Capital Chronicle

Still time to change those francs to euros!

2012-01-18T10:05:00.000+01:00

Limited time offer, ends 17 February!

Not only have the New Year sales just kicked off in France (the dates of which are governed by legislation, an interesting curio) but you can still get a bargain for those old francs under the mattress!

You read right. Take your Pierre and Marie Curies, your Eiffels, your Cézannes and your Debussys - coins no longer accepted, navré - down to your local Banque de France and get...euros (while stocks last)! Affaire!

Who says the EFSF is illusory and circular?

LulzSec forgive us our debts (and other 2012 predictions)

2011-12-26T18:53:00.001+01:00

Debts forgiven!

In a scene reminiscent of the "adult toy" revenge scene from the Girl with the Dragon Tattoo the LulzSec hacker group declare their frustration with the rigidity ofpersonal debt obligations that, they claim, hinder corporate investment inhigher speed internet gaming infrastructure (“no one will be able to afford it if they build it”).

They launch a massive and coordinated hack ofretail bank computer networks across the globe erasing household mortgagerecords (taking the time to digitally tattoo the word "Occupied" in all data fields) and thereby inadvertently solve a hitherto intractable piece of the global debtcrisis. Until, that is, lenders restore their Fukushima-proof backup catastrophe storage systems and put Mummy and Daddy back on the debt hook.

Other natural substances overlooked

Finding the“tough love” message falling, inexplicably, on stony ground Mitt "Ten Grand" Romney hires the marketinggeniuses behind Rennie heartburn medicine (“turns excess stomach acid intowater and to other natural substances”) to sell the austerity/debt acid message ahead of the November election.

IncumbentPresident Obama, considered by many to have long drawn a veil over the “other natural substances” piece of the equation, takesa leaf from web spam methods instead with a blitz campaign of TV spots: “Solve your debt issues quick –and in all cases just after 6 November, 2012”; “Get ready for new economicfeats – shortly after November 6, 2012”; “Do you wish to have the best growth of your life starting from 7 November, 2012?”

HMRC to promise ~~transparency~~ invisibility on tax deals

A stunning 11^th hourinclusion in the 2012 London summer Olympics of the popular but misunderstood sport of Corporate Tax Avoidance causes confusionwhen the United Kingdom's collector of taxes, HM Revenue & Customs, instead of arbitrating, enters as a contestant alongside such renown unofficialunderground champions as Goldman Sachs, Vodafone and Google.

All entrantswithdraw when it becomes clear that the last time pure gold was used to makeOlympic winners’ medals was in 1912.

It subsequently emerges that Goldman had hedged such a result by, first, persuading Lord Coe of the 2012 Olympic Organising Committee to write Event Default Swaps as a 'riskless' source of revenue and, second, then buying up the entire contract inventory.

Thank you, China - and we mean it this time

In a remarkable show of Sino-love both the US Senate andCongress pass the “Renmimbi Manipulation Appreciation Act” officiallycongratulating the Chinese government for its foresight in, to quote Senator Lindsey Graham interviewed from his seaside villa in Hainan (so much more affordable than Myrtle Beach), “getting thebalance right between stealing our jobs, creating massive trade-surpluses for China and then letting the renmimbi rise strongly for2 years to levels where acquisition of our assets became a viable proposition”.

House guest ECB President Mario “Brothers” Draghi joked (well, at least a smile was on his face) that China “should notforget to also take a look at the Euro banking system for even more overpriced asset deals”.

Pouring the drinks, China’s President Hu Jintao confesses that his country has indeed been manipulating the renminbi but that he was gratified everything worked out for the common good just like Alan Greenspan said it would.

Economic Holy Grail found! Maybe...

11. Thou shall buy clothes and consumer electronics

In a long and desperatelyawaited development, Large Hadron Collider (LHC) economists move tantalizingly closerto detecting the elusive “God’s Work Particle”.

Formally named theAsett²⁰(bub)¹² particle it is of the mysterious “boson” typeconsidered by incumbent policymakers key to underpinning capitalism by uniting the “capital”quark and its antiquark, "labour". The multi trillion dollar LHC was conceived torecreate the conditions immediately before the 2001 Tech Wreck and the 2009Great Recession.

Conclusive evidence of the Asett²⁰(bub)¹²particle’sexistence is expected, once again, to be prematurely announced by the IMF inJuly.

(Happy New Year! )

Olympus: the camera never lies...

2011-11-09T18:08:00.001+01:00

Both cloudy

Maybe the move from analogue to digital has not been so smooth after all.

One might think there could be no doubt someone, somewhere in Olympus will serve a stretch for this. However, with the former President Toshiro Shimoyama (1984 to 1993) reportedly claiming that:

"he had no memory of any loss-hiding scheme and was not closely involved in finance at the time"

there seem to be few signs of imminent seppuku. On the other hand, recent executives - younger, sharper and fully digitised on the memory front - probably do recall paying an advisory fee of $687m. It was a little over the odds. $665m over the odds according to Reuters.

There's lots of explaining to do (can't help wonder about the auditors either) but regulatory zealots might bear in mind the long precedent pre-dating even Thurlow that:

"Corporations have neither bodies to be punished, nor souls to be condemned; they therefore do as they like."

"Investor relations", a novel. By MF Global

2011-10-31T17:10:00.002+01:00

But will it sell?

24 October: "NEW YORK, Oct 24, 2011 -- MF Global Holdings Ltd. (NYSE: MF), a broker-dealer providing trading and hedging solutions, has rescheduled the release of its fiscal second quarter 2012 financial results from Thursday, October 27, 2011 to Tuesday, October 25, 2011.(link)

25 October: "Strengthened capital and liquidity position. As of September 30, 2011, the company has over $3.7 billion in available liquidity, including $1.3 billion in available committed revolving credit facilities and $2.5 billion in total capital." (link)

"Over the course of the past year, we have seen opportunities in short-dated European sovereign credit markets and built a fully financed, laddered maturity portfolio that we actively manage. We remain confident that we have the resources and expertise to continue to successfully manage these exposures to what we believe will be a positive conclusion in December 2012," CEO Mr. Corzine (link)

28 October: "By Oct. 28, MF Global tapped the entirety of two banklines, said three people with knowledge of the matter speakingon condition of anonymity since the move wasn’t public" (Bloomberg)

31 October: (link)

Lowlights mine.

Dexia: assume a can opener…

2011-10-10T14:40:00.000+02:00

…or at least no sovereign defaults and - presto - no problems.

Reality maybe as overrated as stress test results but it tends to be expensive to ignore. €10.4 billion of expense in this case – and that’s just the price of theinsurance.

Theinvolvement of the Caisse des Dépôts et Consignations has serious ramification forFrench residents like me: it may put an end to my wondering about curious yearend spending in the commune (eg digging up the mayoral lawn and replacing afunctioning sprinkler system with a new, functioning sprinkler system).

But soit is the world over when local municipalities are preparing to justify nextyear’s budget by demonstrating they really needed, and so used up, this year’s.

Still, whereelse can one have fun with ~€10.4 billion?

Brokeringsecret deals in Libya?
Buying a nice little tech company?
Keeping up with the neighbours’ tax policies?
Buying a few jobs ahead of elections?

Or, mostrelevantly in current context, kissing it goodbye.

Monkeys with guns: high frequency trading

2011-07-12T11:43:00.009+02:00

Andrew Haldane, one of the Bank of England's Executive Directors, illuminated the high frequency trading debate last week with this speech. It contains many gems such as this one:

"In some respects, this may sound like old news. For example, an evaporation of liquidity, amplified by algorithmic trading, lay at the heart of the 1987 stock market crash. And it is also well-known that stock prices exhibit non-normalities, with the distribution of asset price changes fatter-tailed and more persistent than implied by the efficient markets hypothesis at frequencies of years and months, perhaps weeks and days. But these abnormalities were thought to disappear at higher frequencies, such as hours and minutes. Over shorter intervals, efficient market pricing restored itself.

Recent studies point, however, to a changing pattern. Non-normal patterns in prices have begun to appear at much higher frequencies. A recent study by Smith (2010) suggests that, since around 2005, stock price returns have begun to exhibit fat-tailed persistence at 15 minute intervals. Given the timing, these non-normalities are attributed to the role of HFT in financial markets."

The implication is that price returns move more and more to their own frenetic, rhythm-less tune - not to that of any fundamental orchestra - and, given that prices have memory, may end up staining the landscape with additional fat-tail outcomes thereby creating new systemic risk.

Maybe - but it does so far more resemble a campus shooting spree by primates as likely to hurt themselves as genuine students. The goal of protecting those student ought alone to be enough to impose controls - without recourse to prodding awake the systemic bugbear.

Where are the customers' UN Security Council resolutions?

2011-05-31T19:03:00.007+02:00

You could not invent it:

"Libya was furious at Goldman over the nearly total loss of the $1.3 billion it invested in nine equity trades and one currency transaction, people involved in the matter said. A confrontation in Tripoli between a top fund executive and two Goldman officials left the bankers so rattled that Goldman arranged for a security guard to protect them before they left Libya the next day, people familiar with the matter claimed." (link)

God's work, baby.

(Love to see who wrote those options contracts....)

Banks float, galleons sink

2011-05-11T18:17:00.014+02:00

"Corporations have neither bodies to be punished, nor souls to be condemned; they therefore do as they like."(Edward Thurlow)

So much for the $63.8m hitherto thought to have accrued over 7 years to Galleon's investment savvy.

Pending appeal, Raj Rajaratnam did not beat a single charge of the 14 against him for insider trading. His prosecutor, the race-card trumping US Attorney Preet Bharara (how many Punjabi-born federal prosecutors were there to choose from?) said this post-verdict:

“The message today is clear — there are rules and there are laws, and they apply to everyone, no matter who you are or how much money you have.”

Those would be rules and laws unevenly 'applied' by the US Department of Justice (DoJ).

Last August Barclays paid $298 million to settle accusations brought by the DoJ that it proactively helped Iran, Libya, Cuba, Sudan and everyone's favourite model citizen Myanmar transfer dollars hither and thither in contravention of United States sanctions. Erm, over a decade.

The DoJ examined the matter carefully and in due course concluded - like Barclays' senior managers who must have been shocked by the persistence of their underlings' law-breaking initiatives (when, of course, they found out) - that it was a perpetrator-less crime in terms of management responsibility.

