Weekend reading links

1. As Zohran Mamdani charges to victory in New York mayoral elections, an FT long read looks at the rise of Democratic Socialists of America (DSA) and socialism in general in the US.

In 1910, Wisconsin elected the first Socialist member of the US House of Representatives. And in the same year, Milwaukee, the largest city in the state, returned a socialist as mayor. Socialists would run Milwaukee for a total of 38 of the next 50 years, earning it the reputation as one of the best-governed cities in the country. The press called the Milwaukee mayors “sewer socialists”, a label they adopted for themselves, as it drew attention to their preference for providing high-quality public goods and services over the pursuit of class struggle. The term made a comeback this year when Mamdani used it to describe his own vision for New York. “Sewer socialism,” he said, means “that we want to showcase our ideals, not by lecturing people about how correct we are, but rather by delivering and letting that delivery be the argument itself.” 

As the historian Joshua Freeman pointed out, New York had a sewer socialist of its own in the first half of the 20th century: Fiorello La Guardia, who was mayor from 1934 to 1946. Although nominally a Republican, La Guardia governed “like a socialist”, Freeman argued. During his tenure, the city’s physical infrastructure was transformed out of all recognition. And as well as building highways, swimming pools and playgrounds across all five boroughs, he established the New York City Housing Authority, the first such public body in the country, introduced rent controls, brought competing private subway lines under unified public control and kept transport fares low — priorities all echoed in Mamdani’s promises to “freeze the rent” for stabilised tenants and provide “fast and free buses”. “Zohran has definitely seen La Guardia as one of the mayors to emulate,” said Gustavo Gordillo, a co-chair of the New York DSA.

2. Good primer on the practice of borrowing against receivables. This practice has a long history, including Satyam Computers in India to Enron in the US. 

Receivables are difficult for auditors to scrutinise. Companies have lots of clients. Even when they are legitimate, it is hard to tell how much cash will eventually arrive from them. Shady practices such as “channel stuffing”, which involves sending customers more product than they have ordered and temporarily recognising the additional revenue, require a forensic eye to spot... Factoring, in which a supplier sells its receivables to another party at a discount to get hold of cash more quickly, has grown fast. According to FCI, a trade body, the field had a turnover of $4trn last year, up from just over $2trn in 2010... the cost of digging into the creditworthiness of a given company’s receivables can ruin the economics of lending money in such a manner, as margins are often thin. Some forms of credit, such as that secured against regular transactions, are among the most reliable in corporate lending, and thus offer modest returns. Others are riskier and mean borrowers must cough up to entice lenders. 

China’s local-government-financing vehicles, through which the country’s astounding infrastructure boom has been funded, might be the source of the next receivables blow-up. According to data collected by Goldman Sachs, a bank, the receivables of LGFVs for which financial information is available ran to 22.7trn yuan last year, equivalent to $3.2trn or 17% of China’s GDP, up from 13% in 2018. That is bad enough. Worse still, money is largely owed to the LGFVs by local governments themselves, many in perilous financial positions.

3. Important China fact of the day - Nobel Prize edition.

China, despite its vast scientific workforce, has won only one Nobel for research conducted on the mainland (although six Chinese-born laureates have won for research in America, and one for research in Britain).

4. Africa is returning to the era of long-serving dictators. 

 5. Advances in battery and e-bike technologies and dedicated bike lanes are powering a revolution in the use of bicycles across global cities. 

Montreal has become North America’s leading cycling city... Across the city more than a third of the population cycles at least once a week... In London cyclists now outnumber cars in the City, the financial district, by two to one. Paris, where they now outnumber motorists across the whole city, is catching up with Europe’s traditional bike capitals, Amsterdam and Copenhagen, though cycling is still growing in those cities, too. In Copenhagen, the Danish capital, bikes account for almost half of commuter journeys to work and school... Even in Beijing, just 30 years after most cyclists were pushed off the city’s roads to make way for cars, the number of cyclists is rising again.

6. The Government of India has approved a new scheme to promote the shipbuilding industry.

The Union Cabinet has just approved an outlay of nearly ₹70,000 crore to re-vitalise the shipbuilding industry. On the anvil are the establishment of a Shipbuilding Finance Scheme of about ₹25,000 crore to help domestic shipbuilders, a ₹25,000 crore Maritime Development Fund for low-cost financing that will be made available to shipbuilding and related industries, and a ₹20,000 crore fund for setting up shipbuilding development clusters where concentrated attention can be given to the requirements of shipbuilders. This will include expanding the existing capacity of maritime infrastructure and enhancing land connectivity. In addition, the state will establish an apex body to provide credit risk coverage and generally to enhance capability development.

