I travel annually to the California coast and am always slightly unnerved by the number of oil drilling platforms that pepper the coastline from LA to Santa Barbara. My concern was what would happen if one of the platforms broke and the oil just pumped into the ocean given that many of the platforms were easily within a mile of shore.
Whenever I brought it up to Californians they just shrugged their shoulders and moved on to the next topic.
So when the Oil Rig Deepwater Horizon exploded and caught fire some 50 miles from shore in the Gulf of Mexico last week I was terrified that my worst fears were to be confirmed.
It is interesting how little coverage the oil spill was initially given on the news in the UK -perhaps because the rig is owned by BP? The televised news started to be more interested yesterday and even the Daily Telegraph got involved, running an article which began by rubbishing the claims by environmentalist groups that this was a catastrophe.
Its' tone changed however three-quarters of the way through the report admitting that "sometimes nature cannot cope". They went on to say that it's unfortunate that this is happening in the spring as it is the peak spawning time for fish, bird nesting and migration. Then the clincher: "And the timing is dreadful for President Obama, who just this month opened up vast areas of US coastal waters to oil exploration".
First of all I am really worried if even the Telegraph thinks this could be an ecological disaster. Secondly, I love the way they manage to blame Obama.
Friday 30 April 2010
Thursday 29 April 2010
The Farce that is the Rating Agencies
I have heard a number of explanations for the financial crisis but the one group that tends to avoid the limelight has been the rating agencies.
They are a farce, and even worse, a farce with the power to make and break companies-and even countries.
What's even more galling is that under Basle II they gained "regulatory" powers in that the risk weightings for bank assets became predicated on the ratings granted by the agencies.
Whereas in the past risk weightings-which essentially are one of the ways that the Banking Regulatory Authorities manage reserves and thus leverage- the major distinction was between private and public debt. Even within public debt there was a distinction however. Only the debt of those countries who were members of the Organisation for Economic Cooperation and Development (OECD) was (essentially) considered "risk free". Everything else had a risk element attached to it thus attracting a higher reserve requirement.
Then came Basle II. New distinctions were brought to bear in the determination of risk requirements, and this time they were predicated on the rating opinions proffered by the rating agencies. Note the word "opinions". There is no legal recourse to a rating agency opinion as they publish opinions, which they hope but do not guaranty are correct.
Well first of all they are driving on the highway looking at the rear view mirror. Their record of rating changes tends to be a lagging as opposed to a leading indicator.
To be fair they were originally a sort of external credit department and their original expertise was in corporate debt. They would break down financial statements to understand companies and make some projections based on past performance and come up with a rating.
Enter the CDO market. It's attraction was that it came at a time of relatively low interest rates, and for the same rating yielded more than traditional paper. Now for most people if they are shown two things that are presented as being of the same quality but one is significantly cheaper than the other than the rational mind asks why.
Unfortunately, the rational mind didn't get a hearing. Worse, very few investors even bothered to look into the methodology being used to rate CDO's. They generally assumed that the traditional methods were applied. Very bad assumption.
What they did was take the ratings of the names in the CDO and then statistically come up with likelihoods of default/ability to pay. This was the time of the mathematical model. If everything always worked the way the model predicted it to work, no problem.
Of course the models couldn't detect fraud or irrational documentation like NINJA or any other self-certification loans, so of course the first rule of modeling was realised: GIGO(Garbage In Garbage Out for the uninitiated).
Now we have them jumping in with both feet to downgrade Greece, Portugal and Spain. Well it's not as if Greece got worse overnight. At a bare minimum it's been teetering since the beginning of the year. And if you really cared to dig it has been a problem since it entered the Euro.
So why did the agencies act now?
Interestingly the most recent news article on the OECD website, of which Greece is still a member, was from 24.3.10, so who knows what they are thinking.
They are a farce, and even worse, a farce with the power to make and break companies-and even countries.
What's even more galling is that under Basle II they gained "regulatory" powers in that the risk weightings for bank assets became predicated on the ratings granted by the agencies.
Whereas in the past risk weightings-which essentially are one of the ways that the Banking Regulatory Authorities manage reserves and thus leverage- the major distinction was between private and public debt. Even within public debt there was a distinction however. Only the debt of those countries who were members of the Organisation for Economic Cooperation and Development (OECD) was (essentially) considered "risk free". Everything else had a risk element attached to it thus attracting a higher reserve requirement.
Then came Basle II. New distinctions were brought to bear in the determination of risk requirements, and this time they were predicated on the rating opinions proffered by the rating agencies. Note the word "opinions". There is no legal recourse to a rating agency opinion as they publish opinions, which they hope but do not guaranty are correct.
Well first of all they are driving on the highway looking at the rear view mirror. Their record of rating changes tends to be a lagging as opposed to a leading indicator.
To be fair they were originally a sort of external credit department and their original expertise was in corporate debt. They would break down financial statements to understand companies and make some projections based on past performance and come up with a rating.
Enter the CDO market. It's attraction was that it came at a time of relatively low interest rates, and for the same rating yielded more than traditional paper. Now for most people if they are shown two things that are presented as being of the same quality but one is significantly cheaper than the other than the rational mind asks why.
Unfortunately, the rational mind didn't get a hearing. Worse, very few investors even bothered to look into the methodology being used to rate CDO's. They generally assumed that the traditional methods were applied. Very bad assumption.
What they did was take the ratings of the names in the CDO and then statistically come up with likelihoods of default/ability to pay. This was the time of the mathematical model. If everything always worked the way the model predicted it to work, no problem.
Of course the models couldn't detect fraud or irrational documentation like NINJA or any other self-certification loans, so of course the first rule of modeling was realised: GIGO(Garbage In Garbage Out for the uninitiated).
Now we have them jumping in with both feet to downgrade Greece, Portugal and Spain. Well it's not as if Greece got worse overnight. At a bare minimum it's been teetering since the beginning of the year. And if you really cared to dig it has been a problem since it entered the Euro.
So why did the agencies act now?
Interestingly the most recent news article on the OECD website, of which Greece is still a member, was from 24.3.10, so who knows what they are thinking.
Wednesday 28 April 2010
Get Close to your Friends....and even Closer to your Enemies
Pity poor Goldman Sachs. They forgot the cardinal rule-"don't put it in writing if it might bite you in the ass".
Going through the reports of the Senate Hearings it's clear that Goldman had no concerns that outsiders would ever rifle through their internal communications.
We have Mr Blankfein sending memos asking "are we doing enough to sell off cats and dogs in the books", and then explaining that "cats and dogs" means "miscellaneous stuff...aged inventory...part of the discipline of our business is to manage risk and sell inventory".
All good stuff, until you compare it with an email sent by the Co-Head of Fixed Income Sales Stacey Bash-Polley that Sales should focus on clients that can do "size" given the "size of the risk we could move".
Reminds me of the remark a Goldman trader once said to a client of mine-"your size is my size". This was an institutional house that didn't like to play in odd-lots, and as the market grew the size of their positions grew accordingly.
Goldman never did anything which wasn't in their interest. One year they would top the league tables for corporate debt, and the next year they would barely make the top ten. They had determined that there was no longer an opportunity to make "real" money in corporates, but they would be #1 in another area. And so it went.
The problem was that in order to really understand what they were doing you had to do business with them. The problem with that was that it was like holding the mouth of an alligator shut-sooner or later you would get tired, and then you were toast.
But I only single out Goldman because they were the best. Just compare Mr Blankfein's knowledge of the risk positions held by Goldman with the whinging denials of just about anything by Messrs Prince and Rubin of Citi; by Mr Fuld of Lehman; or by Mr Oneal of Merrill.
They are good at what they do, even if they have no moral compass.
Going through the reports of the Senate Hearings it's clear that Goldman had no concerns that outsiders would ever rifle through their internal communications.
We have Mr Blankfein sending memos asking "are we doing enough to sell off cats and dogs in the books", and then explaining that "cats and dogs" means "miscellaneous stuff...aged inventory...part of the discipline of our business is to manage risk and sell inventory".
All good stuff, until you compare it with an email sent by the Co-Head of Fixed Income Sales Stacey Bash-Polley that Sales should focus on clients that can do "size" given the "size of the risk we could move".
Reminds me of the remark a Goldman trader once said to a client of mine-"your size is my size". This was an institutional house that didn't like to play in odd-lots, and as the market grew the size of their positions grew accordingly.
Goldman never did anything which wasn't in their interest. One year they would top the league tables for corporate debt, and the next year they would barely make the top ten. They had determined that there was no longer an opportunity to make "real" money in corporates, but they would be #1 in another area. And so it went.
The problem was that in order to really understand what they were doing you had to do business with them. The problem with that was that it was like holding the mouth of an alligator shut-sooner or later you would get tired, and then you were toast.
But I only single out Goldman because they were the best. Just compare Mr Blankfein's knowledge of the risk positions held by Goldman with the whinging denials of just about anything by Messrs Prince and Rubin of Citi; by Mr Fuld of Lehman; or by Mr Oneal of Merrill.
They are good at what they do, even if they have no moral compass.
Tuesday 27 April 2010
The Fine Line Between Church and State or when is a Duck not a Duck
Across Europe there has been a movement to ban the wearing of headscarves in school as a breach of the separation between church and state.
France bans the wearing of any "ostensible" religious articles. The law does not cite any specific items but hijabs, large crucifixes and yarmulkes have all been essentially removed. Belgium and Denmark ban face masks. Netherlands and Italy have active debates about banning scarves and face masks, but have not as yet.