But the judge, Emmet G. Sullivan, choked on that:

"“Why isn’t the government getting tough with banks?...The public looks at this and says, you know, they’re getting a free ride here...You expect the court to rubber stamp, but we can’t [yet he did, Ed]...You agree there must have been some human being who violated U.S. laws?...Can I just share a thought with you?...You know what? If other banks saw that the government was being rough and tough with banks and requiring banking officials to stand before federal judges and enter pleas of guilty, that might be a powerful deterrent to this type of conduct." (NYT article)

What, one might ask, were the uses the monies that Barclays (and earlier fine-payers Lloyds, Credit Suisse and perhaps others) so enthusiastically shuffled for its sanction-busting clients put to?

Oilileaks

2011-04-01T16:20:00.004+02:00

HMT minutes you'll never see...

TO: CHANCELLOR
FROM: PRIVATE OFFICE
DATE: APRIL 1 2011

INDUSTRY RESPONSE TO BUDGET'S NORTH SEA OIL TAX PLAN

Background:

Yesterday's mugging by oil industry officials of the Secretary of State for Energy, the Secretary of State for Scotland, our own Economic Secretary and the Energy Minister has forced a potentially tricky meeting upon us. BBC press coverage here and more partisan Scottish coverage here.

Lines to take:

"Removing oil-rich North African dictators doesn't come cheap."

Go Mother Theresa by referring to 'thoughts' of recommending to the PM that he consider additional energy levies to finance other noble causes in, say, the Ivory Coast, or Haiti. If necessary echo UN Resolution 1973: "Expressing grave concern at the deteriorating situation, the escalation of violence, and the heavy civilian casualties".

Cite absolute necessity (to all) of avoiding accusations of double standards at a sensitive time.

A full Department of Energy and Climate Change briefing, including industry offical profiles, is expected shortly.

[...continues...]

Crisis toolkits: just follow the instructions

2011-03-15T20:16:00.007+01:00

The blogs I want to write relate to cynical UK (and French) foreign policy towards Libya; and the odds of 40-year old nuclear reactors a scant few months from decommissioning melting down. But these are topics likely to employ either intemperate language; or demand more time than is available.

So a quickie relating to this IMF release of today dealing with real estate booms:

...what matters may be not the boom in itself, but how it is funded. Policy should focus on booms that are financed through credit and when leveraged institutions are directly involved, as the following busts tend to be more costly...

and the toolkit proposed:

So simple. And yet the politics engendered by crisis regularly manage to make key participants take their eyes off the flow chart.

Never mind the gap, feel the growth

2011-02-08T09:04:00.006+01:00

From Towers Watson yesterday, a survey of the 13 largest national pensions markets highlighting some quite remarkable growth in assets over the last year. All, however, placed in context with the following:

Defined Benefit asset/liability indicator, global basis (1998=100)

That is, with asset growth in 2010 hitting double digits the pension gap still only narrowed by 2%.

Full study here.

$573,000? Sure, Mr Chairman, I'll hire...

2011-01-31T20:22:00.008+01:00

Just out, another Federal Reserve Bank of San Francisco Economic Letter featuring another model.

Here is the effect on employment, it suggests, of the $1.72 trillion the US Central Bank has spent buying up various assets since 2008:

That is, the buying spree will have lowered unemployment by a point and a half by (important bit this) 2012. Or, in other words, the Fed will have created 3 million jobs. Nice.

Course, that does pan out to $573,000 (keep the change) per job. But this was not just about jobs was it? D-E-F-L-A-T-I-O-N!

No fear - once establishing that that particular threat is fully under control the authors produce this beautiful section of economic prose-hedging:

"The simulations also suggest that the longer-run inflationary consequences of the program are likely to be minimal, as portfolio-balance effects rapidly fall to zero and conventional monetary policy adjusts to bring conditions back to baseline. In part, this long-run neutrality reflects that agents in the model have confidence in the FOMC’s determination and ability to maintain price stability—a belief that policymakers ratify."

Que? Whatever - it's all good - bring on QE3, baby.

Due to data unavailabilty you'll just have to take my word for it

2011-01-21T21:58:00.005+01:00

In the land where I was born...

...one of my local rags pays the price for sacking the sub editing team (guess). Or not training them enough (certainty).

But in terms of fantasy political-economics the resulting style has much to recommend it.

Have a fine weekend.

Monsieur, with these Wikileaks, you're really spoiling us

2011-01-07T16:34:00.011+01:00

Norway's Aftenposten joined the Wikileaks ball recently from which this quote about state-sponsored industrial espionage à la française comes:

"France is the evil empire when it comes to stealing technology - and Germany knows it," said the director of Americans, while he added that German authorities have shown little willingness to do something about it." (link, Google translated)

Try telling that to the French:

"The French government today said it was the victim of an "economic war" after Renault, the partially state-owned car maker, suspended three top executives over suspected leaks of secret electric car technology." (link to yesterday's Guardian article)

Brilliant counter-PR? Or just a fact of international relations life? Looks like both.

There is a long pedigree for such activities and, in France, the most memorable episode concerned Russian theft of Concorde technology in the early 1960s. Not that the Tupolev TU-144 went on to become a household name or roaring success (Wikipedia entry here, with a nice section on the espionage).

But it is just the type of background in which to perfect what Molière called "the knack of easing scruples". Along with everyone else.

By the way, the Direction Générale de la Sécurité Extérieure, the French intelligence organisation that Aftenposten refer to, have been on a recruitment drive - which continues. A growth industry, no less.

Happy New Year to you.

(And, by popular demand, the ad that inspired US Ambassadors everywhere to spoil their audiences)

Official: US housing excess inventory conundrum solved

2010-12-16T23:43:00.005+01:00

Just out from the Dallas Fed. Fortunately the hurricane season is over - for economics does not come much drier or more detached than this:

"Our results show that the typical hurricane strike raises real house prices for a number of years, with a maximum effect of between 3 to 4 % three years after occurrence. There is also a small negative effect on real incomes. These results are stable across models and sub-samples."

Course, your house has to survive the general inventory ~~destruction~~ reduction (and certain other "negative" effects) for this to happen.

Here come the Sans-culottes

2010-12-15T21:43:00.007+01:00

So my boy asks me to quiz him for a history test. French Revolution.

Ah, triggered by a sovereign debt crisis. The Church, largest land holder and a major political force alongside the soon to be headless King, gets its property expropriated to cover new bonds - “stolen” according to my son (at that point ignorant the Church was exempt from tax and allowed to extract 10% per annum on revenue from the faithful - God's work, don't you know).

Shame, with such a financially promising start based on pain-sharing, things then got out a bit out of hand. Some Cliff Notes:

some national debt paid down but enthusiastic overissuing uncovers the bonds’ collateral
hyperinflation-> shortages (austerity budgets?)-> price controls-> famines & riots
suspension of the Declaration of the Rights of Man-> dissent = crime -> much happy slapping via guillotine-> war as a revenue raising measure-> rise of the army
dictatorship-> ill-conceived adventure in Russia etc etc.

Course, the Church eventually was legally written out of state matters entirely in 1905. Not that verses of the history aren't reprised down the ages. In all sorts of contexts.

The woman says it's mine

2010-12-10T17:44:00.008+01:00

Despite some tearful admissions of paternity from private sector banks (with incitation from Uncle Central) there has not been much in the way of maintenance (outside Iceland) for the strange fruit of their loins.

Indeed, the very idea of financial participation in junior's recovery ("20 cents on the what?!") is invoked as a roadmap to general economic disaster. Not that this is a guarantee of inertia by Chancellor Merkel; or will prevent a deferred "restructuring" in some of today's "austerity budget" economies.

It is interesting (and no more without deeper reading) to contrast this confrontational approach with that of the Islamic banks - as reported in the latest edition of the IMF's Finance & Development.

A little maysir and (more, if this is corporate sponsorship-type spending) zakat would not have gone amiss; and would not going forward either. Unfortunately that reform game seems over (for now, perhaps).

Two extracts below with pdf links here and here:

Euro champions: our beautiful oligopolies

2010-12-06T17:23:00.009+01:00

The nature of gasoline pricing can be a painful obsession; not to mention a hands-on experience of the rockets-and-feathers phenomenon: stations manage to coordinate increases instantaneously, rejoicing in a chorus of margin explosion. Yet let OPEC jack up production and decreases float down very gently.

Yet more infuriating is the oligopolistic nature of pricing. Competitive pricing is rarer than genuine application of the Volker Rule; and the words "price war" simply do not apply.

So it was pleasant to see the German Cartel Office earlier today announce that they had had enough (despite their original OMV / Total ruling being overturned). Strike a blow for consumer motorists!

It is, it appears, a theme - though how strong a theme remains to be seen. For example, the Cartel Office stopped Shell buying as many stations from retailer Edeka as they wanted earlier this month. That is, Shell got 41 instead of 44 stations.

Looks symbolic but the regulators are also set to finish a two year "probe" into the gasoline market. Perhaps this may end up taking heart from research in the Dutch market (where regulators appear more aggressive). A paper from summer 2009 by Lach and Moraga-González, said:

"We found that as competition the number of gas stations increases the distribution of prices spreads out, with the low prices going down and the high prices going up. Consequently, competition has an asymmetric effect on prices.

This result has important welfare implications because when some prices increase and others decline, the price actually paid by consumers will depend on their shopping behaviour. All (hypothetical) consumers in our data, irrespective of whether they are informed about one or more prices, benefit from an increase in the number of stations.

The magnitude of the welfare gain, however, is greater for those consumers that observe more prices. As a result, an increase in competition has a positive but unequal effect on the welfare of consumers."

If the researchers ever turn their sights on other oligolpolies - the cosy division of the French mobile telecoms market into three very unequal shares comes to mind - odds are they would find exactly the same traits (and much the same solutions).

There is useful competition-creating regulation to be enacted on consumers' behalf in the European Union. And has been for some time.

If you thought Wikileaks was a serious diplomatic hoo-haa...

2010-12-03T10:23:00.005+01:00

...now comes news of the recall of the French Consul to Hong Kong for, allegedly, stealing expensive burgundy from a restaurant:

"Marc Fonbaustier is accused of hiding two bottles, worth over £4,000, in his suit before exiting the Hong Kong Country Club’s restaurant, the Wine Cellar." (link)

Sensible observers will first wonder about the mark-up of the restaurant - at least provide us with the details of producer, vintage and cru. Then they might wonder if it's a conspiracy - did Beijing not like the chap? Was he onto counterfeit wine labelling? Was it a joke - who seriously attempts fine wine theft by putting a bottle in each of his pants pockets (Maestro, a visual, please)?

We may never know for the Chinese government has demanded his removal; and Monsieur Fonbaustier has reportedly "admitted the facts and paid reimbursement" without, as Le Monde drily notes, specifying exactly what those facts were.

