It happens. No number of referees and/or linesmen can stop it.

Have a Good Weekend!

A minority have implausibly puritanical levels of integrity.

A few others draw a fuzzy line somewhere between illegal parking and having your child tell the caller you are not at home.

Most people, though, only refrain from money-making civil and criminal misdemeanours when the odds of capture outweigh the potential reward. And weighing those odds accurately tends to be a dynamic calculation - particularly when political administrations change. Just ask Danielle "not such a secure line" Chiesi.

So is the Galleon wiretap-based prosecution a hammer blow for integrity? Will it "change behaviour" in the ethical sense that those words might be interpreted as meaning?

Doubtful - but it is a leaf taken from the syllabus of the Genghis Khan School of Market Administration: blind all but one in the village and send the mono-eyed survivor down the road to the next settlement with the news.

For the hell of it, compare and contrast the size and scope of the SEC (which has not exactly been setting the regulatory standard recently) prosecution with the efforts of the UK's FSA. The FSA, as of last March, now has one (as in "there's only one FSA") successful criminal conviction to its credit. It concerned a small-cap company's counsel, his father-in-law and a total insider profit of £48,919.20 (equivalent, for info, to an off-plan garden flat in extradition treaty-lite Northern Cyprus). One suspended sentence later (father-in-law was 75, poor chap) and eight months in jail for the brief and the FSA gets to give speeches titled "Delivering Credible Deterrence".

Alright - it may be early days since that "success" but the FSA's own Annual report (page 34) shows that “abnormal” share-price movements - possible signals of illegal insider activity - rose year over year in 2009. As, in fact, they have done every year since 2005. Incredible deterrence.

As a footnote, of the twenty-odd civil penalties the FSA has imposed since its 2004 creation not one has been against a major investment bank. Very ethical bunch, clearly. Or maybe, in its current political fight to justify its existence, the FSA ought to do a Genghis. Its limp history would set up the impact rather well.

Another resigned-in-tone guest column from Morgan Stanley's great Stephen Roach in yesterday's Financial Times. Somewhere along the way, he says, the message of The Bust has become mangled beyond comprehension:

This crisis was, first and foremost, about the unsustainability of macro imbalances – imbalances within and between nations – as well as about the egregious flaws in policies, regulatory structures, and risk-management practices that allowed these imbalances to take the world to the brink.

[...]

Recent policy initiatives offer little reassurance. Cash-for-clunkers in America and cash for roads in China are emblematic of a penchant for quick-fix stimulus actions that risk compounding existing imbalances.

US authorities cannot resist opting for another dose of excess consumption – despite the fact that the consumption share of real gross domestic product remains at a record high of 71 per cent.

Nor can the Chinese wean themselves off investment-led growth – even though the fixed investment share of their GDP appears to have surged beyond the already unprecedented reading of 45 per cent in mid-2009. Far from rebalancing, an unbalanced world once again appears to be compounding existing imbalances.

I had been wondering what this situation as described by Mr Roach reminded me of. Then it came to me: the poor facsimiles represented by any number of karaoked covers. Worse, the originals themselves often had few redeeming qualities.

Consider it the Mariah Carey Effect.

A little cricketing truism goes "Everyone scores runs in Antigua. But only Lara breaks records."

BNP Paribas feature in today's news in what at first sight is a fairly banal piece from Bloomberg. The bank, like many peers, is repaying state aid because that aid has "fully achieved its objectives" and, in any case, BNP are doing so well in the "changing environment" that the capital is not needed.

Back in August 2007 the "changing environment" led Baudouin Prot, CEO, to first declare that "As far as the U.S. subprime crisis is concerned, BNP Paribas's exposure is absolutely negligible" and 8 days later have the bank's spokesperson announce that BNP Paribas was freezing three of its negligibly exposed funds due to the "complete evaporation of liquidity in certain market segments of the U.S. securitization market."

