On slicing cake
By Toh Hsien Min
Imagine that you have a very large chocolate cake, which is partly sponge and partly dark chocolate cream. Normally you go to the baking provisions store yourself and pick out the ingredients to your formula, and then bake the cake yourself, but today you were in quite a hurry, so you got your kid cousin to do it for you by paying him a buck. The cake in front of you looks pretty much like any other cake you would have baked, but you're not sure how much cream there is in it and how much sponge. You only know that there's more cream on top and more sponge below, and if you cut the cake in usual way, you would get equal proportions of both in every slice.
Now the customers who have just come into your shop tell you that they're not interested in slices of cake that have very much sponge in it, so you figured that if you cut it top-to-bottom you wouldn't be able to sell any slices of cake. Lightbulb moment: well, why cut it the usual way? Why not cut it horizontally so that the slices at the top get all the cream and the slices at the bottom get all the sponge? You might even be able to sell more cake that way, even if you have to keep all the sponge slices yourself. Besides, if ever your cake shop is attacked by a desperado who's near starving to death (because he can't keep up with his mortgage payments), he'd probably eat the more filling sponge first, and would have filled himself long before getting anywhere near the cream. You even get the town food critic, who must be good since even the law says his assessment of the quality of your cakes will determine the number of cakes you and even your customers can hold, to stick his finger into the cream slices so as to certify that every cream slice is full of cream and not sponge. Before long, your slices of cake are selling like, erm, hot cakes. Some customers even take their cream slices and slice it again so that they can re-sell the very best of the cream. Other people start baking their own cakes (or getting their kid cousins to bake it for them) and start trading the cream slices as well. The economy for cream slices is doing so well that you even buy cream slices from other cake shops to re-sell, and you know that other cake shops are doing the same with your cream slices.
One day, there is a noise at the door. You turn to see a man in rags who is obviously very hungry and quite dangerous. Now just as you expected, he starts by eating the sponge. Your customers are worried, but you say there's no need to worry, everyone will still get their cream. But then a few things happen. First, as the man digs into slice after slice, you realise that the town food critic has been remiss; he had only stuck his finger down the side of the cream slices to check. However, as there has recently been more competition for cake ingredients all the kid cousins had started baking more and more sponge, which have found their way into the middle of the cream slices. Secondly, you realise that the cream slices you've bought in from all the other cake shops have as much, if not more, sponge in them. Thirdly, the man proves to be hungrier than anyone had thought, and after finishing the sponge slices starts snatching cream slices out of the hands of all and sundry and gobbling them all up. It grows worse: some of your customers, having spent their money on supposedly good cream slices that have been eaten up by the hungry man, have to leave the shop; other customers see that your cakes are being rapidly eaten up and refuse to buy any more cakes from you. In fact, the other cake shops start demanding money for their cakes, but the man has eaten so much of your stock that you realise you have not enough in the shop to satisfy all these demands even if you managed to sell every last slice left (but in any case since you're not selling any all your money is stuck in dodgy cakes), and in fact they are making the same demands to one another as well... and the man is still in the shop eating!
If you think the above parable is a little bit ludicrous, that's because it is. It's about how the rush to originate assets without regard for underwriting standards so as to create asset pools that can be sliced and diced in securitisation structures that are distributed among financial institutions has made risk so opaque that asset quality is impossible to gauge and markets lose confidence and shut down as financial institutions stop trading with one another such that the usual infrastructure that the financial system relies on - principally credit and liquidity - fails, normal ALM goes out the window and financial institutions receive a tsunami of cash calls that they have no way of fulfilling. The death spiral was one of the useful lessons I took away from the dotcom era, and it's interesting to see it playing out again, only this time among financial institutions.
We're just reaping what has been sown. On one level, the credit crunch is an object lesson in failure: it shows how useful bank capital is (recent history has been like trying to land fighter jets on aircraft carriers when the admirals keep trying to build shorter and shorter aircraft carriers), how one year into Basel II it's already clear that the new accord has enormous flaws (notably the securitisation provisions), and how it's already clear Basel III will without doubt require an additional liquidity risk component (although I've seen a pithy yet true response to that from a senior banker: "Capital is not a mitigant for liquidity risk"). On another level, it is a necessary kneading out of all of the excess in our global economic system: the lack of prudence, the belief that huge debt loads can always be refinanced, the irresponsible high-rolling of certain financial institutions. From this perspective, the reversal of fortune the world is collectively experiencing is a good thing. It cleans out the stables, and if we collectively seize the opportunity we can set the world on a sustainable path.
As with the last editorial, I'd tapped the above out a bit in advance (mid last year actually). The credit crunch hasn't gone away since, and what I'd written then remains topical now. The reason I'd to call upon it is that on a personal level, particularly with some new research I've been doing on credit conditions, I've been semi-swamped with multiple requests to carry out the equivalent of two weeks' worth of analysis in two days. My slicing of my cake of time hasn't been favourable towards literary activities, hence this issue being a little later than usual.
Still, my time crunch hasn't stopped the team from shaping a good portfolio of literary work. Poetry this time is led by multi-part poems by Rodrigo V. Dela Peņa Jr and Reid Mitchell, and closed off by a third multi-parter by Collin Jerome after pieces from returning contributors Bernard Henrie and Lee Yew Leong. Yew Leong also has a short story, selected separately by Kai Chai, along with two others from O Thiam Chin and Timothy Yang. Along with critical pieces by Leonard Ng and Amos Toh, we are especially pleased to present an essay by Suchen Christine Lim, which relates her own writing to the contest for Singapore's urban future.
Have a Happy Year of the Ox!QLRS Vol. 8 No. 1 Jan 2009