Dennis Meadows, author of The Limits to Growth gave a bit of wake-up call of an interview to der Spiegel as the Copenhagen conference kicked off. It featured this gem of an exchange:

"SPIEGEL ONLINE: How do you deal with the fact that your analyses have failed to bring about any real changes?

Meadows: A long time ago I thought we would have to achieve a total utopia in order to avoid total collapse. Today I am somewhat more balanced. For me personally it is enough if I make the world a little better than it would have been without me. Everyone should rethink their own lifestyle, their carbon footprint and try to think one step ahead into the future.

SPIEGEL ONLINE: What has the reaction been to this kind of advice?

Meadows: A fashion editor once asked me about lifestyle changes. I asked her how many pairs of shoes she had. It was 18. I advised her that three pairs would be enough. Unfortunately the article was never published. Many habits are deeply rooted and it takes practice to get rid of them."


A far meatier presentation of Mr Meadow's views comes in this speech he gave last November at the Central European University in Budapest. Uncomfortable stuff.

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Copenhagen this time of year is not the easiest place to sell global warming. Last Friday night the only thing warming the city centre (well, for half the population) were the many giant posters of Sonia Rykiel's new lingerie collection.

Gratuitous? Hardly - once you've peeked through H&M's Sustainability Report: let no unsound productive practices come between a woman and her knickers.

There are other, more serious, reminders of the sustainability principle from the off. Passengers arriving in Copenhagen on their still non-biofuel powered, jackboot-sized carbon footprinted aeroplanes are greeted by the words "Stop climate change here!" visible on the sail of a yacht anchored immediately under the flight path.

By this time visitors flying SAS will have read though Scanorama, the in-flight magazine, which features an interview with Connie Hedegaard the Danish Minister for Climate & Energy. The minister is refreshingly straightforward and must make PR executives wince:

[Interviewer] "You normally bike from your home to work...is that something you do for the climate?"

[Minister] "No, it's just as much for blowing the cobwebs out of my head and for exercise"

Into the city itself and "Hopenhagen" is the brave theme everywhere (as in the top photo and sponsored, it seems, by McDonald's) occasionally interspersed with "Til Leje" signs seeking renters for office/shop space.

And on the property buy side, residential apartments near Nordea bank's HQ in the Christianhavn district (near opposite the shot, below, of Greenpeace's Arctic Sunrise) are running at over €18k/square metre. A little surprising for a place with (allegedly) one of the worst housing slumps in Europe.

How, one wonders, will budgets be found to pay the price of environmental sustainability in a global economy where even the best-off have financial worries?

A compact paper was published last week by Benjamin Jones and Michael Keen of the IMF called Climate Policy and the Recovery and puts this debate even-handedly and coolly in context. Featuring the large and sad disclaimer:


"The views expressed herein are those of the author(s) and should not be attributed to the IMF, its Executive Board, or its management"

it is worth reading beyond the executive summary.

Prevailing macroeconomic conditions make the task of pricing pollution more sensitive but no less necessary. Useful policy changes would not be impossible to live with; and there is something precious in it for those balancing the most precarious and tax-revenue starved fiscal positions.

Hopenhagen for Christmas.

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Hearing of enthusiastic property development plans for the world's tallest building? Then dust off, perhaps, an old but maybe not so tongue-in-cheek leading indicator...






The 92 metre Masonic Temple, Chicago. Completed in 1892 shortly after the largest quarterly contraction of GNP in US history.









The 119 metre Park Row building, New York. Complete in 1898 and preceded by the 4th largest quarterly decline in real GNP over the period of 1875-1918.










The 187 metre Singer building (completed in 1908) and the 247 metre Metropolitan Life building (1909), New York. Products of the period leading up to the Panic of 1907.










The 283 metre (includes the spire) 40 Wall Street building (completed 1929),










the 282 metre Chrysler building (1930),











and the 381 metre Empire State building (1931). Unpleasant little associations with the Great Depression.












The 417 metre Twin Towers (1972/73) and the 442 metre Sears Tower (1974) just in time for stagflation.











The 452 metre Petronas Tower (1997) stamped the mark of the Asian Crisis.












The 509 metre Taipei Financial Center, Taiwan. Complete in 2004 but born of the 1999 Tech Wreck.









And, finally (for now), all 818 metres of the Burj Dubai Tower which is due for completion in early 2010. Abu Dhabi permitting.