Fast forward and under an agreement with the French state to increase domestic lending to the retail sector by 3% to 4% annually BNP took a total of €5.1bn from taxpayers in December 2008 and March 2009. The bank was meanwhile putting aside €1bn for investment banker bonuses which the French central bank said was fine for it did not break any G20 rules.

Enter Fortis, the wreck of a Dutch-Belgian bank the mooted 2008 sale of which to BNP was so contentious it had already brought down one Belgian administration. In March 2009 BNP offered sweetened terms worth an additional €510m to enraged shareholders and also agreed to take a €1.4bn stake in a Belgian insurance unit via Fortis Bank. The deal, worth a total of circa €10.4bn and including some very generous guarantees by the Belgian taxpayer worth €3.5bn to BNP, went through two months later.

Come August 2009 and BNP, batting on the benign, Antigua-like, wicket of artificially low interest rates and asset price recovery thanks to public underwriting and fiscal stimuli, reports a €261m net income contribution from Fortis on top of scoring €815m of negative goodwill ("badwill"?) from the purchase.

Interesting timeline and not bad work. Suspicions from the European Union that the French aid package would end up subsidising the purchase of cheap banking assets abroad (for the banks and the French state always claimed recapitalisation was not needed) have long since died. Repaying French taxpayers will now relieve BNP of its rather modest domestic lending obligation as well as free - or help free depending on the prevailing political requirements - its bonus policy from state interference. Despite that, Monsieur Prot kindly pledged commitment on both counts to toeing the government's line.

If only banks could play in this "changing environment" every week.

From the Economist. Possibly not the antidote it might be for equities soaring on the back of massive public sector mortgages but interesting. Click the image to go there and see it in action:


A piece of the press release blurb:

"The Global Public Debt Clock was developed using data and forecasts from the Economist Intelligence Unit database. It is, of course, inspired by the 'National Debt Clock', a rolling measure of the US public debt that physically resides in midtown Manhattan. This clock was originally sponsored by a real estate developer, Seymour Durst, who wanted to make people aware of the rising public debt, which at the time was less than $3 trillion. The Global Public Debt Clock includes historical data on sovereign debt back to 1999 and forecasts through 2011. Data can be parsed to view country comparisons, including figures on public debt per capita, debt as a percent of GDP, and yearly rate of change.

The worst global economic storm since the 1930s may be beginning to clear, but another cloud already looms on the financial horizon: massive public debt. Across the rich world governments are borrowing vast amounts as the recession reduces tax revenue and spending mounts—on bail-outs, unemployment benefits and stimulus plans. New figures from economists at the IMF suggest that the public debt of the ten leading rich countries will rise from 78% of GDP in 2007 to 114% by 2014. These governments will then owe around $50,000 for every one of their citizens Not since the second world war have so many governments borrowed so much so quickly or, collectively, been so heavily in hock. And today’s debt surge, unlike the wartime one, will not be temporary. Even after the recession ends few rich countries will be running budgets tight enough to stop their debt from rising further. Worse, today’s borrowing binge is taking place just before a slow-motion budget-bust caused by the pension and health-care costs of a greying population. By 2050 a third of the rich world’s population will be over 60. The demographic bill is likely to be ten times bigger than the fiscal cost of the financial crisis."

A small island importing nearly 90% of its energy needs ought to be acutely concerned that its auction of offshore oil exploratory licences attracted but one successful bidder (BHP Billiton). A clarion call to governmental action stations, perhaps?

Yet, unless press reports last month misquoted the Director of Barbados’ Natural Resources Division, no decision has been made about initiating a second round of bidding. There is thus no timetable to confirm (or not) a US Geological Survey that suggested Barbados may have 1.2 billion barrels of oil and 254 billion m3 of gas in its territorial waters.

The context of the auction’s failure and the actual lack of urgency in pushing on is this: current oil markets, despite current demand weakness, are beset by long-term under investment. When demand does recover tightened global supplies, in hand with the under investment, are likely to produce persistently higher energy prices than those prevailing today.

