The New York Times International - 29.07.2019

T HE NEW YORK TIMES INTERNATIONAL EDITION MONDAY, JULY 29, 2019 | 7

Business

High-price luxury items like sports cars, fine art and even rare first-edition books are generally beyond the reach of average collectors. Now, several technology companies are packaging rare cars, paintings, and books as offerings in which any col- lector can buy shares. Some offerings start with prices as low as $25 or $50 a share. In return, these retail investors

can, the pitch goes, participate in the appreciation of a famous painting in the same way that billionaire art collectors do. “It’s the idea that wealth is not accu- mulated off a salary,” said Rob Petrozzo, chief product officer of Rally Rd., which began by securitizing cars and has recently expanded to art, watches, collectibles and even a first- edition copy of “Harry Potter and the Philosopher’s Stone,” the title used outside the United States for the first of the “Harry Potter” books. The prospect of buying shares in collectible luxury items, known as passion assets, is certainly appealing. But when the underlying asset is fairly

illiquid and not divisible, investors should proceed with caution. “Securitization makes sense when there’s cash flow generated by the underlying assets,” said Steven L. Schwarcz, a professor at Duke Univer- sity’s School of Law. “What that does is provide a mechanism for the investor to be paid if the investor can’t sell the securities, since many don’t have a robust, if any, secondary market.” In the case of art, cars, books and similar assets, there is no such cash flow. The investor is paid back only if the underlying asset or its shares are sold. “Investors can’t force the sale,” Professor Schwarcz said. “That means

a lot of the consumers investing in this will have illiquid investments when the marketing is saying you can make this stuff liquid. It’s misleading to begin with.” Dividing assets into smaller securities has a long history in finance. The practice of securitizing assets like mortgages, auto loans and credit card debt goes back several decades. In this model, an investor buys into a pool, which spreads both the risk and the returns across the entire investor base. If loans go into default or get paid off early, the effect on the individual investor is muted. But the assets that are being securi- WEALTH, PAGE 8

You can own a tiny piece of this Lamborghini

Wealth Matters

PAUL SULLIVAN

In the days after the first crash of Boe- ing’s 737 Max, engineers at the Federal Aviation Administration came to a trou- bling realization: They didn’t fully un- derstand the automated system that had helped send the plane into a nose- dive, killing everyone on board. Engineers at the agency scoured their files for information about the system, which had been designed to help avoid stalls. They didn’t find much. Regulators had never independently assessed the risks of the software known as MCAS when they approved the plane in 2017. More than a dozen current and former employees at the F.A.A. and Boeing who spoke with The New York Times de- scribed a broken regulatory process that had effectively neutered the oversight authority of the agency. The regulator had been passing off routine tasks to manufacturers for years, with the goal of freeing up spe- cialists to focus on the most important safety concerns. But on the Max, the regulator handed nearly complete con- trol to Boeing, leaving some key agency officials in the dark about important sys- tems like MCAS, according to the current and former employees. While the agency’s flawed oversight of the Boeing 737 Max has attracted much scrutiny since the first crash in October and a second one in March, a Times investigation revealed previ- ously unreported details about weak- nesses in the regulatory process that compromised the safety of the plane. The company performed its own as- sessments of the system, which were not stress-tested by the regulator. Turn- over at the agency left two relatively in- experienced engineers overseeing Boe- ing’s early work on the system. The F.A.A. eventually handed over re- sponsibility for approval of MCAS to the manufacturer. After that, Boeing didn’t have to share the details of the system with the two agency engineers. They weren’t aware of its intricacies, according to two people with knowledge of the matter. Late in the development of the Max, Boeing decided to expand the use of MCAS to ensure that the plane flew

smoothly. The new, riskier version re- lied on a single sensor and could push down the nose of the plane by a much larger amount. Boeing did not submit a formal review of MCAS after the overhaul. It wasn’t required by F.A.A. rules. An engineering test pilot at the regulator knew about the changes, according to an agency official. But his job was to evaluate the way the plane flew, not to determine the safety of the system. The agency ultimately certified the jet as safe, required little training for pilots and allowed the plane to keep flying un- til a second deadly Max crash, less than five months after the first. The plane remains grounded as regulators await a fix from Boeing. If the ban persists much longer, Boeing said last week, it could be forced to halt produc- tion. The F.A.A. and Boeing have defended the plane’s certification, saying they followed proper procedures and adhered to the highest standards. “The agency’s certification processes are well-established and have consis- tently produced safe aircraft designs,” the regulator said in a statement Friday. “The 737 Max certification program in- volved 110,000 hours of work on the part of F.A.A. personnel, including flying or supporting 297 test flights.”

