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Riches Among the Ruins: Adventures in the Dark Corners of the Global Economy
By Robert P. Smith, Peter Zheutlin

This book reads like a novel.  Not many business books has so much thrill and suspense like a spy movie.  It is a fascinating account by Robert P. Smith, a legendary pioneer in sovereign bonds trading, about his adventure in the dawn of globalization.  He gives first hand stories about the dynamics of international finance and the inter-connected world economies.

The “ruins”

Modern globalization sprouted up after World War II, and the integration took shape when big western corporations started hunting for business opportunities in the developing countries.  Usually, economic stability and orders suffered tremendously in those countries where wars and political struggles were constant.  With poor economy and almost no exports, many countries imposed strict foreign currency controls to preserve their low foreign exchange reserves.

Profit by bridging the gaps

Mr. Smith found a niche to facilitate the money flow for corporations needed to move their foreign profits.   The method involved trading dollar-denominated foreign government bonds, which were rarely circulated back then.  He scouted out the bond holders and prospective buyers through his personal networking.  Buyers and sellers agreed on his prices based on their respective prospects about the country’s economy.  The price spread he earned represented the difference in confidence toward a particular country.

…and by taking risks

There are more gaps to bridge.  Sellers needed to exit with hard currency and buyers wanted to move foreign funds into safe harbor.  He had to buy the papers (bonds) with US dollars to satisfy sellers, and accept foreign currencies to satisfy buyers.  He financed his purchase with borrowed US funds.  When the sale is closed, he had to convert the proceeds back to US dollars.

He closed the deal by personally delivery to the client.  Personal delivery means a westerner carrying a briefcase loaded with bonds worth millions of dollars walking in dangerous foreign streets.

More often, the country’s official exchange reserve was low and he had to find sources in in the currency “black market”.   The conversion would take weeks because of the magnitude of the exchange, he had to count on the loyalty of his source and the lucks that the fluctuation in exchange rate would not kill his profits.

Black market

Yes, I know.  You have to read the book to find out how the currency black market became part of globalization, why it fluctuated when the official market had fixed rates, and how he did his conversion.  The books has many first hand stories about the operation details.

The value of intermediary

Bottom line, he created a trading market for those bonds by personal efforts.  He added value by bringing together the trading elements, by taking risks of the process, and by solving problems for parties involved.  The value he created justifies the wide spread he earned.  In the good old days, when things are raw and chaotic, lucrative profit is possible for those taking the lead.  Trades like this is established and a norm now, the efficiency has greatly reduced the value of intermediary.

Service economy

Intermediary is an economy necessity and it will always show up in any chain of values.  Some people claim that in the internet-enabled society, intermediary will have no place.    Information technologies may shorten the intermediary chain if the barriers are only informational.  Even in the case of Amazon, one of the prominent internet success, information is abundant and efficiently provided, it is still serving as an intermediary, just more powerful one.

Many links in our service-oriented economy are actually intermediaries.  The creator of goods (commodity, technologies, entertainment, real estate, and so on) always need the intermediaries (distributor, retailer, broker, consultant, insurance agent, marketer, financial advisor, and so on) to pass the value down.  Intermediary organizes logistics, performs due diligence, manages risks, provide advices and judgments on solutions.

Nature of people

Even thought information is more readily accessible now, quite often informational gap is not the only barrier in value delivery.  Human decisions are loaded with emotions.  It is often the gap in minds or perceptions.  One layer of value that Mr. Smith created is to seek out the “optimistic” and the “pessimistic” (motivation of seller and buyers in this book), and created a solution for their perceived risks or benefits.

He told funny stories that some sellers and buyers were actually having offices in the same building or some even belonged to the same multi-national corporation.  They saw each others often in the same social occasions.  It seemed obvious for them after the fact (that is one of reasons people tend to look down on middle man), but it is not obvious until they see the works of the intermediary.  Human being comes with inherent flaw of blind spot or “tunnel vision”, because of our tendency to believe what we want to believe and easily distracted and preoccupied by other information.

Problem = niche of value

Back to the book, as the author traveled to exotic places of the world, he discovered the value of trading sovereign bonds, he thrived in the unstable, irregular and chaotic political and social environments.  That gave me some thoughts on the values of intermediary, but I just realize the term “intermediary” is too restrictive.  It is all about finding niche in the chain of value and niche value exist in the area of “ruin”.

For entrepreneurs, problems, troubles, and areas that people tend to avoid, are the places to look into.  Think from the perspective of hidden value waiting to be realized.  Investigate the problems and uncover the possibility of innovation.  Being agile and adaptive, entrepreneur or small business is born to create value in the uncharted water.  Any ambiguous or unstructured situation is a call for initiative.  Whoever answers it will be the first to define and claim the territory.

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