And then there is Germany. Eight of Germany's 16 States have restrictions on the hijab. One of the eight, the City-State of Berlin bans all religious symbols in public institutions including crucifixes, hijabs and yarmulkes.
Five of the eight that ban religious clothing have an exception for Christian symbols and clothing. In Baden-Wuerttemberg, North Rhine-Westphalia and Bavaria Nuns can (actually must) wear their entire habit, but just a headscarf-even by a nun,is banned.
Now, Christian Wulff, the Minister President of Lower Saxony has announced that the next Social Minister of Lower Saxony is to be Aygul Ozkan. She is the German-born daughter of Turkish Gastarbeiter and the first female Muslim to reach a ministerial position.
She is scheduled to be sworn in tomorrow. Yesterday she decided to announce that given the legal separation of Church and State in Germany, she was not only fully in agreement that the hajib should be banned in schools, but that also all the crucifixes should be removed from the schools.
The outcry was thunderous. There were demands for her resignation before she had even assumed her office. Today, Mr Wulff suggested that Ms Ozkan had been misunderstood, and accordingly, without any outside instigation, she apologised for any "misunderstandings" and any "insults or injury of religious feelings" she might have caused.
Mr Wulff went on further to say that although everyone in Lower Saxony was fully aware of the separation between church and state, there existed a close and happy relationship with the christian churches and therefore for the crucifix in the classroom.
I must admit I don't understand how they can make such statements with a straight face. I have always thought what's good for the goose is good for the gander. Furthermore in all these discussions it is about one religion versus another. What about those of us who adhere to no organised religious group?
The fact that on the continent there are a number of political parties with some form of the word "Christ(ian)" in their names has always irritated me. There are those who say these party names evolved in a different time and the real emphasis at the time was republican versus monarchy. Fair enough. But why not change them to reflect today? I think in most instances the question of monarchy is relatively irrelevant.
I do wonder how Ms Ozkan feels arguing about getting rid of religious symbols while being a member of the CDU- the Christian Democratic Union!
France bans the wearing of any "ostensible" religious articles. The law does not cite any specific items but hijabs, large crucifixes and yarmulkes have all been essentially removed. Belgium and Denmark ban face masks. Netherlands and Italy have active debates about banning scarves and face masks, but have not as yet.
And then there is Germany. Eight of Germany's 16 States have restrictions on the hijab. One of the eight, the City-State of Berlin bans all religious symbols in public institutions including crucifixes, hijabs and yarmulkes.
Five of the eight that ban religious clothing have an exception for Christian symbols and clothing. In Baden-Wuerttemberg, North Rhine-Westphalia and Bavaria Nuns can (actually must) wear their entire habit, but just a headscarf-even by a nun,is banned.
Now, Christian Wulff, the Minister President of Lower Saxony has announced that the next Social Minister of Lower Saxony is to be Aygul Ozkan. She is the German-born daughter of Turkish Gastarbeiter and the first female Muslim to reach a ministerial position.
She is scheduled to be sworn in tomorrow. Yesterday she decided to announce that given the legal separation of Church and State in Germany, she was not only fully in agreement that the hajib should be banned in schools, but that also all the crucifixes should be removed from the schools.
The outcry was thunderous. There were demands for her resignation before she had even assumed her office. Today, Mr Wulff suggested that Ms Ozkan had been misunderstood, and accordingly, without any outside instigation, she apologised for any "misunderstandings" and any "insults or injury of religious feelings" she might have caused.
Mr Wulff went on further to say that although everyone in Lower Saxony was fully aware of the separation between church and state, there existed a close and happy relationship with the christian churches and therefore for the crucifix in the classroom.
I must admit I don't understand how they can make such statements with a straight face. I have always thought what's good for the goose is good for the gander. Furthermore in all these discussions it is about one religion versus another. What about those of us who adhere to no organised religious group?
The fact that on the continent there are a number of political parties with some form of the word "Christ(ian)" in their names has always irritated me. There are those who say these party names evolved in a different time and the real emphasis at the time was republican versus monarchy. Fair enough. But why not change them to reflect today? I think in most instances the question of monarchy is relatively irrelevant.
I do wonder how Ms Ozkan feels arguing about getting rid of religious symbols while being a member of the CDU- the Christian Democratic Union!
Monday 26 April 2010
Those Troublesome Greeks
So now the Greeks have asked for the financial aid necessary to fend off a default. It was always going to come to this, the question was, and unfortunately remains-just how it will be implemented.
It would appear that despite the barriers and threats that German party politics keeps throwing up that Germany will have to bear around 25% of the costs within the EU. That alone would be reason enough to cause disquiet. Now add insult to injury. The Greek Welfare system is more generous by far than the German system which introduced major cuts in social spending with the introduction of Hartz IV.
The Germans don't understand why they, a wealthier nation, as a result of reunification and then the Euro/Maastricht, had to cut welfare spending and the Greeks, who have been less than open about the the true state of their finances,just keep living the good life.
Fair point. The question is will the EU "visionaries" who sought a United States of Europe be able to stay the course, or will the technocrats of the individual states win out?
I think we are at a difficult, and dangerous point. All the moves to expand the EU, and thereby the Euro to the East will be scrutinized much more closely. Hindsight says Greece in the EU yes, in the Euro no. What does that mean for further European integration? And what does it mean for further NATO expansion?
The Cold War is over. Russia is resurgent. Turkey is no longer the Ottoman Empire, but is also no longer the Sick Man of Europe. Add Iran to the mix and it quickly becomes obvious that this is not a game for children.
Can someone tell that to the squabbling Belgians, the striking Greeks, and the posturing French and English?
It would appear that despite the barriers and threats that German party politics keeps throwing up that Germany will have to bear around 25% of the costs within the EU. That alone would be reason enough to cause disquiet. Now add insult to injury. The Greek Welfare system is more generous by far than the German system which introduced major cuts in social spending with the introduction of Hartz IV.
The Germans don't understand why they, a wealthier nation, as a result of reunification and then the Euro/Maastricht, had to cut welfare spending and the Greeks, who have been less than open about the the true state of their finances,just keep living the good life.
Fair point. The question is will the EU "visionaries" who sought a United States of Europe be able to stay the course, or will the technocrats of the individual states win out?
I think we are at a difficult, and dangerous point. All the moves to expand the EU, and thereby the Euro to the East will be scrutinized much more closely. Hindsight says Greece in the EU yes, in the Euro no. What does that mean for further European integration? And what does it mean for further NATO expansion?
The Cold War is over. Russia is resurgent. Turkey is no longer the Ottoman Empire, but is also no longer the Sick Man of Europe. Add Iran to the mix and it quickly becomes obvious that this is not a game for children.
Can someone tell that to the squabbling Belgians, the striking Greeks, and the posturing French and English?
Friday 23 April 2010
Round Two, Part Two-Who's doing the Counting?
Last night was the second of the UK Election debates. New Kid on the block Nick Clegg was the undisputed winner of the first debate so it was always going to be interesting to see how he handled his new found popularity.
Well it truly depends on what newspaper, TV or radio you listen to, and in which country. Also, it would seem, it depends on what TV station is hosting the debate.
But first to the interpretations.
YouGov gave the debate to Cameron by a nose.
ComRes gave it to Clegg, 33% to Brown and Cameron's 30%.
BBC News said it was basically a 3 horse race now with all three candidates essentially a draw, although in any event the polls on the debate seemed to reflect the polls in general, with Cameron slightly ahead, followed by Clegg, with Brown a close third, all of which points to a Hung Parliament.
The Guardian/ICM poll gave Clegg a slight lead, but gave Brown the lead as the best potential prime minister.
The German TV News Programm ARD report this morning announced Clegg the clear winner!
The Austrian Salzburger News was only concerned with questions about EU membership.
The Financial Times Deutschland proclaimed that there were no clear winners.
The French News Agency AFP found that the average result of 5 polls had Cameron and Clegg even with Brown just behind, but all agreed that Brown was the best performer.
Time.Com, partnered with CNN gave the lead to Rupert Murdoch. This second debate was aired on Sky News which is owned by Mr Murdoch. Mr Murdoch's tabloids, The Sun and News of the World are aggressively backing Mr Cameron.
Mr Murdoch's newer acquisition, the Independent however, was not toeing the party line and was duly given a bollocking by Mr Murdoch's son James for running an ad campaign stating that Mr Murdoch won't decide the election, but rather the British public will! Those ads have disappeared.
Yesterday's debate chaired by Sky News went through the pre-arranged discussion of foreign policy then jumped to some less lofty issues such as Mr Clegg's allegedly putting election donations into his personal bank account, and then on to the pros and cons of a hung Parliament. Conspiracy advocates would maintain that foreign policy isn't Mr Cameron's strong suit so it would fit to run through that aspect of the debate as quickly as possible, and then get into the cut and thrust (or Punch and Judy) of domestic British politics where Mr Cameron is totally in his element-as is Mr Brown to be fair.
Well it truly depends on what newspaper, TV or radio you listen to, and in which country. Also, it would seem, it depends on what TV station is hosting the debate.
But first to the interpretations.
YouGov gave the debate to Cameron by a nose.
ComRes gave it to Clegg, 33% to Brown and Cameron's 30%.
BBC News said it was basically a 3 horse race now with all three candidates essentially a draw, although in any event the polls on the debate seemed to reflect the polls in general, with Cameron slightly ahead, followed by Clegg, with Brown a close third, all of which points to a Hung Parliament.