Boeing said “the F.A.A.’s rigor and regulatory leadership has driven ever- increasing levels of safety over the decades,” adding that “the 737 Max met the F.A.A.’s stringent standards and re- quirements as it was certified through the F.A.A.’s processes.” Federal prosecutors and lawmakers are now investigating whether the regulatory process is fundamentally flawed. As planes become more technologically advanced, the rules, even when they are followed, may not be enough to ensure safety. The new software played a role in both disasters, involving Lion Air and Ethiopian Airlines, which together killed 346 people. Boeing needed the approval process on the Max to go swiftly. Months behind its rival Airbus, the company was racing to finish the plane, a more fuel-efficient version of its best-selling 737. The regulator’s hands-off approach was pivotal. At crucial moments in the Max’s development, the agency operat-

Relaxed oversight

at root of Boeing crisis

SEATTLE

Broad authority granted to manufacturer to check the safety of the 737 Max

BY NATALIE KITROEFF, DAVID GELLES AND JACK NICAS

When Ali Bahrami was the Federal Aviation Administration’s top official in Seattle, some engineers believed that he favored managers who would be deferential to Boeing.

JONATHAN ERNST/BLOOMBERG

B OEING, PAGE 8

When they approved the plane, regulators had never independently assessed the risks of the software known as MCAS.

China has too many factories making too many goods. Thanks to its punishing trade war with the United States, its biggest overseas customer isn’t buying as before. So China is seeking new customers. They could prove to be a hard sell. China last week formally restarted its efforts to create a free-trade zone across the Asia-Pacific region, with an unlikely goal of striking a deal by November. If successful, the pact could eventually open markets from Australia to India. Beijing is also trying to keep alive long-shot, three-way talks that would lower trade barriers among China, Ja- pan and South Korea. More broadly, it is unilaterally reducing its own tariffs on a broad range of goods from all over the world, even as it puts higher retaliatory tariffs on American-made goods. At stake is the health of the Chinese economy. Last week, China reported that its growth had slowed to its most sluggish pace in nearly three decades, in part because the trade war with the Trump administration has begun to hit its crucial export sector. Global companies are now looking to shift work to other countries to avoid what could be a protracted trade war. With no end in immediate sight, China needs new markets for what it makes. “It’s hard to replace the U.S., but you have to try; you have to diversify,” said Chen Dingding, a professor of international relations at Jinan University in Guangzhou, China. “We don’t want to rely on the U.S. market forever, even though it’s important.” But trade pacts are difficult to strike, and China’s potential free-trade part- ners have plenty of reasons to be wor- ried. No country can absorb the sheer volume of what China sells to American customers. China’s regional neighbors compete against it in a number of industries. And China continues to maintain high tariffs and other barriers to protect its own industries — barriers that would have to drop if other countries were to sign on. The economic clash between the United States and China has thrown the world trade system out of balance.

China runs an annual surplus in manufactured goods trade of almost $1 trillion, meaning that is how much more it sells to the world than it buys each year. Nearly half of that surplus comes from trade with the United States. China’s overall exports to the United States slumped 8.5 percent in the first half of this year. China’s exports to the rest of the world have risen only 2.1 percent. As Beijing’s trade war with Wash- ington drags into its second year, the question now is who might buy China’s extra factory goods if the United States does not. Already, the country is plagued with excess capacity for making cars, steel and other staples of global trade. More factory slowdowns and shut- downs could lead to job losses and further drag down economic growth. Faced with further potential economic pain, Beijing is looking to open up other markets. The centerpiece of its efforts is a push this summer to negotiate an Asian free trade pact called the Re- gional Comprehensive Economic Part- nership, or R.C.E.P. The partnership would encompass the 10 countries of the Association of Southeast Asian Nations plus Australia, China, India, Japan, New Zealand and South Korea. Midlevel and senior trade officials from across the region began meeting last week in Zhengzhou, China. Their ministers are then scheduled to join them in Beijing on Aug. 2 and 3. The goal is to outline a deal that Asian leaders might then work out at a summit meeting in Bangkok in November. “We are continuing talking on this,

and we hope we can accelerate the speed so that it can be concluded within this year,” said Wu Jianghao, the direc- tor general of the department of Asian affairs at the Chinese Foreign Ministry. China’s leaders have talked since 2012 about the possibility of such a regional partnership, in response to President Barack Obama’s plans for a multination trade deal called the Trans-Pacific Part- nership that would have excluded China. Working out a deal would require solving some thorny issues. “I’m not optimistic about that deal to be materialized in November,” said Takeshi Niinami, chief executive of Sun- tory, the Japanese beverage company, and a member of a council that advises Japan’s prime minister, Shinzo Abe, on economic issues. “Maybe we need more time,” he said. One obstacle had been China’s own high tariffs. Beijing long feared that if it cut tariffs, manufacturers would flee China’s surging wages and find lower- cost refuges in countries like Vietnam and Bangladesh. Starting in May of last year, China began reducing its tariffs. Trade tensions with the United States were rising. Chi- nese leaders had also become increas- ingly willing to lower protective walls around the country’s labor-intensive, low-tech industries so as to focus on more sophisticated manufacturing. Though average tariffs remain higher than those of the United States and the European Union, the categories for which China has reduced tariffs include many low-tech manufactured goods,