Oh, for a little Wikifuite.

'Very little of any real import has changed; on balance, pay practices have worsened.'

2010-11-30T16:34:00.012+01:00

So say Paul Hodgson, Greg Ruel and Michelle Lamb authors of Wall Street Pay: Size, Structure and Significance for Shareowners (link) from the Council of Institutional Investors.

I'm surprised if you're surprised. Sample para:

"In the wake of the financial crisis, the structure of compensation on Wall Street has improved. Positive changes include:

- Substantially improved clawback provisions
- Longer deferral periods for pay, especially equity
- An increase in equity as a proportion of compensation
- A rebalancing of the fixed pay/variable pay mix to mitigate risk taking

Despite these beneficial changes, none of the banks in the study has addressed adequately the importance of tying compensation to long-term value growth. Some banks have increased fixed pay excessively. And the effectiveness of the banks’ stronger clawback provisions has not been tested."

The report has several ideas for improving matters. Unfortunately, none of these include the notion of tying compensation to creditors' long-term interests as well as those of owners of equity. Perhaps they thought the one follows the other.

But, as the report itself notes, better long-term incentives existed pre-crisis in many non-US banks. Yet they too - last time I checked - did not escape pain.

Sadly, a long, strong course of bonusoxifren that might nurture the principle of selling less to and investing more for clients looks a medicine (yet?) too bitter to stomach.

Cropped image is by RJ Matson and can be viewed in full (and purchased on the St Louis Today website

The Chinese X-Factor

2010-11-18T16:11:00.005+01:00

Sofa inertia recently caught me in front of X-Factor. I have to say if you can't cover Bananarama you should probably go back to the day job.

Came similar thoughts when confronted by this google ad for an "iPad Clone" whilst researching smart phones:

I'm sure Deng Xio Sam cuts a great deal; and it is innovation of a sort most people expect from China (if that is where Sam gets his stock). Thus which idle layman would have expected the results of this piece of research out today from the Dallas Fed:

"...To date, the U.S., Japan and Germany have been the global locomotives of ideas. The landscape is changing, however, with patent filings growing rapidly in the BRIC economies (Chart 1). China’s growth has far outperformed other countries, with a fifteenfold increase in patent filings since 1995. Brazil and India have also performed well, with an estimated four- and sixfold increase in patent filings since 1995."

Full report here. Shame the piece does not cut the patents by type/area.

It's still different this time: stable vs botox prosperity

2010-11-07T11:27:00.004+01:00

A link currently doing the rounds of finance blogs points to a WSJ article reminding us, via Melchior Palyi, that history repeats but with twists.

Here's another for Mr Palyi ran a nice line, inadvertently perhaps, in this field:

(1938 Journal of Farm Economics, Vol 20, No 1)

Course, so much as changed since then.

Google: Dutch Sandwich or Dutch Oven?

2010-10-21T20:46:00.004+02:00

Nice job, boys.

JR vs Citi: there was only ever going to be one winner

2010-10-08T10:40:00.003+02:00

To paraphrase JR, "Well, Citi, I find your $11.6 million worth of philantrophy awe inspiring" (Dallas quote-bank here).

This is one story crying out for the detail behind what the arbitrators called "serious misconduct".

Kerviel sentenced (aka why traders need big bonuses)

2010-10-05T11:32:00.019+02:00

It is curious, is it not, that an investment bank which has not, for some time, been updating its ledgers with feathered quills and ink via candle light can readily admit its financial control systems were so poor that a single trader was able to get around them for two years; expose his employer to €50 billion worth of risk; and, finally, lose about a tenth of that. This is, apparently, not a particularly weighty definition of negligence.

Certainly the very frank, honest confession of control ineptitude probably, just a little bit, helped Société Générale's case against Mr Kerviel. Honesty is the best policy. Even when it means saying your controls did not detect, at minimum, 1,071 bogus trades. Not that France's Commission Bancaire was overly impressed back in 2008 with the mea culpa.

Of course, no criminal act by a trader ought to be sympathised with in the slightest. Someone must ~~set a precedent~~ bring them to book. But requiring, on top of a prison term (pending appeal), that a fine equal to the €4.9 bn loss suffered by Société Générale be borne by Mr Kerviel looks a tad daft. Asking him to ~~put in place~~ beef up the internal controls would have been a better long term investment.

And shouldn't they at least net off the €1.4 bn the same hidden Kerviel deals made SG in q4 2007?

Le Monde has a thoughtful audio montage here.

Memo to WSJ: know your socialists

2010-09-28T11:32:00.007+02:00

This (so long as the subs keep missing it) from the WSJ featuring an image of a rapidly aging Ed Milliband. Uneasy lies the head etc etc:

Meanwhile, over in Spain, José Luis Rodríguez Zapatero is looking mighty youthful and stress-free. Benefits of olive oil...

Spend it like Beckham

2010-09-28T10:14:00.002+02:00

I'm guessing the Bank of England's Charlie Bean has no political ambitions.

Mr Ice solves your Florida real estate issues

2010-09-17T11:31:00.001+02:00

All right, stop. Collaborate and listen.

Hot on the heels of the Case-Shiller index showing national US house prices to be back at 2003 autumnal levels - and Miami prices up 1.1% vs last year - comes news via the NY Times that Vanilla Ice is getting his own tv reality show renovating Florida real estate.

Mr Ice is calling the turn, has a 6 bed Palm Beach shell ready for the show and is set to "fix it up amazing".

What does it mean? Yo, I don't know. But it's a hell of a concept.

Word to ya mother.

Great Ideas of our Time

2010-09-13T21:19:00.007+02:00

DSK. He'll wind up president of France if he continues this hotstreak.

Same scheiße different tag

2010-09-12T15:50:00.010+02:00

The Deutsche Bank (DB) rumours are true but underestimated:

"Capital increase with subscription rights with a volume of at least € 9.8 billion"

In June with, perhaps, an eye - and a towel ready to toss - on the sun loungers in Kefalonia, Milos and assorted other beautiful Greek islands that they technically own a bit of DB said that it would raise capital "for buying new earnings streams only".

All mostly to do with its purchase of Deutsche Postbank (effusive WSJ praise for which here); and last week the leaks of DB's €9 bn share sale duly began. Cept it is "at least €9.8 billion". Which is probably more than required for the remains of a target capped at under €6bn (even assuming additional capital injections poor stress tests pointed to in July).

Enter the Basel Committee on Banking Supervision. DB's press release appears to preempt the group's own announcement on higher banking capital requirements also due out today (whilst simultaneously justifying it - neat). You can bet in banking headquarters across the globe that Capital Raising Defcon condition is now flashing red as the competition for funds intensifies through year end.

The subplot is euro bank exposure to sovereign PIG bonds. Those stress tests, as a report last Friday from Lloyds points out, showed just half the exposure that the Bank for International Settlements estimates. The enormous difference is likely due to hedging on parts of the exposure using credit default swaps (CDS).

An excerpt from that Lloyds report:

No problem then - why on earth report gross when insured? On the other hand CDS, like other forms of insurance, can carry exclusions. Detail, schmetail.

Jabulani Regulation

2010-06-21T22:14:00.013+02:00

A fox caught in a trap is capable of gnawing off its leg to escape. The French football squad can do the same. And wthout the need for a trap.

Regulators too, it seems, sport the same self-harming skill set. Take this piece from the New York Times, for example: Volker Rule dilution is imminent. JP Morgan, apparently negotiating to buy hedge fund Gavea Investimentos of Brazil, appears to think so. Even the polite pretence of an uncertain outcome seems not worth their efforts.

There is related form for this sort of thing: the evolution of the USA's Chapter 11 bankruptcy "reorganization" legislation that every large company it was made for has claimed (in this crisis at least) it is too big to suffer though.

Enacted in 1978 it initially allowed a mere 8 exclusions from creditor protection. But that was never going to be enough for bond holding institutions concerned about ~~assuming their risk~~ waiting around to be made good (maybe) while a company gets itself in order.

Which helps to explain how, over the years, Chapter 11 exclusions from creditor protection rose to 34. That the broadest of these related to derivative transactions (none are covered) and included derivative instruments not yet invented is, well, depressingly normal when one takes a gander at the lobbying power behind such outcomes.

Course, 34 exclusions or not, sometimes there just are not enough assets to honour obligations. And for those times when you absolutely must get your capital back - without regard to the health of the underlying economic entity you lent to - credit default swaps were invented. Thank the 1990s era JP Morgan boffins for that. AIG and the US taxpayer certainly have.

But that cautionary tale of regulatory largesse is so 2008 - for now we are getting the Volker Rule. Unfortunately, with no oily pelicans or foreign oil companies in sight the scene is well set for another regulatory goalkeeper Jabulani-moment in the World Cup of finance.

Call of the Vuvuzelas

2010-06-09T21:21:00.014+02:00

After living many unusual professional and personal weeks since the last entry here, getting back into the swing of bloggy things begins with some forecasts. Will there be a double dip recession? Is this the end of the euro? Which is the greater threat, deflation or inflation? When is the first of a domino-like series of sovereign defaults coming?

Frankly, come June 11, who cares?

In a week where "Woody" of Cheers fame can score the winning penalty for the Rest of the World versus England at Wembley, this attitude, in Bill Gross speak, is "the new normal". At least for the duration of the World Cup.

While other forecasters might feel as comfortable as Tony Hayward at a Friends of the Earth rally when issuing their calls readers can draw comfort from the solidity of the following, financially related tournament forecast: it will be good news for the PIIGS (that qualified without recourse to an EU bailout) until Spain (who beat Portugal in the last 16) fall to Italy in the quarter finals. Germany then explain the concept of a "strong euro" (with concrete examples) to Italy in the semis.

And, if there is a regret in all this, it is that the two Koreas will not meet.

More Maestro! That Greenspan testimony in full...

2010-04-07T21:10:00.014+02:00

WSJ report, 2010.

Mr Greenspan's "simmer down" quote, vintage 2003, here. And he said it again for good measure two years later adding, with the remarkable prescience that has become his hallmark, that "prices could even decrease".

Little sign in those speeches of all that political pressure to extend credit which he referred to yesterday.

US banks: 'What's wrong with monopoly? It's fun...'

2010-04-01T14:20:00.002+02:00

I have requested commission from Simon Johnson for this plug. Unfortunately, I'm too small to matter.

The Colbert Report

Mon - Thurs 11:30pm / 10:30c

Simon Johnson

www.colbertnation.com

Colbert Report Full Episodes

Political Humor

Health Care Reform

Thing is, do you really want a dog?