The Guardian/ICM poll gave Clegg a slight lead, but gave Brown the lead as the best potential prime minister.
The German TV News Programm ARD report this morning announced Clegg the clear winner!
The Austrian Salzburger News was only concerned with questions about EU membership.
The Financial Times Deutschland proclaimed that there were no clear winners.
The French News Agency AFP found that the average result of 5 polls had Cameron and Clegg even with Brown just behind, but all agreed that Brown was the best performer.
Time.Com, partnered with CNN gave the lead to Rupert Murdoch. This second debate was aired on Sky News which is owned by Mr Murdoch. Mr Murdoch's tabloids, The Sun and News of the World are aggressively backing Mr Cameron.
Mr Murdoch's newer acquisition, the Independent however, was not toeing the party line and was duly given a bollocking by Mr Murdoch's son James for running an ad campaign stating that Mr Murdoch won't decide the election, but rather the British public will! Those ads have disappeared.
Yesterday's debate chaired by Sky News went through the pre-arranged discussion of foreign policy then jumped to some less lofty issues such as Mr Clegg's allegedly putting election donations into his personal bank account, and then on to the pros and cons of a hung Parliament. Conspiracy advocates would maintain that foreign policy isn't Mr Cameron's strong suit so it would fit to run through that aspect of the debate as quickly as possible, and then get into the cut and thrust (or Punch and Judy) of domestic British politics where Mr Cameron is totally in his element-as is Mr Brown to be fair.
Thursday 22 April 2010
Round Two in the UK Debate
Last night at dinner my 23 year old daughter announced that in addition to her German and American passport she was now applying for a British passport. I am not sure what all her reasons are but I know that she was annoyed that she is unable to vote in the upcoming UK Parliamentary elections so I am sure that is one of them.
In fact, in what I think is a very good sign for (British) politics it appears that her friends and associates-she is a medical student, her friends are either in University or at the beginning of their careers-are all very much engaged in this election.
She mentioned that before the recent smear campaign(her words)by the Tories against Mr Brown she was open to at least a discussion about the Conservatives. Now, however, after two weeks of billboards attacking Brown without any indication of what Mr Cameron would actually do she is quite convinced that the Conservatives won't be getting her vote.
Furthermore she finds it difficult to believe that the Tories would actually decrease the gap between rich and poor; will save the NHS; have any idea how to address youth unemployment; have a strategy to fix the pensions mess; and have a viable plan to decrease the national debt. Somehow platitudes like going after the "causes" of whatever falls on deaf ears. For her the campaign has moved to a choice between Labour and the Liberal Democrats.
Interestingly enough this morning in the BBC News Show the same discussions were aired. Again those interviewed were primarily either university students-tonight's debate is in Bristol-or young professionals. They too were almost universally dismayed by the Tory campaign, had that quintessentially British fascination with the need for change (for the sake of change) and so were almost unanimously leaning towards Mr Clegg and his Liberal Democrats.
In fact, in what I think is a very good sign for (British) politics it appears that her friends and associates-she is a medical student, her friends are either in University or at the beginning of their careers-are all very much engaged in this election.
She mentioned that before the recent smear campaign(her words)by the Tories against Mr Brown she was open to at least a discussion about the Conservatives. Now, however, after two weeks of billboards attacking Brown without any indication of what Mr Cameron would actually do she is quite convinced that the Conservatives won't be getting her vote.
Furthermore she finds it difficult to believe that the Tories would actually decrease the gap between rich and poor; will save the NHS; have any idea how to address youth unemployment; have a strategy to fix the pensions mess; and have a viable plan to decrease the national debt. Somehow platitudes like going after the "causes" of whatever falls on deaf ears. For her the campaign has moved to a choice between Labour and the Liberal Democrats.
Interestingly enough this morning in the BBC News Show the same discussions were aired. Again those interviewed were primarily either university students-tonight's debate is in Bristol-or young professionals. They too were almost universally dismayed by the Tory campaign, had that quintessentially British fascination with the need for change (for the sake of change) and so were almost unanimously leaning towards Mr Clegg and his Liberal Democrats.
Wednesday 21 April 2010
If Murder were Legal would you Commit it?
I have been going back and looking at reports on the collapse of Lehman and one of my favourite was an editorial by one William D. Cohan in the NYT on March 11,2009. The context is on how the CEO's of the major firms were all happy to make huge and risky bets on the manufacture and sale of MBS because "that's where the money was".
The article goes on to praise Goldman, stating that although they weren't saints (because they too were big in MBS) that they got out of the game in 2006 and then cleaned up by selling these securities short.
Oh, so they got out of the business in '06 and started to short MBS? Funny that the last Abacus deal was launched around April '07.
Well Mr Cohan was right-they weren't saints. But he was wrong on what they were doing.
Fast forward to an editorial yesterday by Mr Paul Krugman. He calmly states that "We've known for some time that Goldman Sachs and other firms marketed mortgage-backed securities even as they sought to make profits by betting that such securities would plunge in value." He goes on to say "This practice, however, while arguably reprehensible, wasn't illegal."
I am surprised at Mr Krugman's calm statement that "we've known for some time". Like how long Mr Krugman, and who is the "we"? I think the investors in ABS CDO's, despite the caveat of "buyer beware" really didn't think, let alone know that the investment banks were selling them securities that they hoped would plunge in value.
Whereas I maintain that customers should be aware of what they are buying and what the potential ramifications of adverse market movements could be on their purchases, I am at a loss to see how selling securities that you have created with the expectation/intention to fail is legal.
The fact that a bank can short securities to a customer with the view that they can buy them back more cheaply at a later date is understood to be a viable part of the secondary market. Putting a value on a security is what banks and investors do. They don't always agree-that's what makes a market.
But the introduction of planned obsolescence in a new security-that takes free market theory beyond the pale in my book.
Financial Regulation should not be a question of your political affiliation- pyramid schemes, shell games, racketeering-these are all illegal on Main Street. Why not on Wall Street?
The article goes on to praise Goldman, stating that although they weren't saints (because they too were big in MBS) that they got out of the game in 2006 and then cleaned up by selling these securities short.
Oh, so they got out of the business in '06 and started to short MBS? Funny that the last Abacus deal was launched around April '07.
Well Mr Cohan was right-they weren't saints. But he was wrong on what they were doing.
Fast forward to an editorial yesterday by Mr Paul Krugman. He calmly states that "We've known for some time that Goldman Sachs and other firms marketed mortgage-backed securities even as they sought to make profits by betting that such securities would plunge in value." He goes on to say "This practice, however, while arguably reprehensible, wasn't illegal."
I am surprised at Mr Krugman's calm statement that "we've known for some time". Like how long Mr Krugman, and who is the "we"? I think the investors in ABS CDO's, despite the caveat of "buyer beware" really didn't think, let alone know that the investment banks were selling them securities that they hoped would plunge in value.
Whereas I maintain that customers should be aware of what they are buying and what the potential ramifications of adverse market movements could be on their purchases, I am at a loss to see how selling securities that you have created with the expectation/intention to fail is legal.
The fact that a bank can short securities to a customer with the view that they can buy them back more cheaply at a later date is understood to be a viable part of the secondary market. Putting a value on a security is what banks and investors do. They don't always agree-that's what makes a market.
But the introduction of planned obsolescence in a new security-that takes free market theory beyond the pale in my book.
Financial Regulation should not be a question of your political affiliation- pyramid schemes, shell games, racketeering-these are all illegal on Main Street. Why not on Wall Street?
Monday 19 April 2010
Act of God, or Act of Nature: The Insurance Industry gets Religion
While I appreciate that the ash cloud covering much of the UK and Europe is causing chaos for anyone unfortunate enough to have been traveling I must say that sitting in my back garden in West London and actually hearing the buzz of bees and the singing of birds was almost a revelation-or at least a journey back in time to when there were not over 2000 flights a day in and out of Heathrow.
But staying on theme I would like to call it a revelation, and just for kicks I would throw in the miracle of time travel!
More importantly however has been the discussion of the small print wording of insurance contracts to determine if a specific policy is enforceable or not due to a volcanic eruption. In the UK there are two terms to define such events. Some policies exclude "Acts of God"(AoG), others "Acts of Nature"(AoN).
So if your policy excludes AoN, you are stuffed for sure. But if it excludes AoG, you can argue that God had nothing to do with it-it is a volcano after all, and where's my compensation.
The insurance companies are of course quick to put on their cloaks of religion and make Nature subservient to God, which means volcanoes are God's work, and your AoG Policy means you aren't getting reimbursed. For the followers of Richard Dawkins I guess you could also get into a discussion as to whether there is a God who acts at all, but I'll leave that for the moment.
Another aside that no one seems to focus on. Over the weekend a German Television Weather reporter casually mentioned that due to the lack of planes and therefore the lack of vapour trails that the days would be hotter, and the nights colder.
Wait a minute. There are so many airplanes that their vapour trails act to block out the sun's rays during the day and to keep whatever warmth has developed during the day from dispersing at night!
That seems pretty conclusive that humans are affecting the environment...
But staying on theme I would like to call it a revelation, and just for kicks I would throw in the miracle of time travel!
More importantly however has been the discussion of the small print wording of insurance contracts to determine if a specific policy is enforceable or not due to a volcanic eruption. In the UK there are two terms to define such events. Some policies exclude "Acts of God"(AoG), others "Acts of Nature"(AoN).