For Barbados, where public debt is over 70% of GDP and a painful BDS$730 million (10% of GDP) was spent importing energy last year, that outlook is particularly discouraging.

But there is reason for hope. Until two weeks ago São Tomé and Príncipe, another potential oil producer, faced some similar circumstances: an uncomfortable balance of payments position, one unsuccessful deep water test and little further interest since as the capacities of explorers diminished with the evaporation of global credit.

Then, as this WSJ piece reported last month, along came China's Sinopec with Addax Petroleum, its latest acquired toy. And presto! Drilling resumed!

Now, feelings about China's global hunt for resources are ambivalent. But fair exchange is no robbery and in a credit scarce world there are not many more other than Sinopec, CNPC and COOC who can readily finance deep water energy exploration.

For Barbados it is a quite remarkable constellation of events: a local economy in the grip of a global credit crisis; potentially transformational energy revenues off its shores requiring exploration partners; 32 years of friendly diplomatic relations with a cash-rich China actively scouring the planet for hydrocarbons. And China, in a particulalry funny turn of events, has a geologist as its Premier.

The conclusions the makers of economic policy in the island should draw would seem straightforward enough. Yet governmental fanfare heralding its new Beijing embassy suggests that top priorities are the buying of Chinese military uniforms and hardware, persuading Chinese money to recapitalise a regional airline and cultivating tourism ties with China.

Whatever the merits of those ideas, it would be an travesty were the list not broadened to include a concerted diplomatic-led effort to bring the Chinese integrated oil producers to the bidding table.

The potential payoff is immense, the outlay minimal.

Some noticeable things on a recent trip to Helsinki. €7 beer. Habour-fulls of motor yachts, including a little US$200k/day Vincentian domiciled charter (includes a skipper and a chef - bargain). Handsome and clean buildings of mostly Swedish influence (though there is no concealing the occasional Soviet inspired blot). And residential property prices as high as €15k/m2. In fact, the more one walks the heart (and monied part) of the city the more the apparent lack of economic distress becomes.

One of my Finnish acquaintances (central bank) explained it thus: the rich get richer, especially in a downturn. Another (high tech start-up) said out of Helsinki the picture was quite different and don't even ask about venture capital liquidity. And another (commercial property) said sentiment was now very high again amongst his investors.

This last view stuck with me for his firm is present in Sweden, Finland, Lithuania (claim to fame: we aren't Latvia) and Estonia (claim to fame: we aren't Lithuania).

Sweden has famously financed Baltic expansion and one of its main players in that game, Swedbank, is a now popular short (some background from the NYT here). Estonian GDP shrank nearly 17% in Q2 whilst retail sales fell 16%. Lithuanian GDP fell over 20% with retail sales dropping nearly 28%. Course Swedbank needs to raise capital to "strengthen" its "compeitive position".

Yet Baltic occupancy rates for my acquaintance's firm are high and steady. Moreover, rental agreements are denominated in euros in order to protect the landlord (theoretically) from devaluation. And with his debt maturities covered through 2010 all, it seems, is rosy.

However, there are not many ways back for Estonia and Lithuania other than through lower wages and prices (in order to boost exports and assuming they continue to protect creditor banks by not devaluing).

So some deterioration of these defiant retail property actuals, surely, approaches. And, for the broader economy, it is straightforward to see the linkages from stressed trading partners back to even the sensibly run Finnish banks and property companies - but not so easy to judge impact.

In the meantime in 'old' Helsinki (relatively speaking since there appears not to be a single stone edifice over 150 years old in the place), one of the few conspicuous signs of current stress is that of giveaway hotel prices (after a very gentle haggle). But they'll get you back on the liquor.

Readers may have recognised this 12 August letter to the FT from Mr Keetch as a variant made popular by email chain letters and time-sink Facebook devotees.

FT readers may have taken it a shade too seriously, though, judging by Friday's letter page below.

But at least Mr Keetch remains one step ahead with his latest missive.