NB: (Inspired by Andrew Lawrence's The Skyscraper Index: Faulty Towers! Property Report, Dresdner Kleinwort Benson Research (January 15, 1999a) and Mark Thornton's Skyscrapers and Business Cycles [The Quarterly Journal of Austrian Economics. Vol. 8, No.1, Spring 2005. pp. 51-74.])

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Light week-end relief for anyone taking seriously requests for China-Land-of-Over-Capacity to revalue upwards:


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Amazon is not reporting an increase in sales of Percy’s sonnets but it is looking like Shelley can add “market sage” to a cv already boasting the achievements of “renowned romantic poet” and “over enthusiastic practitioner of free love”.

In some places (one example of several) Dubai's predicament is being described as a “black swan”. This cannot be right on any reasonable reading. For example, over a year ago - September 19, 2008 - Jim Chanos appeared on Bloomberg and declared “if I could short Dubai I’d short it” (8’59”). The SEC have not tried to pin the current woes on him partly due to jurisdiction limitations but also because the menace of a default "standstill request" has simply been out there for a long time.

No, what we have here is another episode in the Waiting for the Wheels to Fall Off game. Unsurprisingly, investors appear to have been encouraged in this by dissembling Emirates authorities with a separate agenda.

This piece outlines that point and some of the reaction retrospection permits. But, when intelligent people with Other People’s Money allow their hopes to obscure reality, quotes from that article such as “The credibility of these guys has been found wanting” tend to cut both ways. It is the price of optimism and faith in today's “anti-market at any cost” dogma of financial crisis management.

The growth of Dubai City has long seemed unsustainably anti-financial, unsustainably anti-nature (UAE ranking, page 14 - I know everyone like to beat the US but this is ridiculous) and anti-“guest worker”.

Revisiting the model is surely no bad thing.

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For a place where the widespread use of postdated cheques represents a dangerous form of unofficial, unregulated credit expansion; and bouncing such cheques is a criminal offense (interesting comments at the foot of this TimeOut Dubai piece) it is painfully ironic that the Emirate now requests a little understanding on a cultural more as sensitive as that of the importance of honouring one's obligations.

Barclays Capital will certainly wonder about Fate's sharp gag writers. A scant 3 weeks ago they considered Dubai sovereign debt "attractively priced at current levels". Well, it's an even bigger bargain today (excluding insurance costs described by some as "overblown").

Barclays, along with Credit Suisse, Lloyds, HSBC (seen last month describing the debt liabilities of related Dubai government companies as "reasonable"), Royal Bank of Scotland and Deutsche Bank, is one of the lenders caught in the dilemma of finding a way through potential losses whilst maintaining precious (for future business) relational ties. And talking its own book does not seem to have done the trick.

In sum, this might prove a story just getting started as both the US Thanksgiving and Islamic Eid al-Adha breaks guarantee that matters marinate until next week.

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Contrary to earlier reports from some Dubai government related entities, notably 31.2% publicly owned Emaar Properties whose tallest-in-the-world handy work is pictured below, it not only seemed a bad idea at the time. It, sadly, was.


Symbolic bragging rights don't come cheap or, generally, in non-pyrrhic packaging.

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As I was being physically crippled during a squash match last week (albeit on a deferred by 24 hours basis) I was lucky enough to have an opponent who competed with the spirit of that vague notion “fair play”. In past matches I have had the dodgy score-keeping opponent; the opponent who regards the let rule as secondary to the chance to get a blindside tackle in; and the screaming, cursing racquet smasher.

It was the day following France’s qualification for the World Cup courtesy of a neat piece of final moments, illegal control by the team’s skipper, Thierry Henry. The referee did not see it (officials missed an even more obvious offside from the kick that led to it) and – voilà it’s not Guinness but something pétillant all round.

Post-match the line of Raymond Domenech, the French manager and a man who allegedly puts astrology at the centre of his life, was “Let me enjoy this happiness!” Unsurprising for a guy whose reaction to being dumped out of Euro 2008 was to ignore questions about his future as manager and instead thought the moment romantic enough to ask journalist Estelle Denis to marry him. This has done little harm to his standing as a figure of fun:

Lorsque Raymond Domenech perd, il demande la main d’Estelle Denis.

Lorsque Raymond Domenech gagne, il demande la main de Thierry Henry.