So if your policy excludes AoN, you are stuffed for sure. But if it excludes AoG, you can argue that God had nothing to do with it-it is a volcano after all, and where's my compensation.
The insurance companies are of course quick to put on their cloaks of religion and make Nature subservient to God, which means volcanoes are God's work, and your AoG Policy means you aren't getting reimbursed. For the followers of Richard Dawkins I guess you could also get into a discussion as to whether there is a God who acts at all, but I'll leave that for the moment.
Another aside that no one seems to focus on. Over the weekend a German Television Weather reporter casually mentioned that due to the lack of planes and therefore the lack of vapour trails that the days would be hotter, and the nights colder.
Wait a minute. There are so many airplanes that their vapour trails act to block out the sun's rays during the day and to keep whatever warmth has developed during the day from dispersing at night!
That seems pretty conclusive that humans are affecting the environment...
Sunday 18 April 2010
Goldman and CDO's-a Match made in Heaven.
Although no one active in investment banking will admit it the CDO was inherently designed for the investor to take the hit if there were a problem. But that shouldn't surprise anyone. Investment firms by definition like to buy things they think are cheap, and sell things they think are expensive.
There are reports tracking individual firms and the IPO's they bring to market to show whose offerings performed better in the secondary market. These reports clearly delineate those houses that are aggressive in their pricing to the advantage of the issuer, and those that are more buyer focused.
Not surprisingly as often as not Goldman's issues are not the best performers in the secondary market, but then again the culture of Goldman was as an investment banker as regards clients, and as a trader as regards itself. Its' salespeople were propelled on the back of powerful equity and debt capital markets capabilities and crushingly powerful trading desks who understood the finesse of managing proprietary and clients trading functions.
Now back to CDO's for a moment. As I explained in my pieces on CDO's Part IV on 17.3.10 the trick in CDO's was to find those names that fit into the guidelines as prescribed by the rating agencies and yet yielded more than their official rating would have presumed. They provided the kicker in yield which made the CDO structure work.
Back in the early noughties I pushed to create CDO's where the investor had the ability to choose the issues in the portfolio, or to actively trade out of those issues they didn't like. The trading desks didn't like the idea, and to be fair it didn't work.
Letting the investor choose essentially resulted in the CDO being too expensive for them to purchase. Trading out of names worked in theory, but the cost of doing so was prohibitive because it was almost always the case that the first names chosen by the investor to trade out of were the names that provided the extra yield. Another problem was that as the market conditions for a specific issuer had deteriorated to the point that the investor wanted to trade out of them the damage in the market price had already been done thus making the transaction redundant.
Add to this that few investors really understood the dynamics of CDO's, nor did they feel competent to manage the credit portfolio. If they did (feel competent) they would offer to manage the credit pools for CDO's essentially becoming either third party managers or independent advisers-like Paulson; but also like any number of Hedge Funds and quite a few traditional Asset Managers that are household names in the US and Europe.
Now we are nearing the perfect storm in which Goldman decided to complete "god's work". You take some clever people-inside Goldman and out-who have a strong opinion that the credit boom was getting way overheated. It wasn't just Goldman. A major European bank at its' seminar for Hedge Funds and Proprietary traders were advising their clients as early as April '07 that they were actively hedging their mortgage exposure and suggested to this rarefied group of accounts that they to should do the same.
So, allegedly, Paulson and Goldman get together and work out the perfect storm. Paulson picks names he wants to short, Goldman slams them into their CDO, and in an action which is an incredibly clear indication that the storm is nearing it's apex, they find another "third party" ACS Management to manage the portfolio, who not only agrees to manage the portfolio, but also invests in it. It appears that ACS Management understood that Paulson was acting as an investor in this CDO. The funny thing was is that he was, but from the short side. I think this is called a lie of omission. I think the SEC calls it fraud.
When I first started on Wall Street I had a boss who told me "I will never lie to you, but you must listen very closely to what I say".
I believe a lot of people will be scrutinising every word out of the mouth of Goldman for a very long time.
There are reports tracking individual firms and the IPO's they bring to market to show whose offerings performed better in the secondary market. These reports clearly delineate those houses that are aggressive in their pricing to the advantage of the issuer, and those that are more buyer focused.
Not surprisingly as often as not Goldman's issues are not the best performers in the secondary market, but then again the culture of Goldman was as an investment banker as regards clients, and as a trader as regards itself. Its' salespeople were propelled on the back of powerful equity and debt capital markets capabilities and crushingly powerful trading desks who understood the finesse of managing proprietary and clients trading functions.
Now back to CDO's for a moment. As I explained in my pieces on CDO's Part IV on 17.3.10 the trick in CDO's was to find those names that fit into the guidelines as prescribed by the rating agencies and yet yielded more than their official rating would have presumed. They provided the kicker in yield which made the CDO structure work.
Back in the early noughties I pushed to create CDO's where the investor had the ability to choose the issues in the portfolio, or to actively trade out of those issues they didn't like. The trading desks didn't like the idea, and to be fair it didn't work.
Letting the investor choose essentially resulted in the CDO being too expensive for them to purchase. Trading out of names worked in theory, but the cost of doing so was prohibitive because it was almost always the case that the first names chosen by the investor to trade out of were the names that provided the extra yield. Another problem was that as the market conditions for a specific issuer had deteriorated to the point that the investor wanted to trade out of them the damage in the market price had already been done thus making the transaction redundant.
Add to this that few investors really understood the dynamics of CDO's, nor did they feel competent to manage the credit portfolio. If they did (feel competent) they would offer to manage the credit pools for CDO's essentially becoming either third party managers or independent advisers-like Paulson; but also like any number of Hedge Funds and quite a few traditional Asset Managers that are household names in the US and Europe.
Now we are nearing the perfect storm in which Goldman decided to complete "god's work". You take some clever people-inside Goldman and out-who have a strong opinion that the credit boom was getting way overheated. It wasn't just Goldman. A major European bank at its' seminar for Hedge Funds and Proprietary traders were advising their clients as early as April '07 that they were actively hedging their mortgage exposure and suggested to this rarefied group of accounts that they to should do the same.
So, allegedly, Paulson and Goldman get together and work out the perfect storm. Paulson picks names he wants to short, Goldman slams them into their CDO, and in an action which is an incredibly clear indication that the storm is nearing it's apex, they find another "third party" ACS Management to manage the portfolio, who not only agrees to manage the portfolio, but also invests in it. It appears that ACS Management understood that Paulson was acting as an investor in this CDO. The funny thing was is that he was, but from the short side. I think this is called a lie of omission. I think the SEC calls it fraud.
When I first started on Wall Street I had a boss who told me "I will never lie to you, but you must listen very closely to what I say".
I believe a lot of people will be scrutinising every word out of the mouth of Goldman for a very long time.
Friday 16 April 2010
Cerno fossorex suus viaticus *
I know I should be outraged by the revelation that some investment bank sold the city of Saint-Etienne a financing package which included an embedded option that had the city “...playing the dollar against the Swiss franc until 2042” as a means of lowering their borrowing costs.
But in this case I can't. The derivative contracts entered into by Saint-Etienne had nothing to do with the financing of the city.
In an article on Bloomberg this morning they quoted "More than 1,000 municipalities in France had 11 billion euros in “risky” contracts at the end of 2009, according to Paris-based Finance Active. In Italy, about 467 public borrowers faced losses of 2.5 billion euros on derivatives as of the end of September, according to the Bank of Italy."
The same article went on to say "In Germany, Deutsche Bank sold contracts based on the difference between long- and short-term rates to about 50 municipal governments and utilities. Local authorities also bought swaps from regional banks and Commerzbank AG. No national consolidated figures exist, according to Roland Simon of Simon & Partner, a law firm in Duesseldorf."
Saint-Etienne apparently saved 126,377 Euros. They are currently in arrears around 1.2million Euros. To unwind the swaps would cost around 100million Euros.
What was the treasurer of Saint-Etienne thinking? Or any of those responsible for municipal financing? Any number of them took on risk speculating on the shape of the yield curve-short term vs long term interest rates. Note the word "speculating". Why were any of these people speculating with municipal finance?
It is common to blame the derivative instruments in the first instance and then to blame the investment banks for selling them. I maintain that the buyers too should be held to blame.
Lest anyone think I am being soft on investment banking however, look to today's title. Investment bankers had to seek out the fools whom they could separate from their money. In three countries alone they were able to find over 1500 fools who took on risks-probably after an extensive dinner-which lined the pockets of the investment banks and are now tearing massive holes in the fabric of municipal finance.
*Separate a Fool from his Money
But in this case I can't. The derivative contracts entered into by Saint-Etienne had nothing to do with the financing of the city.
In an article on Bloomberg this morning they quoted "More than 1,000 municipalities in France had 11 billion euros in “risky” contracts at the end of 2009, according to Paris-based Finance Active. In Italy, about 467 public borrowers faced losses of 2.5 billion euros on derivatives as of the end of September, according to the Bank of Italy."
The same article went on to say "In Germany, Deutsche Bank sold contracts based on the difference between long- and short-term rates to about 50 municipal governments and utilities. Local authorities also bought swaps from regional banks and Commerzbank AG. No national consolidated figures exist, according to Roland Simon of Simon & Partner, a law firm in Duesseldorf."
Saint-Etienne apparently saved 126,377 Euros. They are currently in arrears around 1.2million Euros. To unwind the swaps would cost around 100million Euros.