2010-03-30T22:36:00.031+02:00

Imagine how Diego Maradona feels. On top of all his other concerns in this World Cup year (and they are considerable for Argentina whatever those odds makers claim) he probably was not expecting his own dog to bite him. On the lip. Three times. The upper lip. 'Nips of God'?

The dog is a Shar Pei - a breed of Chinese origin designed for guard duties. Wikipedia has this, amongst its usual anorakian tit-bits, to say on the race:

"It is a largely silent breed, barking only when playing or when worried."[link]

Which brings to mind the FSA. And there is some confusion in the City of London, apparently, about just which mood the regulator is in. Gartmore Group lost 13% of its value last week on mere rumours that one of its star managers had "links" to one of the insider trading suspects arrested on 24 March.

With remarkably unfortunate timing (for there are, it seems, no links to the raids - see Reuters link below) today Gartmore have suspended that same manager (cue share price fall of 30%) and launched an investigation into:

“breaches of internal procedures regarding directing trades”

Which, decoded from My Learned Friend-speak into plain English, might come to be interpreted as "directing trades" not to the cheapest broker but to the most knowledgeable and helpful one.

Possibly comfortingly for Gartmore investors the statement also said:

“Gartmore has not identified any information to date which suggests that Gartmore’s clients have suffered any loss as a result of these breaches,”

The suspended manager, a 3.85% owner of the fund in question, may indeed draw comfort from it. So long as it emerges that Gartmore cack-handedly chose the worst conceivable moment for his reputation to issue today's statement; and the time never comes to establish the plausible deniability that sprinkles of losing "directed trades" provide.

(Business Week report here)
(Reuters story here)

Prime property in 2009: how the other half fared

2010-03-29T10:27:00.010+02:00

High-end realtors Knight Frank recently published their property porn 'Prime International Residential Index' results for 2009. Some graphics (click for something legible):

And a cherry-picked piece of their commentary which, unsurprisingly even for the house-trained of their species, Knight Frank generously balance out in the rest of the report.

"We have to consider the current support for market growth created by ultra cheap money. In fact it is not just property markets that have succumbed to exuberance – equities and commodities saw prices pushed up sharply during 2009.

Rock-bottom interest rates and the “creation” of money via government stimulus packages have led to an injection of liquidity into the world economy, which has found, inevitably, its way into asset markets, including property, gold and shares.

Low interest costs have protected potentially distressed owners and reduced the supply of property for sale. At the same time, low savings rates have encouraged the wealthy to move investments out of cash and into property in the search for acceptable yields. This has driven demand for property higher and, set against tight supply, has served to push values upwards in many locations.

Ironically, the unintended consequence of government economic stimulus packages has been to support demand and pricing in top-end residential markets – probably not something governments would readily admit to."

By the way, Barbados (thanks to its west coast attractions) was not the bottom performer in the Knight Frank charts. Palma (-22%), Dublin (-25%), western Algarve (-30%) and, for some reason, Dubai (-45%) managed to do worse.

FSA bites back: Wrath of (Genghis) Khan

2010-03-24T12:48:00.007+01:00

Seems while I was away in Caribbean climes the FSA has itself turned down the volume of the conscious reggae vibe, foresworn the pull(s) of challis, arisen from its lounger and left the beach. Obviously that October "Ghengis" piece was premature.

Conversion to the Genghis Khan School of Market Administration (blind all but one in the village and send this latter fortunate to the next village with the news) is certainly welcome. But it is a long two-way battle.

Related link:
FT: FSA dawn raids shock City

'Short Apple!'...

2010-01-28T00:07:00.008+01:00

...is usually advice straight out of the wishful thinking school of speculation - for Apple fans are a fervent bunch. Even Marc Faber might hesitate at the idea of selling the company however "heavy" its share price may be acting.

That is because Apple has managed to sell 3.6 million marvellous Macs, 8.7 million incredible iPhones and 21 million intense iPods (actually a decline from the prior quarter) - all just in Q4 2009. Magic touch.

Still, those fans may yet have to cultivate new levels of devotion in order to believe the latest gizmo is as "revolutionary" as Steve Jobs proselytized today. This slab is just an oversized iPod Touch, isn't it?

And maybe the the 'iPad' name could use a rethink.

IMF vs Andy Xie: 'a multispeed recovery' or 'poison'?

2010-01-26T16:51:00.016+01:00

It is funny how so much can be agreed and yet, when conclusions are drawn, how much of a fundamental divide can remain.

These excerpts, fresh off the presses, come from the IMF's World Economic Outlook update:

"Real activity is rebounding, supported by extraordinary policy stimulus. Global production and trade bounced back in the second half of 2009. Confidence rebounded strongly on both the financial and real fronts, as extraordinary policy support forestalled another Great Depression. In advanced economies, the beginning of a turn in the inventory cycle and the unexpected strength in U.S. consumption contributed to positive developments. Final domestic demand was very strong in key emerging and developing economies, although the turn in the inventory cycle and the normalization of global trade also played an important role.

[...]

At the same time, there are still few indications that autonomous (not-policy induced) private demand is taking hold, at least in advanced economies.

[...]

Continued policy efforts are needed to sustain the recovery and prepare for exit.

[...]

Lastly, policymakers are facing major structural policy challenges. In advanced and emerging economies with excessive external surpluses and domestic saving rates, global rebalancing could be fostered through structural policies to support domestic demand and the development of nontradable sectors. On the other hand, economies that relied excessively on domestic demand-led growth will need to shift resources toward the tradable sector."

And this is Andy "they asked arsonists to put out the fire" Xie, formerly of the Roach / Morgan Stanley stable, last week:

"Some of the bright spots, like bank earnings and GDP growth, that governments are touting as results of the trillions of dollars they have spent are misleading...How could banks make such huge profits? The usual explanation is that banks have traded well, like borrowing short-term funds from the Fed at a zero percent interest rate and investing in treasuries at 3.5% interest rate...Just 2% spread from such trades could yield over USD 300 billions in profits. That seems like a miracle: nobody is hurt, and banks make billions.

The pain is actually postponed in two ways. First, the low funding cost for banks' trading will turn into inflation that dilutes everyone's cash holdings: The Fed is just redistributing money from savers to banks, only the savers don't know it yet. Second, the banks' low funding cost has a government-guarantee component...their profits would be wiped out if the debt market doesn't believe in a government bailout...The cost associated with the guarantee is effectively a free insurance policy from the taxpayers. When the next crisis hits, the cost will materialize. The financial recovery that governments are touting is really a sham; it is just another robbery.

[...]

The next crisis will essentially be a continuation of the last one...governments and central banks have thrown trillions of dollars towards preventing necessary economic adjustments, believing that stimulus will bring back growth. The money is buying some time, but the costs are (1) that the governments won't have enough money to cushion the pain during the coming economic restructuring and (2) that inflation will increase misery in an economic downturn.

The whole world is drinking poison to quench its thirst. It may feel like relief now, but the sickness will strike in 2012."

Some people are never happy, of course, and their glass is always half-empty. The IMF appears to put great store in the assumption that private demand will "self-sustain" in due course and that inflation will not prove to be a problem. The rest is tricky but careful management etc etc.

Mr Xie, in contrast, assumes the course of private demand does not really matter much: his balances of probability already suggest that the critical action will concern inflation just when it hurts the most.

Fairly mutually exclusive looking outcomes...

Official: Fed says there is a magic bullet for inflation. Maybe.

2010-01-19T21:12:00.012+01:00

Bill Phillips, whose eponymous curve had been thoroughly roughed up by Milton Friedman by the time I studied it, was far more interesting than the relationship between unemployment and inflation which made him ~~famous~~ fairly well-known.

Or at least so his Wikipedia entry suggests. Personally, I wonder about how 'secret' his prisoner-of-war camp kettle really was. But anyone with the stories (crocodile hunter?) he surely had deserves much slack. All in all, it is somewhat bizarre that it is but the "Phillips Curve" for which he is principally remembered:

And so it is the San Francisco Fed has put together another of its informative, if not lively, Economic Letters called Inflation: mind the gap (from which the above chart). It fits topically into the current, broader, inflation versus deflation debate.

The broad conclusion is that the Phillips Curve would have worked pretty well since 2007 (disruptive economic times suit it, apparently) and, moreover, it suggests inflation will continue to fall - assuming continuing stubbornly high unemployment.

Couple of elephants watching this from armchairs. The Federal Reserve's balance sheet expansion; and (some may struggle to recall this bit) the vaporisation of financial assets over the last 30 (minus the recent 10) months. Or has the letter puts it:

"Our evidence does not imply that inflation cannot run up as long as unemployment remains low. Other factors determine inflation beside the unemployment gap. This is an important and painful lesson that we have learned from the experience of the 1970s. For example, supply shocks and commodity price increases can push inflation up."

Nice examples.

Le bonus modéré: liberté, égalité, fraternité

2010-01-18T13:43:00.018+01:00

Despite a fifth straight year of being assessed by International Living magazine as offering the globe's best quality of life (top 10 here, all 194 here) it is nice to know that France can still find fault with herself. Or can she? From Le Monde (link):

"Are French banks moderate in bonus matters? According to our calculations, Paris-based traders of French banks, as well as those employed by the French subsidiaries of foreign banks, are set, this March, to enjoy bonus payouts of between €900m et €1bn. It is the equivalent of what 62,000 minimum-wage earners make in a year. [...]

These estimates are based on the statements made by Finance Minister, Christine Lagarde, in Le Figaro on Tuesday, January 12, which valued the take from the bonus tax on 2010 payouts from 2009 performances at around €360m. This 50% tax applies to bonuses over €27,500 - a sum representing nearly 80% of all bonuses paid in France..."

But breath easy, citoyens, although this implies average bonuses of over €250,000. All is relative:

"In this context, and while the severe effects of the financial crisis continue to be felt in the real economy, can we talk of moderation? In their defense, the French banks stress that they compete globally in a market largely dominated by American and British banks. Moreover, in bonus matters, these two continue to lead all others. Last year saw the poaching in London of two star performers from Merrill Lynch, Antonio Polverino and Bruce Van Saun, by the Royal Bank of Scotland. Both men will pocket over 10 million pounds (€11.3 million euros) in bonus guarantees!"

Separately Le Monde also report that high-end Paris property has got its groove back. Little, it appears, to do with the 3,500 registered traders/operators covered in the first article but again, it seems, the work/fault of foreigners. Impoverished, laissez-faire Anglo-Saxons apart.