But Domenech was right – enjoy it for his team played the system and won. The cast-iron logic was provided by the head of French football and boiled down to “it cuts both ways, that’s how it is, how it has been – and, by the way, accords to the structure in place”.

This is a good defence, one that transcends sport. Precedent is important. So important that, once installed alongside codification, “individual responsibility” becomes an idea of ridicule and “paying the consequences” an acceptable risk. Those are things for a third party to assess and levy.

As the handy Thierry Henry said, “I am not the referee”. It is the professional footballer’s (strangely familiar) Safe Habor statement, a shield and an invitation to deceive.

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




Have a Good Weekend!

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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.

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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.


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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.

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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."

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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.

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Sober in Helsinki

Monday, September 07, 2009 | , | 0 comments »


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.

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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.

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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.

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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).

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(July Newsletter content snippet)

"Barney Frank, Chairman of the powerful US Congressional Financial Services Committee, asked bankers during one of his hearings last February “Why do you need to be bribed to have your interests aligned with the people who are paying your salary?”.

Contrastingly, he had a scant month earlier personally written an “earmark” provision into the Troubled Asset Relief Program bill specifically aimed at helping a failing bank in his home state. No ordinary collaterally-damaged-by-the-fallout bank but one under a Federal Deposit Insurance Corporation “Cease and Desist” order for (amongst a great many managerial and operational failings) “allowing the payment of excessive compensation”.

This US-focussed study does not do irony but it does look at the economic impact made by a leading politician in his home state when he is appointed to the chair of one of the 10 most influential congressional committees..."

(Ludicrously generous summer trial available in July and August, email for more info)

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In March a small "Pros vs Cons" of the US Public Private Investment Plan (PPIP), more accurately known by its vernacular "toxic asset plan" title, appeared here. A quote from PIMCO's Bill Gross was cited:

“This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically. We intend to participate.”

Which is interesting because they chose yesterday not to participate in the "win/win/win".

Now, observes can choose to believe PIMCOs reasoning that "as a result of uncertainties regarding the design and implementation of the program, PIMCO withdrew its application to serve as a manager for the PPIP in early June" although no one else in the race did.

Or they can consider the merits of a LA Times piece yesterday:

"Pimco may have stumbled badly with its initial foray into buying troubled mortgage-backed bonds in 2007. That could have fueled concerns internally that the firm wouldn’t be able to raise from investors the minimum $500 million seed capital required for a manager in the PPIP under the Treasury’s rules." (link)
Hazards of bottom fishing...

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Ponzi got 14 years. Bernie, 150.

Either the US Justice system knows more than the rest of us about the demographic time bomb threatening pensions or its sentencing system may be a touch detached from reality. That's alot of porridge and a shade more than the 12 his lawyer suggested was "fair".

Some media coverage:

Newsweek - "The Greediest of All Time". Probably the only time Mr Madoff will share space with a Pope whose family clearly had fiscal taxation ideas way ahead of their time:


The Daily Telegraph - even coverage of dodgy UK parliamentarians must bow to Bernie in this slightly unfairly slanted (by title) piece "Ten Top American Fraudsters":


The FT - "Wall Street’s white-collar criminals". Is it comforting to know Ebbers and Skilling are scheduled to get out less than 5 months apart in 2028?




Time - "Top 10 Crooked CEOs" a list that skillfully manages to include a porn star liaison:



And finally, Forbes - "The Longest White-Collar Prison Sentences". If you thought Bernie's 150 was tops disabuse yourself. He's an improbable number 4 some distance behind numero uno Sholam Weiss (currently serving 845 summers).


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Have a good one:




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I cannot say with certainty that British Airways' management are most responsible for the current dire accounting position the carrier finds itself in. But it is particularly interesting that CEO Mr Walsh leads a team that deems the public demonisation of their front line staff a prerequisite to preventing a calamitous financial stall.

There are 13,000 pilots and cabin crew in a total headcount of 40,627. A public battle and fixation on this 30% of staff who face customers seems a curious way to built a harmonious, customer service tilted company.

Still, on this count I tip my hat to Mr Walsh's Investor Relations and PR squads - for the press has given them an easy ride. It is rare to see such a lack of media cynicism to his well-trailed CEO stunt of foregoing a month of pay and then a few weeks later floating the same idea for those staff who did not receive £90,678 in company-paid pension contributions last year (page 70).

