Muddy Waters …no not the blues singer, but the investment research firm headed by lawyer/founder Carson Block, reports on which Chinese companies can be “trusted.” Block engaged in a heated debate at the Bloomberg Hedge Funds Summit in New York last week with Daniel Arbess, a partner from asset management firm Perella Weinberg. Block boldly reminded listeners that China is a communist country where they “shoot people who dissent.” He continued that, “From a rule of law viewpoint, this is a place to stay away from.” Block insisted that, “Emerging markets (like China) don’t reward partners who are overly ethical.“
Arbess took the opposing view claiming that Block was over-generalizing. Arbess claimed that after working in emerging markets and China for many years, corruption was not as widespread as Block indicated. He stated that, “There will always be fraud…I believe it is not beyond manageability.” Fellow panel member, James Rickards, senior managing director of Tangent Capital Partners weighed in saying, “Corruption is like a septic tank; it fills up before it starts to smell.” Rickards pointed out that often in emerging markets there is always “a guy in the room” who no one knows “who gets things done.”
Bloomberg host Jonathan Weil reminded the panel of “the continuum of fraud” in the U.S.” He said in the past decade every energy trading and telecom firm was suspect in the wake of the WorldCom, Enron and Tyco debacles. It seems prudent to point out the elephant in the room that no one on the panel mentioned. The current public mistrust for U.S. financial firms following the banking collapse proves that emerging markets are not the only markets that need to earn integrity brownie points. In 21st century business, trust is one of your greatest assets and one of the hardest to come by both in emerging and established markets.