IMF Graphs 1: IMF text 'subject to a sizable statistical uncertainty' Nil

2010-01-15T18:48:00.011+01:00

Just in time to cheer equity bulls for the weekend, the IMF today published one of their "Position Notes" entitled U.S. Consumption after the 2008 Crisis. Its conclusion:

We expect the U.S. consumption to remain at a relatively subdued level over the next several years, with the household saving rate settling at 5–7 percent of disposable personal income, somewhat above the 2009 saving rate of nearly 5 percent. Though the estimate is subject to a sizable statistical uncertainty, it is supported by several alternative estimates and simulation analysis. Compared to the pre-crisis years (2003–07), the estimated changes in saving and consumption imply a decrease in the U.S. private-sector demand of 2–3¾ percentage points of GDP—close to a half of the U.S. current account deficit at its peak. This will have substantial effects on global economic development after the current crisis. [Guess whose emphasis]

Nice long-term graphs, though, for some superb context:

Have a good one and do something precious for Haiti's future with Save the Children.

A serious investment in the future....

2010-01-15T18:14:00.000+01:00

Do what you can this weekend for Haiti with Save the Children.

God is dead. Marx is dead. And bonuses are back from the dead.

2010-01-14T20:08:00.026+01:00

With the bonus battle reaching new heights of frenzy, this piece in the WSJ from Professor Macey of Yale Law School jumped out. An excerpt:

"These paychecks are highly rational from the shareholders' perspective...[the] bonuses are big and they are unremittingly linked to performance.
What Mr. Obama and others apparently fail to understand is that the banks' own shareholders benefit from these huge performance bonuses. The bonuses are paid to those who make large profits for their employers—that is, they are linked to performance."

This is, of course, the linchpin of the we-have-to-pay-this-much-or-the-talent-will-walk argument. But what is this "performance" measure that anyone curious to ask about is hard pressed to find defined in mainstream media?

Academic literature is reasonably rich in plausible answers. A notable 2008 paper comes from Smith & Swan and describes increased equity and bonus awards to CEOs as the "road to riches" for shareholders. "Performance" is measured by Return on Assets for operations and by Tobin's Q for firm valuation.

Contrast this with the conclusions in a paper from last month by Michaud & Gai.

"Do CEO compensation schemes in large public companies relate to public company performance? Our empirical research shows that firm’s performance is not affected by CEO compensation.

Does a pay “incentivized” public CEO enhance firm performance? If so, to what degree does this occur? Our empirical research shows that the incentive components of CEO compensation packages including bonuses, stock options, and stock awards do not affect firm performance.

If CEO compensation does not influence firm performance, then how do we account for the relatively high levels of CEO compensation? What factors drive CEO compensation? Our empirical research indicates that that primary factor driving CEO compensation is firm size (measured in net sales). We note that is most likely due to CEO compensation benchmarking and the perception by compensation consultants, boards, and CEOs themselves, that there is a limited pool of talent that can manage large cap U.S. public companies."

Confused? Well, "performance" looks mighty different when considering - not unreasonably - if it means increasing shareholder wealth as defined by a measure (Economic Value Added) that is less artfully determined than Tobin's Q. Looks like Professor Macey may have assumed too much on the shareholder benefit front.

Lurking inside this argument of definitions is the directly related issue of handsome upside compensation versus no downside financial penalty. Try betting all-in at the poker table every hand and disaster awaits. Yet the feeling is that one would be an idiot not to do exactly that when in the world of investment banking compensation structures.

Watching bonuses being paid out this season thanks to the unique episode of massive global government intervention only reinforces this feeling; and efforts to bring symmetry to the problem (clawbacks, the cancellation of deferred share etc) look more like politically expediency than rueful recognition of good fortune and moral hazard.

QE and credit creation: not even counterfeiting is an option...

2010-01-12T12:42:00.009+01:00

New counterfeiting data for the euro zone from the ECB reproduced below in graphical form:

Unfortunately, perhaps, for QE and M2 it is not big money in total - €19.9m - although the trend is sharply skywards with the onset of the credit crunch in late 2007:

This mirrors UK trends where, despite the end of the productive career of counterfeiter Stephen Jory in 1998 and the forced change of £20 design this compelled in 2007, the increase in fakes has jumped. With, funnily enough, the specialty being... £20 notes. The UK's Serious Organised Crime Agency has a neat little round-up of matters here.

Including US estimates counterfeits in circulation of dollars, euros and sterling do not appear to exceed $120m (assuming detection is as efficient as all claim). Even after printing off another $50m on top in order to account for the 2006 supernote story the sums would still make Madoff, and other white-collar equivalents, have a laugh.

Pulpit Fiction and other 2010 predictions...

2010-01-08T21:33:00.038+01:00

Ten for 2010. Seriously, put your money on them:

1. Goldman Sachs finances and produces a sequel to the 2009 anti-banker film The International entitled Pulpit Fiction. Lloyd Blankfein stars as ex-Interpol agent Louis Salinger, a driven yet dreamy sort of fellow not entirely at home with the concept of perspective. Hired by publicity-shy Icelandic banking group Krashbanki his life's purpose is the widespread securitisation of the revolutionary Krashbanki instrument, the Ephemerally Backed Indulgence (EBIs). A portfolio of EBIs, claims the proselytising Salinger, can buy entry into heaven.

Sinister villain Martin Luther (uncannily interpreted by Willem Buiter) once worked side by side with Salinger at Krashbanki before a bonus payment contretemps. Now he plots a bloody revenge from his employ as Chief Economist at Krashbanki's archival Sillibank. Watch for his scathingly delivered, Dirty Harry-like tag line “Because Jesus endorsed self-interest, punk!”

2. In the face of poor historical precedent (“The Soviets had no idea what they were doing”) President Obama’s December 1, 2009 decision to send 30,000 additional troops to Afghanistan - or one more GI every 21 km2 - secures a remarkable mid-summer 2010 peace accord. The Taliban, the former mujaheddin, communists, assorted reformers, poppy farmers and a motley crew of other hitherto uncooperative tribal warlord interests all admit the recent election of President Karzai was entirely above board and agree to work “together for the greater good”. Transparency International are forced to apologise for the “provocative and without basis” ranking of the country as the 2nd most corrupt in the world. The GIs are all withdrawn by year-end.

3. China’s President Hu Jintao confesses that his country has indeed been manipulating the renminbi and apologises for trying to raise the standard of living of his nation instead of “co-operating” like every other nation does in the global economy. “There was no excuse.” he says between tears in surprisingly fluent, mid-Atlantic lilted English on CNN’s Larry King Live. He continued, “Certainly not our massive industrial over-capacity in everything from umbrellas to shipbuilding that depend totally on export orders. We will just have to do The Right Thing and find ways to stimulate domestic consumption despite the alarming rise in penniless, newly unemployed rioters”.

4. After a 2009 during which central bankers everywhere read or heard that they may possess a secret pleasure zone inside their bodies that, if stimulated correctly, yields intense pleasure (and perhaps even some heady inflationary highs) most of 2010 passes without this alleged “I-spot” being precisely identified as a concrete economic entity. The furious search for the elusive I-spot continues until right up to December when some research teams begin reporting isolated successes (h/t CNN).

5. After losing the June, 2010 UK general election Labour’s Gordon Brown successfully challenges David Cameron for the leadership of the Tory party. Triumphantly returning to 10 Downing Street he declares “This is a momentous day in the long and glorious history of British politics. We have stepped back from the edge of an abyss in whose dark depths lurks a public policy decided by shop stewards over pints of bitter in the smokey back rooms of northern working men's clubs solely for the benefit of avaricious, casino banking, capitalistic wolves. Instead, we will march arm in arm, lock step onto the sunlit prairie of a new democratic dictatorship. Let one hundred flowers bloom instead of Labour boom and bust!”

6. Greek archaeologists working on the underwater site of the ancient Mediterranean harbour and trading centre Pavlopetri uncover a stunning cache of what experts judge to be Mycenaean gold. Initial estimates put the haul at 12,000 metric tonnes worth approximately €300bn – or around 75% of the entire Greek national debt depending on whose statistical service one believes.

Post-find and celebration, Greek Prime Minister Georgos Papandreou puts in a drink-and-dial call to ECB president Jean Claude Trichet transmitting what is later described by diplomats as a “particularly frank conveyance of opinion” regarding the ECB’s earlier refusal to consider any economic aid for the Greeks’ “home-grown” difficulties.

The gold market convulses at the discovery of a trove equal to 10% of the metal's known existing stock. Oil and the euro spike. Greece encourages Italy to take a leaf from its book and divert significant government expenditure to its archaeological service.

7. La Ciciollina, concerned about rising nuclear tensions between Iran and Israel, revives her Middle East mediation technique. She declares "I am available to make love to President Ahmadinejad and Prime Minister Netanyahu to achieve peace in the Middle East. Together or separately. Let me remind everyone what a shame it was Saddam Hussein declined my 1990 and 2002 offers - not to mention my rebuffed 2006 offer to Osama. Just look at where all this hate has led us to!”

Oil, initially steady, drops sharply on rumours of requests by both sides for younger celebrity alternates to the 58 year old Staller.

8. Thought relatively benign at the end of 2009, the H1N1 virus unexpectedly mutates in 2010 and attacks the Apple iPhone, stealing personal data, emptying bank accounts, making prank pizza orders and generally causing mayhem. Interpol rapidly concludes the hybrid virus is the handiwork of an international cabal consisting of the Russian Mafia, militant animal rights campaigners, a global hegemony of Zionist hardliners, Lagos-based Nigerian Muslims and a mysterious sub-group known only as “G”.

Apple shares plunge 65% along with smaller but pronounced drops for the likes of Nokia, Palm and Motorola. Google inexplicably hits 52-week highs whilst the value of UK Premier League transfer deals surges. The prices of pork bellies, oil and flights to Yemen melt up.

Belatedly, the SEC swings into action, condemns all short sellers and asks Harry Markopolos to explain how Madoff might have performed this latest mischief from behind bars.

9. US Treasury Secretary Geithner launches another emergency initiative: the Publicly Underwritten Relief Effort for Commercial Real-estate Assistance Program. The PURECRAP facility targets all commercial property landlords with less than 97% occupancy rates and aims to buy up the voids at average 2007 rates (with a contractual annual rent uplift of inflation + 8.5%).

An army of civil servants is hired to occupy the space, a generous central government headcount increase that insures the smooth administration of not just the PURECRAP but also the TARP, the PPIP, the TALF, the TGLP, the CAP, the TIP, the CPFF, the AMLF and the MMIFF.