That may seem irrelevant. But in its last accounts BA recorded a pension deficit roughly equal to its market cap of £1.4bn. And that represents an improved position - the last actuarial triennial in 2006 put the hole at £2.1bn.

Guess where an instant £400m of the reduction came from in 2007? Staff - including those terrible 1970's (in spirit) work to rule trouble makers - who agreed to less retirement benefits (which were not notably generous to begin with) and an older retirement age. The overall deal is also good for ongoing annual savings of £80m*.

That staff contribute that much and then see 1 in 3 of their number demonised a scant 24 months later as recalcitrant saboteurs seems a tad hypocritical.

Now, had they been responsible for the price fixing scandal and fines of 2007 (£270m and counting) it would be understandable. Or had they decided to sell the low cost carrier Go at the moment it became profitable in 2001 for £200m only to see it resold a bare year later for £374m to EasyJet who now carry more passengers than BA that, too, would be a mitigating factor. Or, having done that, had they then decided that being a one-trick London to NY pony was a Good, Diversified Strategy well, there too, demonisation might be a fair option. And is there a need to mention the customer goodwill (and compensation money) lost with the bungled Terminal 5 opening? It is not easy to stack 28,000 bags in a corner because they cannot be delivered with their owners.

So, in the circumstances, that management led by CEO Mr Walsh and CFO Mr Williams now talk about the high cost base of "legacy carriers" and attempt to set-up cabin crew as villains is very amusing in a pantomimish sort of way. Or it would be were a minority's livelihoods not, it appears, being lined up against the cost of past strategic mis-steps.


*Yet even this may not be enough with some analysts questioning the last pension deficit assessment. Citi, for example, expect the next actuarial triennial valuation (this September) to put it between £3bn and £3.5bn.

NB: Some scribe bias due, possibly, to the several BA and Air France staff he knows.

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Through my snail mail this morning arrived this cautiously optimistic piece from the LSE. An excerpt:

"At its core the recent failure of the global financial system reflects profound faults in our system of global governance. There has been no clear division of labour among the myriad of international institutions that have sought to address the crisis: their functions have often overlapped, their mandates have conflicted and their objectives have too often blurred. Attempts to tackle the crisis have been dogged by competition between states – leading to a dissonant response."

The authors emphasize the need, as ever, for reform but gloss over the process as "highly politicised". Understatement alert. It is a battleground with the Rest of the World aiming to reduce US and UK - its principle satellite ally in international fora - influence.

Revealing picture too:

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5 word response: Congrats, but where, Paul, where?

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Yesterday my hard drive died. As did the Obama Administration's plan to cap salaries at financial firms. But they still, apparently, intend to produce strong - very, very strong - "recommendations" (still unsurprisingly fuzzy in definition) on pay at some future date. Is there a link? Certainly.

Producing policy and guarantees that sell well but offer few protections to consumers is a valuable skill set. As Dell attempt to wiggle out of a warranty with 121 days to run whilst also encouraging the purchase of a further "extended guarantee" so administrators continue to behave like a guild of financial apothecaries floating one set of prescriptions then another all in the search, it seems, for something with no adverse side effects for themselves - or the patient - but that also proves popular.

The argument that government ought to "stay out of the private sector" is a powerful and usually adequate one. However, these are regulated firms for a reason: what they decide is optimal for them is not necessarily so for society. Extreme leverage, massive sector concentration and little financial downside for managers trying to goose the stock prices of firms greasing The Key Mechanism of the Credit System make it so.

Now the latest prescription out of the White House calls for a "pay czar". Snappy title but it does well to recall that the last real Czar did not enjoy a Disney ending. Perhaps a "pay commissar" might be more appropriate for (s)he might demand that financial executives' variable pay be tied to all the primordial interests in their firm - including those of depositors and debt holders*. More elegant than a cap.

Revolution! Not only would that keep owners' and executive option holders' wilder profit fantasies in check: it could be the shake-up (or should that be shake-down?) capable of taming leverage positions, fragmenting an industry in the interests of the greater good and injecting some semblance of institutional responsibility into the credit industry.


NB: Suggestions of cost-effective data recovery services most welcome.
* Full discussion of this approach by architects of the idea in June's newsletter.