What was the treasurer of Saint-Etienne thinking? Or any of those responsible for municipal financing? Any number of them took on risk speculating on the shape of the yield curve-short term vs long term interest rates. Note the word "speculating". Why were any of these people speculating with municipal finance?
It is common to blame the derivative instruments in the first instance and then to blame the investment banks for selling them. I maintain that the buyers too should be held to blame.
Lest anyone think I am being soft on investment banking however, look to today's title. Investment bankers had to seek out the fools whom they could separate from their money. In three countries alone they were able to find over 1500 fools who took on risks-probably after an extensive dinner-which lined the pockets of the investment banks and are now tearing massive holes in the fabric of municipal finance.
*Separate a Fool from his Money
The Gluttony of Political Manoeuvering
Although I am far too experienced-my favourite euphemism for being older-I still am always shattered by the myopia of politics regardless of the setting.
In my tenure in a myriad of Executive Committees I was forever hoping that in those hallowed halls of senior management we would be able to let our "career" guards down and actually focus on doing the right thing for the company. Invariably the same turf battles that took place on the trading floors were reflected in the respective heads of businesses in the committee. This sad realisation was unfortunately repeatedly compounded by the poor leadership of the Committee Head who either was the CEO or would present to the CEO, who also depressingly was either a megalomaniac, or a dithering fool, neither of which were what was required to effect rational decision making and strong leadership.
Imagine then my despair to "discover" that the Office of Thrift Supervision (OFS)and the Federal Deposit Insurance Company (FDIC) engaged in the same foolishness fighting turf battles rather than focusing on the problems at hand with relation to Washington Mutual (WaMu).
In the world of finance, and most likely in the world in general there are basic cliques that are always in a contentious relationship with one another.
Among them there is the "what's good for the firm is good for me" group in conflict with the "what's good for me is good for the firm" group. Tangential to these are those that fight over their share of the pie, versus those that try and make the pie bigger....and then fight over their share of the pie.
Of course it's obvious that the regulators are human and therefore just as fallible as anyone else. I think however that what it really exposes is the lack of quality of management which pervades every corridor of power regardless of the setting.
All this clamouring for more regulation smells like "garbage in-garbage out".
Senate investigators said that the OTS protected WaMu from other government agencies and failed to act when it identified errors, risk and fraud at the Seattle-based lender.
The Regulators were fully aware that there was a problem, and knowingly concealed it in a turf war!?
I guess they were in the "bigger piece of the pie" club. Pity by the time they got their plate the pie had burnt.
In my tenure in a myriad of Executive Committees I was forever hoping that in those hallowed halls of senior management we would be able to let our "career" guards down and actually focus on doing the right thing for the company. Invariably the same turf battles that took place on the trading floors were reflected in the respective heads of businesses in the committee. This sad realisation was unfortunately repeatedly compounded by the poor leadership of the Committee Head who either was the CEO or would present to the CEO, who also depressingly was either a megalomaniac, or a dithering fool, neither of which were what was required to effect rational decision making and strong leadership.
Imagine then my despair to "discover" that the Office of Thrift Supervision (OFS)and the Federal Deposit Insurance Company (FDIC) engaged in the same foolishness fighting turf battles rather than focusing on the problems at hand with relation to Washington Mutual (WaMu).
In the world of finance, and most likely in the world in general there are basic cliques that are always in a contentious relationship with one another.
Among them there is the "what's good for the firm is good for me" group in conflict with the "what's good for me is good for the firm" group. Tangential to these are those that fight over their share of the pie, versus those that try and make the pie bigger....and then fight over their share of the pie.
Of course it's obvious that the regulators are human and therefore just as fallible as anyone else. I think however that what it really exposes is the lack of quality of management which pervades every corridor of power regardless of the setting.
All this clamouring for more regulation smells like "garbage in-garbage out".
Senate investigators said that the OTS protected WaMu from other government agencies and failed to act when it identified errors, risk and fraud at the Seattle-based lender.
The Regulators were fully aware that there was a problem, and knowingly concealed it in a turf war!?
I guess they were in the "bigger piece of the pie" club. Pity by the time they got their plate the pie had burnt.
Thursday 15 April 2010
The Russian Bear
Germany's fixation on its' lack of natural geographical borders, especially to the east, has been used as an explanation for German aggression ever since the creation of the Prussian State in 1642 but harks back to Roman times.
The focus on "indefensible" borders has precipitated a number of wars, WW I and II being the most recent and the most devastating. The creation of the EU and the inclusion of Germany in 1955, after the Soviet Union had requested joining NATO was a difficult but logical step during the Cold War. As late as 1985 of the 26 divisions guarding the Central European Frontier 12 of them were German.
So although much has been made recently of concerns about Germany's apparent shift in position as regards Germany's role as the financial provider to Europe, little was said of Germany's role as the largest Army on the Continent.
Clearly the reason for this was a fear of the Soviet Union, and a willingness to use German troops as a bulwark against the threat of invasion. France's nuclear weapons were aimed at the East/West German border-the next war was going to fought in Germany.
What many people don't realise is that the Russians are filled with the same concerns of geographic vulnerability. Russia has no barriers to the east until the Urals. The North German Plain-essentially encompassing Poland was not only viewed by the Germans as a route for invasion from the east; the Russians had the same concerns albeit in this case it was invasion from the west.
So Russia has traditionally sought to insure that they controlled the land to the south east thus expanding into the Ukrainian marshlands-Ivan the Terrible; to the Urals and the Central Asian steppe and the Tien Shan-Catherine the Great and into Eastern and Central Europe-the Soviet Union.
Depending on when in history one looks essentially the Russians have been worried about the Swedes and the Germans to the west; the Chinese/Mongolians from the southeast; and Turks and Iranian from the south/southwest.
Unlike in Europe where Germany was bound into the framework of the EU and NATO, Russia has been the major power with a strategy to coerce/conquer those lands adjacent to it to provide either natural borders or at least buffer states to protect the Russian homeland.
The encroachment of NATO from the Baltics to Southeast Europe in the years since the fall of the Soviet Union has dented both Russia's ego, and reopened the doors to fears of invasion. With the US preoccupied in Iraq and Afghanistan the Russians have been busy trying to regain their "empire". This ranged from agitating in the Ukraine to preclude Ukrainian inclusion in NATO; aggression in the Caucasus to insure that Chechnya, Ingushetia, Daqgestan, Georgia, Armenia and Azerbaijan don't fall sway to Iran or Turkey, re-establishing influence in Kazakhstan and Belarus, and recently Russian involvement in Kyrgyzstan to ensure that the Fergana Valley, home to most of Central Asia's population, remains a no-man's land looking to Russia for protection.
Then came Katyn.
One of the first things to notice when looking at maps of Katyn is to recognise that in 1939 Polands eastern border included Minsk and Kiev. The Ukraine was part of the Soviet Union, as was Belarus. Today Belarus and the Ukraine are independent, but much more clearly in the Russian sphere of influence, and Poland was already in the sights of Russian planning.
The history of Polish-Russian relations is not pleasant and so it was especially poignant that yet another "massacre", from the Polish perspective, should have occurred in Katyn, even if it appears to have been an accident/pilot error.
Indeed, the German media is most concerned with the cause of the crash speaking somewhat confidently of "discussions" in the cockpit which help explain the decision to try and land despite the recommendation from the Russian Air Controllers to go to either Minsk or Moscow. Much is made of Kaczynski's poor relationship with Belarus (Minsk) and Russia (Moscow)-he was not officially invited to the ceremony but rather the Russian-friendly Minister President Tusk (who was therefore not on the same plane).
In any event there has been a massive change in the relationship between Russia and Poland-at least from the side of the Russians who have quickly moved-some would say cynically-to announce a National Day of Mourning for the Polish dead and to use the opportunity to try and ease the tension between the two nations.
Strange that when the Germans are perceived to act in their self-interest the media is quick to splash it over the headlines. When Russia acts in its' self-interest, it shows up on page 17.
The focus on "indefensible" borders has precipitated a number of wars, WW I and II being the most recent and the most devastating. The creation of the EU and the inclusion of Germany in 1955, after the Soviet Union had requested joining NATO was a difficult but logical step during the Cold War. As late as 1985 of the 26 divisions guarding the Central European Frontier 12 of them were German.
So although much has been made recently of concerns about Germany's apparent shift in position as regards Germany's role as the financial provider to Europe, little was said of Germany's role as the largest Army on the Continent.
Clearly the reason for this was a fear of the Soviet Union, and a willingness to use German troops as a bulwark against the threat of invasion. France's nuclear weapons were aimed at the East/West German border-the next war was going to fought in Germany.
What many people don't realise is that the Russians are filled with the same concerns of geographic vulnerability. Russia has no barriers to the east until the Urals. The North German Plain-essentially encompassing Poland was not only viewed by the Germans as a route for invasion from the east; the Russians had the same concerns albeit in this case it was invasion from the west.
So Russia has traditionally sought to insure that they controlled the land to the south east thus expanding into the Ukrainian marshlands-Ivan the Terrible; to the Urals and the Central Asian steppe and the Tien Shan-Catherine the Great and into Eastern and Central Europe-the Soviet Union.
Depending on when in history one looks essentially the Russians have been worried about the Swedes and the Germans to the west; the Chinese/Mongolians from the southeast; and Turks and Iranian from the south/southwest.