Unfortunately, having chewed up and been poisoned by David X. Li's magical Gaussian copula, financial engineers at investment banks may already be looking at ways to commercialise this latest (old) conundrum.

The solution (and I write under instruction from an infuriatingly quick friend) is that the rearrangement does not fit together snugly. For that one would have to divide by 3.0557 and 4.9443 rather than 3 and 5. And the gap covered by the rounding and thick line work is a tidy 1 unit.

For those from sugar producing nations there has been a particularly interesting little frenzy in that market during the holidays. The FT Alphaville site has a concise explanation.

There is something else, though, not explained in the piece. In the name of food security the Government of India (GoI) operates a price control system on certain grains and softs. Last year they raised the minimum prices on both rice and wheat. Unsurprisingly, farmers planted more of both. As of July this year stocks for the pair (33m tonnes of wheat, 20m tonnes of rice) were double what the GoI considers adequate buffer levels.

The flip side is that sugar under cultivation fell both as a result of these controls and on the back of consecutive bumper harvests into the 2006 season which did little for prices. Fast forward to now and, well, you cannot reap what you don't sow.

Consensus appears to be that next year will also see a “deficit” sugar harvest. As a result futures are in backwardation (see chart below) – a sign of great market strength - as industry and speculative buying piles in hoping to ride the proverbial Jim Rogers commodity quintuplet.

Small prediction. The sugar cycle runs 15 months in India, the second largest global producer in 2008 (28.8m tonnes, 2.6m less than Brazil). Without doubt the big growing states of Uttar Pradesh, Maharashtra and Tamil Nadu are already looking beyond the imminent end of this year's harvest at ways of bringing more land into cane production. And, if domestic food security policy runs true to form (India is the largest consumer of sugar), there may even be some cycle-exaggerating GoI production encouragement to mix in (this NYT piece is an excellent primer). In short, bulls be careful.


Chart: Sugar prices, real (1980-82=100) & nominal, 1960-2009


Footnote: the Granny of the 1974 and 1980 OPEC Inspired Sugar Booms and Busts (for those who did not have it fed to them at school) was the 1919-1920 Dance of the Millions. The real price per pound rose 350% over 6 months to hit $2.39. Over the next 7 months it then fell 80%.

Nice paper on it here. Different circumstances, some parallels (tangentially, substitute “sugar market” for “credit market” and have more fun still) and probably a similar result in due course. For sure India will not be alone in looking to secure today's higher prices.

When I contacted Peter Swan recently about a paper he had written with colleague Jaeyoung Sung (Executive pay, talent and firm size: why has CEO pay grown so much?) I was pleasantly surprised to receive a polite holding reply and then a later follow up with the information requested.

I was after the table their paper hinted at listing the Top CEO Talent for the years 1995 to 2007. It is below:




“Talent” is a tricky notion to nail. The paper's proxy is based on post appointment CEO performance and involves 13 years of S&P 1500 data and an eight page algebraic model. A model, reassuringly for the hardcore, that is supported by a further four pages of mathematical proofs.

Once through the greek (or Maginot-like, for many, around it) the end result is the finding that talent, as estimated under the model, explains 64% of the firm's enterprise return* and 82% of the incremental quantum of salary that CEOs trouser. Steve Jobs obviously puts a small spanner in the works with his $1 pay packages of 2005 and 2007.

It is notable that ten of the thirteen on the list come from the tech world. That tends to raise question of, erm, dumb luck. Put Ellison in charge at Bear Stearns, Lehman or CIT and would the assumption he controlled enterprise returns independently of industry hold?

In that context - and perversely perhaps - intuition suggests the Top Talentless CEOs list might better showcase the Swan/Sung model. Incompetence respects no frontier (nor, increasingly, does the threat of litigation).


*The market value of year-end assets plus the difference between net distributions and net (capital equity and debt additions).

NB: ARM subscribers may recognise the paper as one featured in July's issue. The table is taken from a fine op-ed by Messers Swan and Sung that appears in today's Australian Financial Review (have to pay, I'm afraid).