PURECRAP is described by President Obama as “Another far-seeing and innovative program of Secretary Geithner’s. It will buttress the perilously poised commercial property market whilst also creating many new and essential jobs. Secretary Geithner continues to enjoy my unwavering support.”

Geithner leaves his post due to “personal reasons” 3 weeks later.

10. As low real interest rates around the globe begin to work what is called by a derided and dismissed few (notably Stephen Roach) “an illusionary magic” and “the papering over of structural faults”, Alan Greenspan finds his reputation fully rehabilitated. Despite the quite phenomenal timing of his May 2008 characterisation of the US economy as being in an “awfully pale recession” (after which equity markets immediately began a nine month fall of 50% and unemployment started its inexorably rise from 5.5% to 10%) the popular press begins once more, as asset prices return to mid 2006 levels, to refer to him as “Maestro”.

Happy New Year!

Copenhagen: 'we are too late'

2009-12-09T22:28:00.006+01:00

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.

Hopenhagen and public policy

2009-12-07T13:50:00.041+01:00

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.

A brief history of the World's Tallest Buildings (and financial crises...)

2009-11-30T22:12:00.031+01:00

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.])

Forget Dubai - will you kiss me?

2009-11-28T20:16:00.007+01:00

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

In other news, Ozymandias does Dubai

2009-11-27T11:12:00.012+01:00

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.

Weeks ago Barclays loved Dubai debt like a tonne of bricks...

2009-11-26T09:59:00.024+01:00

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.

Just in: trees continue to not grow to the Dubai sky (despite best efforts).

2009-11-25T20:24:00.010+01:00

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.

'I am not the referee'

2009-11-22T22:34:00.009+01:00

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.

A Friday the 13th reminder: Risks of the Game

2009-11-13T16:47:00.003+01:00

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

Have a Good Weekend!

Suffering a Genghis (aka the 'Glad that we talk on a secure line' surprise)

2009-10-19T11:01:00.020+02:00

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.

If there's a camel up a hill...

2009-10-07T19:21:00.008+02:00

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.

French cricket

2009-09-29T09:11:00.011+02:00

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.

Global Debt Comparison: interactive graphic

2009-09-16T16:37:00.004+02:00

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."

Credit Crises of the Caribbean: Barbados oil & gas

2009-09-09T08:30:00.000+02:00

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.

Sober in Helsinki

2009-09-07T13:55:00.015+02:00

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.

Alice back in Wonderland...

2009-08-16T12:02:00.007+02:00

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.

Sugar: sweetness and blight

2009-08-13T15:57:00.021+02:00

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.

Top CEO Talent, 1995-2007

2009-07-16T08:16:00.012+02:00

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).

Stimulus plans and crowding out...

2009-07-09T11:41:00.003+02:00

(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)

PIMCO PPIP-ed at the 'win-win-win' post

2009-07-09T10:14:00.007+02:00

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...

Celebrating Bernie

2009-06-29T20:25:00.010+02:00

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).

Must be Friday...

2009-06-26T17:50:00.003+02:00

Have a good one:

British Airways Management: the Art of Framing the Question

2009-06-22T18:02:00.020+02:00

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.

Global financial governance system: SNAFU

2009-06-16T17:19:00.005+02:00

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:

Richly deserved Webby recognition for the FT Alphaville squad

2009-06-13T16:14:00.003+02:00

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

Dell to design US financial firm executive pay policy

2009-06-11T08:37:00.010+02:00

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.

Newsletter alert

2009-06-08T23:22:00.008+02:00

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:

US commercial bank asset destruction in pictures

2009-06-02T23:09:00.019+02:00

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!

A picture of those US home sale numbers...

2009-05-28T16:27:00.005+02:00

...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.

US housing optimists: watch the foreclosures resume

2009-05-27T11:37:00.010+02:00

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...

Euro housing meltdown: on the other hand...

2009-05-26T09:06:00.014+02:00

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.

Euro house price collapse coming...

2009-05-25T16:41:00.014+02:00

...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.

Can Michael Lewis write a dull sentence...

2009-05-22T10:22:00.008+02:00

...even in a book review piggy-backing on great work?

This piece from The New Republic casts a favourable eye on Alice Schroeder's new biography of Warren Buffett, The Snowball: Warren Buffett and the Business of Life.

An excerpt:

"Which brings us, oddly, to our present financial crisis. There has never really been a bad time in the last fifty years to be Warren Buffett, but just now would seem to be less favorable than most. If Buffett still measures his life by the book value per share of Berkshire Hathaway, then for the first time in forty years he must feel like a wasting asset. His share price is still off more than 40 percent from its highs, underperforming even the S&P 500. He railed against derivatives as weapons of mass destruction, and now turns out to have been sitting on a $68 billion pile of credit default swaps and exotic put options on various stock market indexes. And having vowed never again to become entangled in a big Wall Street investment bank, he has gone and sunk $10 billion into Goldman Sachs, a virtual re-enactment of his investment in Salomon Brothers--cash for reputation. The difference this time is that he has gotten himself a sweeter deal than not merely ordinary shareholders, but also the U.S. Treasury."

How pleasant to peer into the management accounts of the Buffett character, method and machine rather than merely having to be content with the PR equivalent of a GAAP financial accounting snapshot.

Greenspanballs: "We’re on the edge and if this thing doesn’t get resolved quickly I’m worried"

2009-05-21T14:47:00.004+02:00

Have a feeling the man who called all this a "pale recession" may be a shade late on the cliff analogy in his latest (presumably unpaid) media utterance.

Great quote in there too from the man who produced the Cash for Clunkers notion, Alan "Playing a" Blinder:

“if there are no more reversals, history will judge that by May 2009 we will have passed the worst of the crisis.”

Let me offer readers this free, evergreen tool in the same spirit:

“if there are no more reversals, history will judge that by [fill in a date of your own choosing] we will have passed the worst of the crisis.”

UPDATE: James Quinn, the Daily Telegraph's "Wall Street Correspondent" this morning described Mr Greenspan's message in this same interview as "prescient". Right. My bad.

Barclays Bank: one way to avoid the Government taking them by the short and curlies

2009-05-19T10:56:00.015+02:00

Since that story broke last week about Blackrock (maybe) muscling in on the iShares sale to CVC Capital Partners by swallowing the entire Barclays Global Investors (BGI) operation I have wondered what possesses the bank's board, in actual context, of the necessity to dump such an asset.

FT Alphaville last Friday covered much of the ground in this regard and generously provided one analyst's take (Alex Potter at Collins Stewart):

"Whilst BGI does generate c.15% of Barclays group profits, is a relatively low-risk business and has been a great success since its acquisition from Wells Fargo and Nikko in 1995 for $440m, the benefit of raising book value and capital whilst avoiding government intervention outweighs this loss, in our view."

The bothersome part is not that it leaves the fate of earnings in the hands of the investment bank which, thanks to the Lehman acquisition, had a strong first quarter. That the level of these results is probably not sustainable is a given. There will be volatility.

No, the curious bit is what they left behind on the balance sheet instead. "Sell your losers" is the difficult but necessary task of market business.

Barclays has £18 billion of leveraged loans and commercial real estate sitting on its books. Mostly the latter. And, whilst page 1 of Friday's FT led with the potential $10 billion BGI sale, page 3 was entirely devoted to rising defaults in UK commercial property (link to web version). For its part, Barclays wrote-down £2.6 billion, partly in this sector, during the first quarter: the £18 billion referred to above is the post-losses number.

As the FT article sets out, UK banks do not want another 1990s property slump to deal with. They are therefore not calling in the loans but gouging borrowers on the rollover. Sounds a good idea for margins but this puts them in danger of doing a Japan and "supporting" problem loans in the very sector that requires the unpleasant medicine of a shakeout.

That would allow Barclays (and the others) to keep classing such loans as performing. But it will also contribute to keeping capital values at depressed levels - including those on their own balance sheet. To perhaps end up doing it with the good money made from the sale of a true asset whilst merely only delaying the day when government intervention is required looks the risk.

Barclays diluted shareholders twice in 2008 to the tune of nearly £12bn - all at a cost higher than the terms on offer from the UK's Treasury. Now it hopes to get another £6bn to £7bn from BGI. It all looks mightily like selling winners in order meet margin calls on losers.

Perhaps there will be no more deterioration beyond what is forecast by the bank (1.5% impairment this year on the whole loan book). But in the event that they are wrong (again) one wonders where the next pot of money will come from if not the public purse. Equity holders should wonder too.

All guesswork, of course, although the Japan "zombie" banking experience through five public recapitalisations is a handy guide.

NB: Scribe short BARC

A Visual Guide to cognitive dissonance in UK MPs

2009-05-15T10:06:00.005+02:00

It must be Friday:

If you have not seen the coverage the Daily Telegraph's scandal central page is here; and a very amusing (and depressing) slide show of some of the things MP's indulged themselves with at taxpayers' expense is here.

So far, no British MP has been found to have expensed a Caribbean holiday…

2009-05-14T11:00:00.004+02:00

The Daily Telegraph took time out last week from the search for honourable members in the UK’s House of Commons to post this upbeat article on the beneficial impact of the swine flu scare upon Jamaica’s tourist industry.

This is a case where it pays to check the context and the data cited very carefully. Last year aircraft delivered tourists to the country rose 3.7% compared to 2007 – but this was more than offset by a decline a 7.7% in cruise passenger visits. And the start to the year has not been anything to cheer about either: whilst air passenger number in the first quarter rose modestly cruise arrivals fell off a cliff, down nearly 29%. Overall, more than 70,000 fewer tourists than Q1 last year.

The trend is similar across the Caribbean. Last year was poor but not catastrophic. But this year – going on the incomplete data provided by the Caribbean Tourist Organisation (CTO) – appears for most destinations to have started very badly. Most worryingly, there is not a single destination in this report from the CTO to which aircraft passenger arrivals in the first 3 months of the year are not decelerating at an increasing pace compared to 2008.

What might the future hold? The rough and ready chart below tracking Barbados air arrivals against the S&P 500 is at once comforting and foreboding. In historical terms the industry is holding up – but the trend is far from encouraging.

Official: Maestro innocent of bubble blowing

2009-05-12T21:00:00.010+02:00

In an appearance at the National Association of Realtors Alan “Pale Recession” Greenspan responded to a somewhat ironic suggestion (given his audience) that critics who said his easy central bank policies had inflated the housing bubble had a point:

“I respectfully disagree, they're wrong… I think there is a recalibration of financial history that I find very puzzling” (link)

The artist formerly known as Maestro also:

predicted that the economy could handle a further 5% decline in house prices
found it puzzling that sliced bread rather than chow mein was given so much credit
was confident that Chairman of the House Financial Services Committee Barney Frank would win the Miss America crown in 2010 at a canter.