Unlike in Europe where Germany was bound into the framework of the EU and NATO, Russia has been the major power with a strategy to coerce/conquer those lands adjacent to it to provide either natural borders or at least buffer states to protect the Russian homeland.
The encroachment of NATO from the Baltics to Southeast Europe in the years since the fall of the Soviet Union has dented both Russia's ego, and reopened the doors to fears of invasion. With the US preoccupied in Iraq and Afghanistan the Russians have been busy trying to regain their "empire". This ranged from agitating in the Ukraine to preclude Ukrainian inclusion in NATO; aggression in the Caucasus to insure that Chechnya, Ingushetia, Daqgestan, Georgia, Armenia and Azerbaijan don't fall sway to Iran or Turkey, re-establishing influence in Kazakhstan and Belarus, and recently Russian involvement in Kyrgyzstan to ensure that the Fergana Valley, home to most of Central Asia's population, remains a no-man's land looking to Russia for protection.
Then came Katyn.
One of the first things to notice when looking at maps of Katyn is to recognise that in 1939 Polands eastern border included Minsk and Kiev. The Ukraine was part of the Soviet Union, as was Belarus. Today Belarus and the Ukraine are independent, but much more clearly in the Russian sphere of influence, and Poland was already in the sights of Russian planning.
The history of Polish-Russian relations is not pleasant and so it was especially poignant that yet another "massacre", from the Polish perspective, should have occurred in Katyn, even if it appears to have been an accident/pilot error.
Indeed, the German media is most concerned with the cause of the crash speaking somewhat confidently of "discussions" in the cockpit which help explain the decision to try and land despite the recommendation from the Russian Air Controllers to go to either Minsk or Moscow. Much is made of Kaczynski's poor relationship with Belarus (Minsk) and Russia (Moscow)-he was not officially invited to the ceremony but rather the Russian-friendly Minister President Tusk (who was therefore not on the same plane).
In any event there has been a massive change in the relationship between Russia and Poland-at least from the side of the Russians who have quickly moved-some would say cynically-to announce a National Day of Mourning for the Polish dead and to use the opportunity to try and ease the tension between the two nations.
Strange that when the Germans are perceived to act in their self-interest the media is quick to splash it over the headlines. When Russia acts in its' self-interest, it shows up on page 17.
Wednesday 14 April 2010
Who is the Audience
I just spent four days in Germany during which the "agreement" for Greece was hammered out, and the second disaster in Katyn occurred.
Now although I watch German TV daily it is still not the same as being there-and I certainly don't read the German equivalent of the English "Red Tops" such as Bild Zeitung in the UK although the headlines are impossible to ignore when in Germany.
What struck me this time, is the difference between how the same subject is treated when it is targeted for domestic versus international consumption.
Let's start with Greece. The international press, has focused on the significance of Germany's moves in a geopolitical sense casting the spectre of a resurgent German Nationalism. Yesterdays' IHT front page headlines declared a change in Germany's policy and trumpeted a change from gentle giant of Europe into a more assertive Germany.
The Headlines in the main German newspapers such as the FAZ and the SDZ view Germany's approach to Greece solely in domestic terms. It is much more subtle in describing the shift stressing that Germany had to go through difficult times to make it "fit for globalisation".
Germany sees consumer spending as an adjunct; not the main driver of it's economy. Modern German history is scarred by two World Wars, one hyperinflation and two new currencies; the DM and the Euro. Economic stability, low inflation and fiscal discipline are given precedence even if means the implementation of harsh fiscal conditions and slower growth. The German domestic discussion is that everyone should be required to swallow the same bitter medicine that the Germans prescribe themselves.
Internally this is viewed as rational. Externally it is viewed as German Nationalism bearing with it all the risks that portends.
I am sure that many in the external audience have little sympathy for Germany and view such actions by the Germans as worrisome. I am sure that many feel that Germany still has many sins to atone for and they should continue to pay for the sake of European unity/prosperity.
Internally, the expenditures associated with re-unification have left Germany, though still well-off, significantly less wealthy than before. This has made it much more difficult for German politicians to continue to subsidize the rest of Europe. As always, in addition to understandable concerns about the costs associated with Europe being raised in Germany there are also populist rabblerousers who make a lot of noise. What is more a disappointment is the technocratic attitude of the FDP that is willing to jump onto the bandwagon, even if it means lending credence to the run-of-the-mill populists.
There is a new Germany. Not necessarily good or bad, but new, and finding it's place will take time and patience-neither of which are likely to be granted internally or externally.
I will address Katyn tomorrow.
Now although I watch German TV daily it is still not the same as being there-and I certainly don't read the German equivalent of the English "Red Tops" such as Bild Zeitung in the UK although the headlines are impossible to ignore when in Germany.
What struck me this time, is the difference between how the same subject is treated when it is targeted for domestic versus international consumption.
Let's start with Greece. The international press, has focused on the significance of Germany's moves in a geopolitical sense casting the spectre of a resurgent German Nationalism. Yesterdays' IHT front page headlines declared a change in Germany's policy and trumpeted a change from gentle giant of Europe into a more assertive Germany.
The Headlines in the main German newspapers such as the FAZ and the SDZ view Germany's approach to Greece solely in domestic terms. It is much more subtle in describing the shift stressing that Germany had to go through difficult times to make it "fit for globalisation".
Germany sees consumer spending as an adjunct; not the main driver of it's economy. Modern German history is scarred by two World Wars, one hyperinflation and two new currencies; the DM and the Euro. Economic stability, low inflation and fiscal discipline are given precedence even if means the implementation of harsh fiscal conditions and slower growth. The German domestic discussion is that everyone should be required to swallow the same bitter medicine that the Germans prescribe themselves.
Internally this is viewed as rational. Externally it is viewed as German Nationalism bearing with it all the risks that portends.
I am sure that many in the external audience have little sympathy for Germany and view such actions by the Germans as worrisome. I am sure that many feel that Germany still has many sins to atone for and they should continue to pay for the sake of European unity/prosperity.
Internally, the expenditures associated with re-unification have left Germany, though still well-off, significantly less wealthy than before. This has made it much more difficult for German politicians to continue to subsidize the rest of Europe. As always, in addition to understandable concerns about the costs associated with Europe being raised in Germany there are also populist rabblerousers who make a lot of noise. What is more a disappointment is the technocratic attitude of the FDP that is willing to jump onto the bandwagon, even if it means lending credence to the run-of-the-mill populists.
There is a new Germany. Not necessarily good or bad, but new, and finding it's place will take time and patience-neither of which are likely to be granted internally or externally.
I will address Katyn tomorrow.
Friday 9 April 2010
The Run-up to the Election (UK)
Living as I do in the UK where I pay taxes but do not vote I pay particular attention to the political process as I will be affected by it but cannot influence it. One of the idiosyncrasies of the political process here is that the Party in power declares an election which will take place a month later thus sparing the nation and the candidates the trials and tribulations of a year-long slog to polling day.
Yesterday I listened to an interview on Radio 4 with Gordon Brown followed by an interview today of David Cameron. I patiently waited for today's interview as I was somewhat taken aback by the Fox News mad dog approach in Mr Brown's interview and so waited to see how Mr Cameron was treated. To my (relative) dismay he got a firm but fair and civil questioning.
I have always held up the BBC as an example of how reporting should be-fair, stern and non-partisan. I have also always held ex-President Reagan responsible for the removal of the requirement in the US for the media to be fair and even-handed in their reporting regardless of their editorial slant.
Therefore I believe Reagan is responsible for the rise of Fox News and its' brethren and thereby a massive decline in the level of the political debate in America. Partisan politics are now allowed to override truth and rational analysis. It was thus with surprise and disappointment that I listened to the outrageous interrogation of Mr Brown on the BBC, a broadcaster that I had previously held in high regard.
But back to the UK election. Through the rage of Mr Brown's grilling he maintained his poise and position with just a touch too much of blaming the financial crisis on a global phenomenon rather than admitting that the UK too rode the wild horse of credit excess and soaring tax income. Otherwise he presented a balanced account of what he had done and what he would do.
Mr Cameron on the other hand squirmed and twisted speaking in platitudes about dealing with the causes of problems rather than with the problems themselves. But, among others, when pressed, admitted that part of the "hard decisions" the Conservatives would take would be to decrease the size of the Public Sector i.e. dismissals and that the pay scales in the Public Sector would have to be changed as it was unacceptable that managers in the Public Sector should earn significantly more than their subordinates.
He went on to say that this pay differential was fine in the Private Sector. Wait a minute. Is Mr Cameron not suggesting a Marxist approach to public service and a Capitalist approach to the private sector? Is he not telling the ambitious of Britain to avoid public service and pile into the private sector and let the public sector be filled by the less ambitious, possibly the less capable and oh lest I forget the charitable do-gooders?
About the only thing positive I can say about these first two interviews is that Mr Brown came out much more statesmanlike than Mr Cameron- but then Mr Cameron does come from a Corporate Communications background....
Yesterday I listened to an interview on Radio 4 with Gordon Brown followed by an interview today of David Cameron. I patiently waited for today's interview as I was somewhat taken aback by the Fox News mad dog approach in Mr Brown's interview and so waited to see how Mr Cameron was treated. To my (relative) dismay he got a firm but fair and civil questioning.
I have always held up the BBC as an example of how reporting should be-fair, stern and non-partisan. I have also always held ex-President Reagan responsible for the removal of the requirement in the US for the media to be fair and even-handed in their reporting regardless of their editorial slant.