like handbags and low-cost garments, which many of China’s neighbors would like to export. “We will continue to lower overall tariffs voluntarily, remove non-tariff barriers, actively increase the import of goods and services, and enhance import facilitation,” Premier Li Keqiang said in a speech on July 2 in Dalian, China, at the “summer Davos” session of the World Economic Forum. Winning support could be a tall order. India, for example, with its size and fast growth could be a potentially vast buyer of Chinese goods. But India protects its markets behind the highest average tariffs among the world’s biggest econo- mies, and it fears floods of low-priced imports from China. Still, Indian phar- maceutical makers want to ship more generic drugs to China. Service industries, like computer programming, want to make it easier for Indian program- mers to get temporary work visas there. “There are sectors that feel very vul- nerable, and there are sectors that stand to gain, like services,” said Gaurav Dalmia, the chairman of Dalmia Group Holdings, an Indian industrial and fi- nancial conglomerate. Yet China has been wary of opening its doors to Indian pharmaceuticals and Indian workers. One possibility is that the negotiations could reach a deal that does not initially include India, said Mari Pangestu, a former trade minister of Indonesia. But that would limit the benefits for the other countries in the talks. Even if a deal is struck, it is not clear how much China might benefit. A number of potential members, like Japan and South Korea, are highly competitive manufacturers themselves and may not import a lot more. China has also been in long-running talks with Japan and South Korea on a trilateral trade partnership. But the prospects for any new trade deal among China, Japan and South Korea have been put in serious question by a sim- mering trade dispute between Japan and South Korea. Even if China strikes new trade pacts, it will still face pressure to find markets for the vast amounts of manufactured goods it makes, said Brad Setser, a former Treasury official in the Obama administration who is now at the Council on Foreign Relations in New York. “There’s absolutely no other country in the world that is willing right now to replace the United States in running a close to $400 billion annual trade deficit in manufactured goods with China,” he said.

Factory workers in Guangzhou, China. “It’s hard to replace the U.S., but you have to try; you have to diversify,” an educator said. “We don’t want to rely on the U.S. market forever.”

LAM YIK FEI FOR THE NEW YORK TIMES

Beijing looks for new buyers

BEIJING

Trade war with U.S. leaves China mountains of stuff and nowhere to send it

BY KEITH BRADSHER

China’s manufactured goods trade

Source: China’s General Administration of Customs, via CEIC Data

Note: Annual figures for China’s exports and imports of all manufactured goods. China runs a trade deficit in many raw materials, notably oil and iron ore.

trillion$2.

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Imports

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THE NEW YORK TIMES

NOTICE TO CHAOFENG JI:

Youhavebeennamedasareliefdefendantinalawsuit ledbytheU.S.SecuritiesandExchange CommissionintheUnitedStatesDistrictCourtfortheSouthernDistrictofNewYork.Thename ofthecaseisSEC v. Yin, et. al.,andhasacasenumberof17-cv-0972-JPO.TheSECallegesthat throughyourownershipinterestinafamilybrokerageaccountnominallyheldbyyourrelative, reliefdefendantBeiXie,youreceivedill-gottengainsfromillegalinsidertrading.TheSEC furtherallegesthatyouhavenolegitimateclaimtothoseproceeds.TheSECseeksdisgorgement ofyourill-gottengains. YouaredirectedtocontacttheSECat:TrialUnit,Attn:GaryY.Leung,SeniorTrialCounsel, LosAngelesRegionalOce,SecuritiesandExchangeCommission,^444 S.FlowerSt.9thFloor, LosAngeles,California,90071,323.965.3213,[email protected],sothatyoumaybeservedwith theSummonsandSecondAmendedComplaint.IfyoudonotcontacttheSECwithin daysofthepublicationofthisnotice,theSECwillbeentitledtoseekentryofyourdefault judgementagainstyoubydefaultintheabove-entitledcasepursuanttoRule^55 oftheFederal RulesofCivilProcedure.

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The New York Times International - 29.07.2019

Business

Relaxed oversight

at root of Boeing crisis

Beijing looks for new buyers

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