Those stress test results: course it's not political...

2009-05-08T11:33:00.003+02:00

Click through to the fine interactive version on the FT site.

You probably do not need to have to slog through the detail of the test methodology to have a view on how well the "150 economists and professionals" were able to get to grips with the balance sheet judgement calls that banks everywhere shoehorn into GAAP and IFRS.

Credit crisis management: meat and one veg

2009-05-08T10:34:00.006+02:00

A photo like that was made for caption contests.

In fact, this snap was made on a recent city-break to Lyon, sans enfants, in the town's Parc de la Tête d'Or and marks the 1996 G7 get together that took place there. The dedication reads “Together for Peace and Justice”.

That was rightful acknowledgement of what at that stage appeared to be a resolution of the most serious of the Balkan fighting (pre Kosovo), the bombing and killing of 19 at a US military compound in Saudi Arabia 2 days before the conference begun as well as being the usual platitudinous reference encompassing debt relief, trade justice (excluding Cuba of course) and so forth.

But in cold economic terms it was a conference sandwiched by the Mexican Peso Crisis and the collapse of Barings Bank on one side and the approaching Asian Crisis on the other.

The then IMF Managing Director, Michael Camdessus, whatever the criticisms (and they bear scrutiny ex-post) that would be levelled at him for the IMF's “solutions” to the Asian Crisis made presciently clear the week of the Lyon conference that the infrastructure permitting financial crisis on a grand scale was solidly in place – even if it was impossible to work out which bus it would arrive on:

"The global economy has suffered several costly financial crises over the last decade. Plunging asset prices, major bouts of exchange market volatility, a crisis in emerging markets sparked by events in Mexico, and the collapse of several major financial institutions, in the industrial and emerging market countries alike, all underline one of the major weaknesses of our system. Thus far, the international community has been able to cope with these episodes, but not without difficulty. Will it be prepared for the next one? " (link)

Unfortunately, he then embarked on a self-congratulatory sketch of what the IMF was doing to prevent a recurrence of the last (Peso) war without considering the versatile capacity of the underlying financial conduits to fight new style wars.

A long way of saying plus ça change. We are at it again, fire fighting, muddling through and looking backwards for solutions. In the daily minutiae of SCAP announcements, TARPs and QE it is easy to forget the fundamental approach must be prevention - and the logical place to concentrate on that is with strong, though desperately unpopular, contra-cyclical policies.

But we don't seem to have the full complement of vegetables for it.

Captain Kirk as equity analyst: the perils of going boldly where no man has gone before...

2009-05-07T15:46:00.017+02:00

On the occasion of the upcoming release of the latest Star Trek movie, some internal promotion of this site's newsletter:

"Way back in March 2008 Richard Bove, one of the oft-seen talking heads from the financial television invitee carousel and the then bank sector analyst for Punk Ziegel & Company, wrote this in a note to clients:

"The actions taken by the Federal Reserve were innovative, dramatic, and, in my view, brilliant because they went right to the problem [...] The actions being taken by the Federal Reserve are being mirrored by the Treasury, which now has finally grasped the scope of the problem. […] The last time an opportunity of this nature existed to buy bank stocks this cheap was in 1990. The next time will be in 20 years. This is a once in a generation opportunity."

One might think such a spectacularly incorrect call would sink, without a trace, an analyst's career. However, Mr. Bove appears to have flourished both in terms of his media presence and professionally. But has he? Having issued such impoverishing advice how would it be possible?

Calls like Mr. Bove's are the sorts Kadous and Mercer analyse in their forthcoming paper “Is there safety in numbers” They take the commonsensical starting point of assuming that bold plus accuracy produces more credibility for an analyst than accuracy alone...."

...Continue reading here on page 8. For mailing list, subscription info and rates go here.

What has academia ever done for us?

2009-05-06T14:08:00.014+02:00

Strictly speaking, it's arguable if they can compete with the Romans. However, in April alone, amongst the hundreds of papers they produced, the academics tackled:

How come bankers are happy with fair value accounting when it comes to their compensation packages but not so thrilled with it for their firms' results?
What are the latest developments in fundamental indexation research?
Should equity analysts be bold with their calls or stay with the crowd?
When will US housing recover?
Does the way a CEO finances his own home purchase say something about how he will finance his company operations?

There are some gems but a lot of digging is required to find them - even with some of the best web aggregators. So this monthly round-up below may be of help. Further info, mailing list requests, the downloadable .pdf version and pricing go here.

ARM May Edition

Publish at Scribd or explore others: Finance Business & Law investment economy

What might be the macroeconomic impact of a swine flu pandemic?

2009-04-28T11:01:00.003+02:00

From the (recent) archives, a Lars Jonung and Werner Roeger report on behalf of the European Union's Directorate-General for Economic and Financial Affairs: The Macroeconomic Effects of a Pandemic in Europe (June 2006).

A brief cherry-picked quote:

"In our baseline scenario we find for the first year of a pandemic, that is for 2006, a supply effect of - 1.1 per cent of GDP and a demand effect of -0.5 per cent, totalling a fall in GDP of - 1.6 per cent. These effects diminish sharply for 2007 and 2008 but a long-run negative effect of - 0.6 per cent remains due to the reduction in the labour force caused by the pandemic. Additional effects can be added to this scenario. If we do so, we end up with an estimate of the GDP loss ranging between 2 and 4 per cent.

[...]

Still, such a pandemic does not have to spell economic disaster for Europe. The macroeconomic effects of a future pandemic as estimated here are roughly of the same size as those of a major recession."

If there is already a "major recession" underway all bets are off.

Swine fever: Mexico sneezes - the world catches a cold*.

2009-04-27T15:43:00.014+02:00

(*HT to an anonymous commenter at FT Alphaville for the adaptation)

Some 5 minute price interval reactions from around the globe as of 15h00 today (GMT+1h):

French group, Accor Hotels:

British Airways:

Germany's carrier, Lufthansa:

Singapore Airlines (15 minute intervals and includes futures data):

Norway's cruise line Royal Caribbean International:

Spanish meat processor Viscofan:

Finally, two daily charts: of Biota Limited, the Australian license holder of Glaxo's antiviral drug Relenza, up 82% last night Down Under;

and Cipla Limited, the Indian maker of the genetic version of Roche Holding's tamiflu, up a more modest 2.7% on the day:

Al mal tiempo, buena cara.

NB: This entry in the vein of FT Alphaville's earlier post.

Making the top ranks of the World's 50 Safest Banks

2009-04-21T12:38:00.009+02:00

Via Global Finance magazine (free sub here) this "mid year" 2009 list of the world's safest banks:

The soundness of rating agencies rankings and the relative value of the word "safest" notwithstanding there is a curious thing about the first seven names on this list: none are "classic" banking groups in the free-market, stock exchanged sense of the word:

KfW is owned by the German Federal Government and its individual member states. Its modern form was created out of Marshall Plan funds and a strong social development mandate
La Caisse des Dépôts et Consignations is the French sovereign wealth fund dedicated to sustainable and socially beneficial development in France
Bank Nederlandse Gemeenten is owned by the central Netherlands Government, its municpal and provicial authorities and - in its own words - "a water board". Its goal is to minimise the cost of provision of social services
Landwirtschaftliche Rentenbank is controlled by the German Federal Government with a mandate to develop and promote German agriculture and its food industry
Rabobank, while not a public sector entity, is owned by 153 independent local cooperative banks in the Netherlands. Its roots lie in rural cooperatives and specialised lending to the food and agricultural sector - still its focus today
Landeskreditbank Baden-Württemberg Förderbank is a German state bank mandated to finance the economic and social development needs of Baden-Württemberg businesses and residents
NRW.Bank is also a German state bank (for North Rhine-Westphalia) with similar aims

Public ownership or a cooperative structure certainly do not guarantee prudence - some of the less thoughtful German public sector financial institutions (IKB, saved coincidentally enough by KfW in 2007; WestLB; and SachsenLB) demonstrated 2 summers ago that direct state guarantees, although helpful with the ratings agencies, made them astoundingly risk tolerant when it came to subprime investments.

Yet those at the top of this list have something else, it seems, differentiating them from their fully-quoted private sector brethren. While Rabobank appears to be is a separate species with the role played by its cooperative structure on its risk management perhaps being significant, the others appear to have benefited from very specific operational foci and/or smaller than average asset bases (and so smaller margins for error) with which to play.

It may also have helped that they perhaps had dedicated professionals who believed their organisations' mission statements were not produced primarily for use by the investor relations departments.

Course, the reality may not be that simple...

Citi dissembles

2009-04-17T15:38:00.016+02:00

"Our results this quarter reflect the strength of Citi's franchise and we are pleased with our performance." (link)

Citigroup CEO Vikram Pandit

Is there a holiday equivalent to the fortuitous effects of fair value accounting? If so it would have, perhaps, "smoothed out" the derived (dis)pleasure of my Easter break and eliminated the aggravation caused by constant rain, blocked plumbing (and here I pass over the detail), burst pipes and excitable house-bound children in the middle of an isolated French forest.

Citi is suffering the financial parallel of such an experience - yet it is hard to see the distress in their latest quarterly earnings as reported by Bloomberg: $1.6bn of net income! Great Recession? What Great Recession? And the quality of those earnings must be good for Citi say in their statement that:

"The adoption of the changes to FAS 157 had no impact on Citi's financial results."

Fair value accounting and FAS 157 caused, of course, a few ripples earlier this month and even featured here. Citi said at the time it would have no impact and so it has proved - the Good Guys would not stoop to abuse the latitude the new guidance provided for in accounting for toxic assets. Very reassuring - even if the $4.7bn of trading income Citi scored could not exactly be called the solid, low risk, recurring revenue a banking giant requires to sustain itself.

And yet the Bloomberg piece also refers to $2.5bn of mysterious "unrealized" earnings booked by Citi from:

"accounting rules that allows companies to profit when their own creditworthiness declines"

These paper gains reflect increases in the worth of derivative insurance against declines in the value of Citi's own debt and are termed CVA's in the Citi statement. Or more helpfully (maybe) "credit value adjustments". The accounting directive referred to by Bloomberg is, presumably, FAS 159. Which is another one of the Financial Accounting Standard Board's "fair value" statements (surprised?). While its objective:

"to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions."

is reasonable - and the effects can cut both ways - when the bottom line impact equals 156% of net earnings, as it does in Citigroup's case, it is surely questionable whether the statement is truly serving its purpose.