Therefore I believe Reagan is responsible for the rise of Fox News and its' brethren and thereby a massive decline in the level of the political debate in America. Partisan politics are now allowed to override truth and rational analysis. It was thus with surprise and disappointment that I listened to the outrageous interrogation of Mr Brown on the BBC, a broadcaster that I had previously held in high regard.
But back to the UK election. Through the rage of Mr Brown's grilling he maintained his poise and position with just a touch too much of blaming the financial crisis on a global phenomenon rather than admitting that the UK too rode the wild horse of credit excess and soaring tax income. Otherwise he presented a balanced account of what he had done and what he would do.
Mr Cameron on the other hand squirmed and twisted speaking in platitudes about dealing with the causes of problems rather than with the problems themselves. But, among others, when pressed, admitted that part of the "hard decisions" the Conservatives would take would be to decrease the size of the Public Sector i.e. dismissals and that the pay scales in the Public Sector would have to be changed as it was unacceptable that managers in the Public Sector should earn significantly more than their subordinates.
He went on to say that this pay differential was fine in the Private Sector. Wait a minute. Is Mr Cameron not suggesting a Marxist approach to public service and a Capitalist approach to the private sector? Is he not telling the ambitious of Britain to avoid public service and pile into the private sector and let the public sector be filled by the less ambitious, possibly the less capable and oh lest I forget the charitable do-gooders?
About the only thing positive I can say about these first two interviews is that Mr Brown came out much more statesmanlike than Mr Cameron- but then Mr Cameron does come from a Corporate Communications background....
Thursday 8 April 2010
The Global Financial Catastrophe Defense
I am to understand that in the United States, in an article in the WSJ that banks have won dismissals of lawsuits with variations of "a global financial catastrophe defense" arguing the blame should be on collapsing markets rather than any actions on their part?!
What judge in his right mind would listen to such a defense?! Are the banks suggesting that they were passive bystanders? Did CDO's, NINJA Loans, Sub-Prime and all the other financial products appear out of thin air?
I just don't get it. Next will we see a murderer throw away their weapon and point to the number of murders happening in general and blame an anonymous "them" for the crimes they committed?
And then Greenspan chimes in that he was 70% right but he and the regulators were being pressured to expand credit, particularly to foster home ownership. Wait a minute. Home ownership isn't a right. It brings with it responsibilities like being able to pay. Rather than hiding behind veiled barbs at Republican enemy #1 Barney Frank why not focus on the lax regulation and oversight that allowed the sub-prime mess to evolve in the first place. Oh, but then that would assume that Greenspan would acknowledge his responsibilities....
Which leads us straight to those towering intellects of Citibank Mr Prince and Mr Rubin. What exactly was Mr Rubin paid to do? Apparently it was to meet with clients and advise on "strategic and managerial issues". Well Mr Rubin was certainly on top of the strategic and managerial issues at Citibank. I wonder what advice he was pedalling.
And then that paragon of intelligence Mr Prince. He blames the financial crisis on a combination of prolonged low interest rates, the growth of the securitization market, policies encouraging home ownership and the "patchwork nature" of sub prime mortgage regulation! He then goes on to say that he believed that neither he, Citibank's chief risk officer Mr Bushnell or Citigroup's senior traders and bankers "understood the risks" in their CDO portfolios.
No Mr Prince, it was clear that there was a problem-if you were willing to look at the structures closely. That would require an ability to look beyond the revenue figures that were being generated and actually inquire as to how they were being achieved. It would also require a risk manager who actually asked difficult questions and would be willing or able to challenge traders and structurers.
I can only partially agree with Phil Angelides, the Chairman of the Financial Crisis Inquiry Commission when he told them "you were either pulling the levers, or asleep at the switch". They were obviously asleep at the switch-I also think they were either criminally negligent, or negligently criminal. In either case the operative word is "criminal".
What judge in his right mind would listen to such a defense?! Are the banks suggesting that they were passive bystanders? Did CDO's, NINJA Loans, Sub-Prime and all the other financial products appear out of thin air?
I just don't get it. Next will we see a murderer throw away their weapon and point to the number of murders happening in general and blame an anonymous "them" for the crimes they committed?
And then Greenspan chimes in that he was 70% right but he and the regulators were being pressured to expand credit, particularly to foster home ownership. Wait a minute. Home ownership isn't a right. It brings with it responsibilities like being able to pay. Rather than hiding behind veiled barbs at Republican enemy #1 Barney Frank why not focus on the lax regulation and oversight that allowed the sub-prime mess to evolve in the first place. Oh, but then that would assume that Greenspan would acknowledge his responsibilities....
Which leads us straight to those towering intellects of Citibank Mr Prince and Mr Rubin. What exactly was Mr Rubin paid to do? Apparently it was to meet with clients and advise on "strategic and managerial issues". Well Mr Rubin was certainly on top of the strategic and managerial issues at Citibank. I wonder what advice he was pedalling.
And then that paragon of intelligence Mr Prince. He blames the financial crisis on a combination of prolonged low interest rates, the growth of the securitization market, policies encouraging home ownership and the "patchwork nature" of sub prime mortgage regulation! He then goes on to say that he believed that neither he, Citibank's chief risk officer Mr Bushnell or Citigroup's senior traders and bankers "understood the risks" in their CDO portfolios.
No Mr Prince, it was clear that there was a problem-if you were willing to look at the structures closely. That would require an ability to look beyond the revenue figures that were being generated and actually inquire as to how they were being achieved. It would also require a risk manager who actually asked difficult questions and would be willing or able to challenge traders and structurers.
I can only partially agree with Phil Angelides, the Chairman of the Financial Crisis Inquiry Commission when he told them "you were either pulling the levers, or asleep at the switch". They were obviously asleep at the switch-I also think they were either criminally negligent, or negligently criminal. In either case the operative word is "criminal".
It's just Football!
Last night Bayern Munich played Manchester United in the quarter-finals of what is now called the Champions League. At one time the teams in this competition were the winners of the respective leagues in Europe who would play against one another to determine the European Champion.
This was all pre-Bosman and so the teams involved truly represented their countries at club level-each team was only allowed to have a maximum of 2 foreign players. So in the past when Bayern played United, it was essentially Germany versus England.
Now, post-Bosman, it is possible that club teams can and do field 11 players, none of whom are from the home country of the league for which they play. Last night United started 5 British players, and Bayern fielded 5 Germans. Despite this, in the English media there remained an undercurrent of Germany versus England. In the German media the focus was on the 1999 Champions League final which United won beating Bayern in injury time just as the whistle blew.
I watched the game in German, I find the German commentators tend to be more neutral and if anything are more critical. The English tend to be much more one-sided for example what is a "professional foul" by United is an example of "dirty play" by Bayern.
In the post-game analysis the Germans admitted that for the first 45 minutes United was spectacular. With 43 minutes played United was ahead 3-0. Than Bayern scored. They came out in the second half and played very well getting a second (beautiful) goal and so won on the away goals rule. There was a a contentious moment when a young United defender was shown his second yellow card and therefore was sent off.
Now a couple of things here. The United defender was called for two fouls: both were yellow cards. After the match it is common for players to shake hands with the referee. Rio Ferdinand, captain of United and England refused to shake the referee's hand. Lastly, when asked about the sending off the coach of United blamed "typical Germans" for crowding the referee resulting in the red card. Ironically it was a French player who was fouled who remonstrated.
The real point here is why did a football game played by international players and coached by a Dutchman and a Scotsman decline to blaming "the Germans" again?
This was all pre-Bosman and so the teams involved truly represented their countries at club level-each team was only allowed to have a maximum of 2 foreign players. So in the past when Bayern played United, it was essentially Germany versus England.
Now, post-Bosman, it is possible that club teams can and do field 11 players, none of whom are from the home country of the league for which they play. Last night United started 5 British players, and Bayern fielded 5 Germans. Despite this, in the English media there remained an undercurrent of Germany versus England. In the German media the focus was on the 1999 Champions League final which United won beating Bayern in injury time just as the whistle blew.
I watched the game in German, I find the German commentators tend to be more neutral and if anything are more critical. The English tend to be much more one-sided for example what is a "professional foul" by United is an example of "dirty play" by Bayern.
In the post-game analysis the Germans admitted that for the first 45 minutes United was spectacular. With 43 minutes played United was ahead 3-0. Than Bayern scored. They came out in the second half and played very well getting a second (beautiful) goal and so won on the away goals rule. There was a a contentious moment when a young United defender was shown his second yellow card and therefore was sent off.
Now a couple of things here. The United defender was called for two fouls: both were yellow cards. After the match it is common for players to shake hands with the referee. Rio Ferdinand, captain of United and England refused to shake the referee's hand. Lastly, when asked about the sending off the coach of United blamed "typical Germans" for crowding the referee resulting in the red card. Ironically it was a French player who was fouled who remonstrated.
The real point here is why did a football game played by international players and coached by a Dutchman and a Scotsman decline to blaming "the Germans" again?
Wednesday 7 April 2010
"Just because we're a bank doesn't mean we're wrong"
This is a quote from CEO of a major American Bank. He also sends a dossier to every politician that he's going to visit in advance of the meeting. It contains such information as how many people the Bank employs in the lawmaker's home state and how much the bank pays in taxes.
No Mr CEO,it's not that you are a bank that makes you wrong. It's your callous pursuit of profits from your clients, be they retail or institutional regardless of the risks-to them, or to your own bank; it's your veiled threats of blackmail/bribery when you discuss the financial muscle your bank has; it's the fact that your and other banks played the "heads I win tails you lose" game to the hilt; frankly, it's your inability to understand how banks and government and the public are connected.