But Michael Pinto urges a note of caution on one aspect of the scheme

This is the proposal to link disbursement of funds under the scheme to the use of at least 40 per cent of local content. It is difficult to see the logic of this proposal. The government must decide its priorities: Does it want to encourage shipbuilding in the country or does it want to encourage the use of local inputs? There could well be a contradiction between the two. If an entrepreneur is investing his money in shipbuilding, we must assume that he will use the best materials at the most competitive rates. If such materials are available locally, there is no way that anyone would go outside to source them. By insisting on a minimum local content will we not be compromising on quality issues and protecting local suppliers who have not taken the trouble to upgrade their production to international standards?

7. Putting in perspective, the importance of rare earths in the defence sector.

In the first week of the Iran-Israel conflict in June this year, approximately 800 missiles were exchanged. Each contained anywhere between two and 20 kilogrammes of rare earth elements, including two, dysprosium and terbium, now subject to Chinese export controls. Based on conservative estimates from the limited data, this means anywhere between 1.6 and 16 metric tonnes of rare earth elements were vaporised in that conflict in seven days. Ukraine’s extraordinary recent performance in its drone war against the Russian invasion is almost entirely dependent on electronics and magnets imported from China. Ukraine is now less concerned about whether European arms deliveries will arrive on time and more worried about the flow of tech imports from China. In the past 30 years, China has become the world leader in the processing of most of the 54 raw minerals that the US Geological Survey classifies as critical for US industry, including the defence sector. Currently the Chinese can process virtually any mineral 30 per cent more cheaply than its competitors.

8. This long read on the story of Patrick James, the founder of the collapsed auto-parts conglomerate, First Brands, is fascinating. With a string of business failures behind him, and finding formal asset-backed lenders cut off, he turned to the private credit industry, and his success in mobilising massive private debt is a testament to the problems of lax lending standards in the $2 trillion industry.  

The bankruptcy filing was only the beginning of a harrowing experience for the group’s lenders. It was soon revealed that First Brands, which last year made a loss of $12mn, had racked up close to $12bn in both conventional loans and off-balance sheet financing. That was billions of dollars more than many of its lenders had realised. Even worse, an investigation under way as part of the bankruptcy began to probe whether the invoices and inventory underpinning much of the group’s financing were pledged “more than once” or “commingled” between lenders. Department of Justice prosecutors are also examining how so much money disappeared so quickly... many of First Brands’ mainstream lenders were unaware that the group had also raised billions of dollars backed by its inventory through off-balance sheet “special purpose entities”...

Many lenders now fear they may have fallen prey to a shell game, involving hidden off-balance sheet entities and phantom collateral. One lawyer told a Texas courtroom this month that his client was as much a “victim” as a creditor. Another claims that more than $2bn extended by lenders “simply vanished”... Billions of dollars in losses have been collectively inflicted on titans and pioneers of private capital, such as Blackstone and CarVal, to little-known equipment leasing firms. Financial institutions from Zurich to Tokyo are facing reputational damage for their dealings with a company that was scarcely known outside the murkier corners of credit markets until a few weeks ago. Even insurance firms may now be on the hook after writing policies against the complex financial products that funded First Brands.

This description of loans made by Jeffries, one of the earliest private credit lenders to First Brands, is instructive. 

Jefferies, which does not take deposits, generally did not underwrite such loans. Instead, it passed on much of the risk outside the banking system to collateralised loan obligations, investment vehicles that transform risky loans into bonds with pristine credit ratings through the alchemy of securitisation. Several CLO managers told the FT that many of their peers were likely to have done only cursory checks on James’s business record in their haste to package his company’s debt up into tradeable securities. While Jefferies’ stock in trade was selling risky loans to investment funds, James also made heavy use of supply-chain financing — a controversial tool through which a bank pays a company’s suppliers, in an arrangement accountants do not class as debt. In addition, First Brands tapped other forms of borrowing tied to assets, inventory and invoices, although it consistently also took out traditional bank loans.

9. China's sweeping rare earth export control restrictions take a leaf out of the US playbook. 

The type of supply chain restriction that China is embarking on first came into play in 2020. Washington dusted off an obscure provision known as the foreign direct product rule to target the Chinese tech giant Huawei, which the U.S. government considered a national security threat. But instead of restricting American technology exports just to Huawei, the United States said any company anywhere in the world could not ship a product to Huawei if it contained U.S. parts or was made with U.S. equipment or software. Because of the United States’ key role in the global chipmaking industry, the rules basically encompassed all advanced technology. It was a broad exertion of U.S. economic power that became the basis of a series of global tech rules during the Biden administration. Although foreign governments chafed at being told what to do, many cooperated for fear of being cut off from U.S. technology.

10. In a reflection of how dependent the US economy has become on the AI-fuelled equity market boom, research by Mark Zandi at Moody’s shows that the top 10% of spenders account for half of all US personal spending, and a wealth effect of 5 cents (from every dollar Americans gain on the stock market, they spend a nickel).