But at least it does, as Mr Pandit states, reflect the true "strength" of the Citigroup franchise.

NB: FAS 159 is the election to use fair value methods on assets AND liabilities; FAS 157 is the guidance on how this should be done. Citi adopted FAS 157 on January 1 2008 (having alread made the FAS 159 election). The statement that the relaxation of FAS 157 would have no offect on the latest results may suggest that there was already enough margin in the deterioration of Citi's liability side (the $2.5bn) to defer use of the softer FAS 157 until a later date.

Credit crises of the Caribbean: CL Financial & Clico International Life

2009-04-08T18:17:00.025+02:00

Yesterday the US authorities extended the TARP programme to cover certain life insurance companies.

Meanwhile, in the Caribbean, leaders chose last week to establish a fund to provide as yet undefined “liquidity” assistance to the ailing if not terminal giant regional conglomerate (US$16bn of assets) CL Financial and its subsidiaries - which include large life insurance operations.

Of the modest US$80m earmarked for this exercise US$50m are old monies diverted from an existing petroleum subsidy fund put together in 2004 by Trinidad and Tobago. It may well be safe to assume this sum will end up protecting the interests of Trinidadian taxpayers.

Given this realpolitik one CL financial subsidiary, the Barbados-based US$500m (by assets) life insurer Clico International Life, may not see material benefit from the fund. In breach of regulatory reserve requirements, the firm requires capital having been caught out by an aggressive underwriting strategy, too much leverage, falling asset markets and illiquid holdings. Salt in the wounds, it also bought bond-based but derivative-powered “guaranteed return” structured investment products from Deutsche Bank which carry redemption penalties if cashed early. This further hurt its liquidity position.

Which is why, as much of the rest of the CL Financial insurance operations in the eastern Caribbean fall apart, it is in talks brokered by the Government of Barbados to sell up to a competitor. That single suitor is a Bermudan firm of identical gross asset value – Bermuda Fire & Marine (BF&M) – whose capacity to finance an acquisition that will double its size whilst maintaining a prudently structured balance sheet is surely questionable.

Understandably in a small island with rising unemployment and where nearly half of all households have policies with the firm the survival of Clico has become a hot political issue. If BF&M choose to cherry pick – and who would blame them in the current economic context - there will be a rump of operations left over for the local social safety net and taxpayers to deal with. Worse, BF&M could simply walk away.

So it would make sense for the government to hedge by encouraging multiple bids rather than halting the brokering effort at a single potential buyer as they have done. And there is a cheap and elegant method of so acting which might even have a place in the current US context: a sovereign guarantee underwriting against further falls in value the bulk of the riskiest and most illiquid company assets.

The broad template might be this: 90% of said assets are covered with the first 10% of any deterioration to be eaten by the new owners. Falls below that 10% that are covered by the two parties in the same 90:10 proportion. In exchange for this guarantee the government takes preferred shares convertible into up to 15% (say) of the ordinary share base upon re-capitalisation - which is set up on best terms for the taxpayer by the existence of the guarantee itself.

Bar the recapitalisation piece, this was an idea tried by at least one US bank last year with partial success. Except that the absence of new capital hamstrung the initiative. But carried through in its entirety this approach permits taxpayers – for zero cash outlay – to:

Cap the potential future portfolio losses of Clico thus making the investment more attractive to more buyers
Reassure policyholders with a specific sovereign indemnity thus stemming withdrawal pressure
Safeguard local jobs by reinforcing the ongoing commercial solvency of Clico
Receive collateral for his guarantee rather than the higher tax bill that might be associated with the likely soft loans of the new "liquidity" fund
Secure a nationally strategic stake in and entitlement to the future profits of a recovered business

There are no resources in the Caribbean to do a US-scale TARP or similar. And having but one option in the sale to a private buyer of Clico’s life operations is a needless risk. The net for potential suitors can and ought, with a little imagination, to be cast wider.

Barclays Bank plc do irony....

2009-04-07T11:02:00.015+02:00

Barclays sponsoring reports on bank capital quality? From today's Wall Street Journal front page website - click for larger image to read the "Heard On The Street" tag in full:

Barclays, currently trading at 162p, passed a UK Financial Services Authority "stress test" last month. The result saw its house broker, Credit Suisse, lay a 'Buy' rating and target price of 170p/share on the firm.

Others without the commercial ties still have doubts - and a 46p target.

Still, someone in Barclays marketing department saw the funny side....

(Disclosure: short BARC)

Smooth move, FASB

2009-04-03T18:18:00.012+02:00

As the afterglow of the G20 love-in fades there was something else worth considering this week: the Financial Accounting Standards Board (FASB) decided yesterday to relax its mark-to-market rules.

Nearly from the beginning many financial companies have opposed mark-to-market on the grounds that investors "wouldn't understand" the pricing mechanisms of thin and volatile markets. What was the point, many argued, in adopting a system that simply highlighted pointless earnings volatility quarter after quarter?

Interestingly, these arguments lost some passion once the same financials heard the kerching! of the Easy Al economy ringing in recognition of their unrealised asset gains. It was all one way, it seemed. Only it wasn't. And now - of course - everyone claims to be holding to maturity or that the market for their asset is temporarily "not active".

FASB has taken these issues on board and with its proposed FSB 157 will be asking firms to make what are, essentially, economic judgements. Very reasonable. But those judgements are also an increase in wiggle room in the remuneration game. Without inputting the slightest ignoble motive to the FASB proposal it is simply hope against experience to give an inch and not expect to lose a yard in this particular principal-agent problem.

It seems a long time ago that Ken Lay and Jeff Skilling hid losses of over $1 billion off the balance sheet. The fair value accounting principals were part of the response to that fraud. Those who claim mark-to-market is the problem and markets have badly over reacted because of it ought to put their money where their mouths are and buy up what is so cheap.

History, though, consistently shows that over reactions are a function of psychology combing with reality, not accounting rules. Banks, it seems, now find reality to be materially overrated.

The bottom line is that, whilst imperfect, fair value accounting has improved disclosure, highlighted issues and thus kept the market more honest than it otherwise would have been. That is why is ought to remain in place, undiluted.

Unfortunately, the keys may just have been given to the inmates.

G20 Communiqué texts: November '08 vs April '09

2009-04-02T22:52:00.009+02:00

Couple of tag clouds of the most recent G20 communiqué compared to that issued last November:

Analysis 1: November 2008

Analysis 2: April 2009

Seems this time we are to have even more Global Financial Action and Support Agreed by more Countries. Which means, presumably, that we can all move on from November's lesser quantity of Actions aimed at International Financial Markets, Regulators and Development.

Sorted.

Buy, buy, buy.

All G20-ed out?

2009-04-02T12:21:00.008+02:00

Markets aren't with Europe and US futures well up.

For a fora that is now 10 years old and of doubtful worth to the 12 countries added to it from the "core" G7 (the 13th member is the EU bloc) it has understandably got a lot of press in recent times.

The G-20, of course, sprung up after the 1997 Asian crisis. By 1999 when it was formally constituted everyone had recognised the dangers of unfettered capital flows, weak banking systems and risky private sector lending. It was thoroughly realized that these weaknesses could spread and magnify crisis regionally - and even globally. In the face of such a systemic threat the G-20 had to act and Do Something like hold a series of multi million dollar conferences in order to...wait a second...sounds oddly familiar....

Enjoy the rally and the fine communiqué bound to come by early afternoon. But spare a moment for this Der Spiegel interview with Joe Stiglitz published yesterday from which the following quote is taken:

"The governments will find the words to put a positive spin on the conference. If they can do anything, they can do that. Everyone will say that more regulation is necessary and that balance is needed between national sovereignty and common action in a globalized world. But how much substance will lie behind their words? I'm skeptical. "

NB: Photo credit to Getty Images from which this is a severe crop. Full pic here.

Greenspan one day early on his April Fools' Day frightener

2009-04-01T14:38:00.013+02:00

When it crossed the wire services yesterday I checked the calender wondering how I'd lost a day. The headline was:

"Alan Greenspan says he would start a bank if he were 60 years younger"

Yet it wasn't a joke (apparently). This from the Wall Street Journal today:

"Mr. Greenspan joked that if he were "60 years younger" he would start a small bank, given the "very wide" spread between rates on good loans and the cost of capital...For a bank, that's like "shooting fish in a barrel," Mr. Greenspan said." (link)

Mr Greenspan is a man who knows a thing or two about negative real interest rates and the cost of capital. But somewhat less about "good loans". His borrowers would love him; his shareholders would be wise to check the collateral.

NB: Painting by Geoffrey Raymond. Check out his blog here.

Cuisine & deal making – French style

2009-04-01T11:34:00.007+02:00

It takes either courage, money or a moment of carelessness to hand back the wine list to a sommelier in a Michelin 3 star restaurant with the words "Etonnez-nous" ("surprise us").

Yet that, not so long ago, is what one regional entrepreneur did here when hosting visiting American buyers at La Maison de Marc Veyrat situated on the water’s edge at the Lac d’Anncey. If the trip up the Grésivaudan valley by helicopter had been a marvel of stunning alpine scenery the cuisine "montagnarde" that followed was, for gourmands, its equal.

In due course the bill appeared. The sommelier had been true to his instructions and the sum owed earned an abrupt faux humorous break in the conversation. Payment made, all piled back into the helicopter and headed off.

The employees present were sworn to secrecy as to the amount - "spectaculaire" is how it was described – but whatever the guests thought of dropping a small fortune on a wine bill seemed, fortunately, to be forgotten as the owner successfully cut his deal with them later that month.

However, what the host did not know at the time is that later in the week the clients were driven into Grenoble by some of his executives for a relaxed locally-made beer and croque-monsieur. Having not uttered a word of critical judgement on the Veyrat cooking or extravagant wine bill this fodder was generously praised to the skies by the visitors. Much back-slapping and joviality ensued long into the night.

Now, I’m not saying a toasted ham and cheese sandwich saved and/or sealed the deal. But it probably didn't torpedo it either...horses for courses.

Notes:

La Maison de Marc Veyrat shut down earlier this year whilst Monsieur Veyrat continues his recovery from a skiing injury
The entrepreneur subsequently sold a majority interest in his firm over (allegedly) a Big Mac and fries to US private equity during covenant-lite times
This is good local beer

A different type of sentiment index

2009-03-31T23:59:00.003+02:00

From the New York Times - click to visit this piece of timely and clever creativity: