of the Indian economy’s elephantine forward stomp, regularly achieving annual growth rates between 7.5% and 9%, is pushed by observers, from the likes of former Procter & Gable CEO Gurcharan Das’s bestselling India Unbound to even the CIA’s futurologists, who expect India to overtake the US by 2050.


Yet India now sits on the brink of a currency crisis. In a rupee avalanche of Himalayan proportions, India’s currency has depreciated 14% since the beginning of the year, hitting an all-time low in August of 68 to the dollar. Despite the rejuvenatory efforts of India’s new “rockstar” central banker Raghuram Rajan, the rupee’s value remains below 60 to the dollar, a widely-held “psychological benchmark”. An exodus of equity investors looms. Although Unilever recently did kindly buy out minority stakes in its Indian division, foreign bondholders have withdrawn $6.5bn since mid-May.


Indian officials blame the prospect of US tapering (the rolling back of quantitative easing), dismissing the crisis – as Prime Minister Manmohan Singh did in his last speech on the economy – as “a short-term shock”, while the likes of India’s richest man Mukesh Ambani continue to claim “India is still rising”. But although the rupee, like most emerging market currencies, will prove a casualty of the US Federal Reserve’s monetary policy, the rupee crisis in fact points to a fatal seam in India’s entire progressive narrative.


For starters, US Federal Reserve Chairman Ben Bernanke can hardly be blamed for India’s enormous trade deficit (Ajit Ranade of AV Birla approximates to be $300bn by 2013/14), which, coupled with lower capital inflows owing to uncertainty over economic reforms, have summoned the spectre of a 1991-style current account crisis, a spectre Manmohan Singh supposedly banished to its grave during that era’s subsequent reforms.


Spellbound by India’s noughties growth rates, policymakers were unbothered by the fact that, unlike China, India was (and still is) importing more than exporting, neglecting manufacturing to become instead the world’s IT outsourcing capital. This despite the truism that no country in history has undergone an economic transformation without a labour-intensive manufacturing boom; India has yet to experience industrial revolution. The likes of Gurcharan Das hubristically believed that India could become the first economic superpower without a substantial manufacturing base: “The notable thing about India’s rise is not that it is new, but that its path has been unique.”


This illusory notion of Indian exceptionalism has been one myth among many that inspired the intoxicating vision of India’s tiger-like economic leap. Others include India’s much-vaunted ‘demographic dividend’, which, as Amartya Sen’s forthcoming book An Uncertain Glory points out, has been squandered on child mortality that is 25% higher than in neighbouring, infamously poor, Bangladesh. What human resource capital remains is a more likely booster of crime than GDP. India’s skilled, English-speaking workforce is similarly mythical, with a quarter of Indians effectively illiterate. Sen explains how literacy has always been at the forefront of any economic transformation, from present-day China to Meiji Japan, the latter’s 1868 literacy levels higher than India’s today.


And there India’s economic problems come full circle. To stave off a current account crisis, India needs to scale back government spending. That, inevitably, will result in the rolling-back of literacy and healthcare programmes essential for the healthy, educated workforce investors expect.


There are no easy answers to India’s economic bind. The only certainty is that the illusions haven’t helped. The Indian novelist Aravind Adiga’s insight that “the greatest danger to the nation’s future is no longer poverty or Pakistan, but overconfidence,” is an astute one. In a country famed for its mythology, such are the pitfalls when a tradition for myth-making pervades even the economy.