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Newsletter alert

Monday, June 08, 2009 | | 0 comments »


The June Academic Research Monitor edition is out. Some highlights include:

  • The impact of corporate governance styles on profits in the current crisis
  • Re-tooling bankers' variable pay
  • The current under use of the US bankruptcy reorganisation procedure
  • The Great Depression vs the crisis of 2007-?
  • The effects of subprime fallout on retail lending levels
  • The common trait of recent asset bubbles
  • Price impact of foreclosures and distressed sales on the US house market
  • Time for gold, surely?

Subscribers, take your password and go here:

Potential subscribers, try a sample issue here.

Quarterly subscriptions are US$120. Email requirements or requests for more info to:

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Many interesting pics out moments ago from the Federal Reserve in the snappily titled report, Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008. A sample, rearranged to tell their own story:

1) Bigger is better!




2) 'Cause concentration permits economies of scale!


3) Looked hunky dory 'till '07...


4) Damn ninjas! They lied to us!




5) And the so-called business elite were just as freaking imprudent! I mean, how the hell did some of the CEOs behind all these "strategic visions" get their jobs!?


6) Still, at least we managed to dodge the bullet to the heart - phew!



7) Course it was with help - the taxpayer backed us whole heartedly with new capital in recognition of our inherent worth and superior risk-management skills...



8) ...and just in time to stop these numbers changing sign! See you in Courchevel if not the Maldives!

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...released today:


Data source: US Census Bureau


And an excerpted commentary from DJ Newswire (my emphasis):


"The market is bedeviled by foreclosures. Buyers are gobbling distressed property, priced cheaply, and passing up on new homes [...] The median home price dropped 15.4% to $170,200 from $201,300 in April 2008."

C/F the renewed foreclosure wave referred to in yesterday's post.

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A little chart from SG to chew over whilst waiting for this afternoon's US National Association of Realtors (NAR) existing home sales data:


Nice work - by including the Federal Housing Finance Agency (FHFA) data SG get around the criticisms that the two Case-Shiller indexes (the "CS" runs in the graph) only represent a quarter and a third of the US population respectively; and that the NAR is simple marketing guild.

The broadest-based FHFA data also shows affordability to be well above historic lows. Which looks, well, curious if this is supposed to be real estate's near-trough during a an acute financial crisis. Still, the latest FHFA House Price Index (HPI) data point is out tomorrow [correction, today] and optimists will hope it builds on two months of...price rises! [Correction, the FHFA data fell sharpish].

Against that is the weight of inventory: Fannie and Freddie, and a few other lenders, ended a moratorium on foreclosures in March that had been in place since last November.

Looks like the long haul...

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A brief counterpoint to yesterday's back-to-flint euro housing vision. The OECD composite leading indicators, despite the bad press these get in some quarters, belie the prevailing economic melancholy (a bit).

The latest numbers (paradoxically for leading indicators, from March) look like this:


Exhibit 1: OECD composite leading indicators, 2005 to 2009



French, Spaniards and Brits may guffaw. But, considered together with the OECD's business confidence data below, the overall pictured seems less gloomy:


Exhibit 2: OECD business confidence indicators, 2005 to 2009



Still, it is irrational to be sanguine when the monthly leading indicators for Germany and the United States continue to fall with increasing pace (what inflexion point?). Indeed, the US picture (SPX data through May included) looks like this:


Exhibit 3: OECD composite leading indicators for the USA





Nevertheless, equities called the turn in April and such anticipation was comforted by last week's release of slightly more timely US Conference Board leading indicator data:



Vast fiscal stimuli and free money will have its day.

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...according to Citigroup research in their Euro Weekly note entitled "Housing Bust".

Yes, deflating news for euro property owners. Citi's trio of analysts Michael Saunders, Jürgen Michels and Giada Giani are calling for the bust in several European Union (EU) nations on the basis of a departure by prices from the fundamentals that have driven them over the last 15 years. They foresee price drops of 10%-15% by 2010 and 20% - 30% over the next 4 to 5 years.

Some graphs:

(why aren't EU prices more in line with the US and UK trend?)




(it's not as though EU wealth has defied global macroeconomic forces)




(nor is financing easier than during the peak buying frenzy of 2004)




(in fact affordability levels are near historical nose-bleed levels)




(worse, beyond 2010 poor trends in the“household formation” population are a negative driver)




There is more than a hint of confirmation bias in the report – property bears are de rigeur nowadays. And, despite its tabloid title, the data aligns more with the observed inexorable, slow hiss of price deflation ongoing in much of this scribe’s corner of France as sellers come to realise they won't get even last year's prices now - much less those of 2007.

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