This same CEO was quoted as saying "Punishing whole industries, whether you were reckless or not, just isn't the way to do things." Well, the banking industry as a whole has inflicted a punishment essentially on the whole world, whether they were reckless or not.
Perhaps a little self-reflection is called for?
No Mr CEO,it's not that you are a bank that makes you wrong. It's your callous pursuit of profits from your clients, be they retail or institutional regardless of the risks-to them, or to your own bank; it's your veiled threats of blackmail/bribery when you discuss the financial muscle your bank has; it's the fact that your and other banks played the "heads I win tails you lose" game to the hilt; frankly, it's your inability to understand how banks and government and the public are connected.
This same CEO was quoted as saying "Punishing whole industries, whether you were reckless or not, just isn't the way to do things." Well, the banking industry as a whole has inflicted a punishment essentially on the whole world, whether they were reckless or not.
Perhaps a little self-reflection is called for?
Tuesday 6 April 2010
Not Quiet on Any Fronts
Today German Defense Minister zu Guttenberg announced that Germany found itself at War in Afghanistan. Although this was aimed at the German Public and came as a result of an ambush of German Peacekeepers stationed in Afghanistan it has the potential to spark a number of discussions over Germany's role as a military force.
Briefly, the German Troops in Afghanistan were sent as Peacekeepers and although part of NATO were not understood by the German Public to be active in a military sense but rather were focused on training and reconstruction. On Good Friday they were ambushed by the very people whom they have been working with to help build infrastructure.
The ambush killed 3 German Troops, and in the confusion 6 Afghan troops were killed by "friendly-fire". In the Defense Minister's statement he said that the equipment supplied to the German Troops there was adequate for a Peacekeeping Mission, but the fact was that they were at War and as such their requirements were very different.
Zu Guttenberg was careful to say that Germany was at war "in" and not "with" Afghanistan, but the message was essentially that German Troops will be receiving more equipment and that they will be more likely to use force in the future.
At the same time, in an interview published March 31st German Finance Minister Schaeuble in which he was addressing Germany's role in the discussions on the Greek Debt crisis he said: “In the 1990s, after reunification, all Europeans said that Germany should, at long last, become a normal country … Today, Germany is a normal country, and some are still not happy.”
Since WWII Germany has been anything but a normal country in any number of ways, but one truly extraordinary aspect was the way that European Union was based on German economic efficiency which essentially paid for everything, without having a voice.
With reunification Germany remained committed to the status quo. The financial crisis however exposed different views and the German response was significantly different to that of the English and the Americans. The Greek crisis was dealt with under German terms. The English were not involved as they are not part of the Euro. They are part of Europe and whereas for the past 50 years or so they were confronted with a Franco-German combination, this is first time for a very long time that Germany on it's own initiative acted first and foremost in it's own interest.
The ball has been kicked rolling. It will be interesting to see where it goes.
Briefly, the German Troops in Afghanistan were sent as Peacekeepers and although part of NATO were not understood by the German Public to be active in a military sense but rather were focused on training and reconstruction. On Good Friday they were ambushed by the very people whom they have been working with to help build infrastructure.
The ambush killed 3 German Troops, and in the confusion 6 Afghan troops were killed by "friendly-fire". In the Defense Minister's statement he said that the equipment supplied to the German Troops there was adequate for a Peacekeeping Mission, but the fact was that they were at War and as such their requirements were very different.
Zu Guttenberg was careful to say that Germany was at war "in" and not "with" Afghanistan, but the message was essentially that German Troops will be receiving more equipment and that they will be more likely to use force in the future.
At the same time, in an interview published March 31st German Finance Minister Schaeuble in which he was addressing Germany's role in the discussions on the Greek Debt crisis he said: “In the 1990s, after reunification, all Europeans said that Germany should, at long last, become a normal country … Today, Germany is a normal country, and some are still not happy.”
Since WWII Germany has been anything but a normal country in any number of ways, but one truly extraordinary aspect was the way that European Union was based on German economic efficiency which essentially paid for everything, without having a voice.
With reunification Germany remained committed to the status quo. The financial crisis however exposed different views and the German response was significantly different to that of the English and the Americans. The Greek crisis was dealt with under German terms. The English were not involved as they are not part of the Euro. They are part of Europe and whereas for the past 50 years or so they were confronted with a Franco-German combination, this is first time for a very long time that Germany on it's own initiative acted first and foremost in it's own interest.
The ball has been kicked rolling. It will be interesting to see where it goes.
Thursday 1 April 2010
Are 10 Year Rates always Inflation Expectations for Tomorrow?
An old tenet in the bond markets was that the yield on the current 10 year reflected the market's expectations for inflation in the future.
Given that a positive yield curve is viewed as "normal" one has to assume therefore that inflation is built in to the system-the question is just "how much?".
That sort of thinking is behind Mr Greenspan's announcement that there is a "canary in the mine" because the 10 Year is flirting with 4% and this is a sure sign that serious inflation is lurking just around the corner.
And of course, with all the debt issuance by the US, UK and actually the OECD it is no wonder that there are concerns about inflation. Sovereign debt in the OECD has increased from 44% of GDP in 2006 to a whopping 70% today. The Bank of International Settlements (BIS) estimates that the US,the UK and Japan would have to introduce a fiscal tightening of 8-10% a year for the next 5 years to get debt levels back to where they were in 2007!
Yesterday I discussed the concerns that China has about maintaining social stability. I shudder to think what the social stability in US and the UK would be if a such a fiscal tightening were introduced.
Look at how the Greeks have reacted to government plans to reign in fiscal spending. There has been a very quiet strike going on in Ireland for the last 6 or 7 weeks("work to rules"). In the UK the election is being fought over how the deficit can be cut without drastic fiscal tightening. Everyone talks about "efficiency savings" in the Public Sector as the way forward.
Well, the Railway signal workers of the RMT which represents the Rail, Maritime and Transportation Workers has voted to go on strike efficiency cuts as their interpretation is that this means plans to cut jobs and for more maintenance work to be done weekends.
They view these cuts as the thin edge of the wedge. They are probably right. These are the descendants of those workers in the UK who were willing to strike during WWII. (Strikes reached a highpoint in 1944 with a record 2194 stoppages with 3,700,000 days lost!)
So what happens in "peacetime" when real cuts are introduced? Or will they be? It is popular to talk about the need to cut spending, but there is a potentially massive social cost to be paid.
This is an extremely sensitive question. I mentioned a couple of days ago that US and UK sovereign debt were trading Swaps Plus. If this is really a harbinger of a repricing in sovereign debt then it is really questioning the basis of the marketplace. Sovereign debt is supposed to be "risk-free". It is what the cautious investor buys. Under the term cautious I mean such investors as pension funds, insurance funds and anyone looking for a safe, liquid investment. Under Basle I and II OECD sovereign debt has a 0% risk-weighting so it is the core investment to stabilize the banking system, especially in a positive yield curve environment.
I don't know what the answer is and I don't like to scare monger, but I am worried.
Given that a positive yield curve is viewed as "normal" one has to assume therefore that inflation is built in to the system-the question is just "how much?".
That sort of thinking is behind Mr Greenspan's announcement that there is a "canary in the mine" because the 10 Year is flirting with 4% and this is a sure sign that serious inflation is lurking just around the corner.
And of course, with all the debt issuance by the US, UK and actually the OECD it is no wonder that there are concerns about inflation. Sovereign debt in the OECD has increased from 44% of GDP in 2006 to a whopping 70% today. The Bank of International Settlements (BIS) estimates that the US,the UK and Japan would have to introduce a fiscal tightening of 8-10% a year for the next 5 years to get debt levels back to where they were in 2007!
Yesterday I discussed the concerns that China has about maintaining social stability. I shudder to think what the social stability in US and the UK would be if a such a fiscal tightening were introduced.
Look at how the Greeks have reacted to government plans to reign in fiscal spending. There has been a very quiet strike going on in Ireland for the last 6 or 7 weeks("work to rules"). In the UK the election is being fought over how the deficit can be cut without drastic fiscal tightening. Everyone talks about "efficiency savings" in the Public Sector as the way forward.
Well, the Railway signal workers of the RMT which represents the Rail, Maritime and Transportation Workers has voted to go on strike efficiency cuts as their interpretation is that this means plans to cut jobs and for more maintenance work to be done weekends.
They view these cuts as the thin edge of the wedge. They are probably right. These are the descendants of those workers in the UK who were willing to strike during WWII. (Strikes reached a highpoint in 1944 with a record 2194 stoppages with 3,700,000 days lost!)
So what happens in "peacetime" when real cuts are introduced? Or will they be? It is popular to talk about the need to cut spending, but there is a potentially massive social cost to be paid.
This is an extremely sensitive question. I mentioned a couple of days ago that US and UK sovereign debt were trading Swaps Plus. If this is really a harbinger of a repricing in sovereign debt then it is really questioning the basis of the marketplace. Sovereign debt is supposed to be "risk-free". It is what the cautious investor buys. Under the term cautious I mean such investors as pension funds, insurance funds and anyone looking for a safe, liquid investment. Under Basle I and II OECD sovereign debt has a 0% risk-weighting so it is the core investment to stabilize the banking system, especially in a positive yield curve environment.
I don't know what the answer is and I don't like to scare monger, but I am worried.
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