Accidents waiting to happen?

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.

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.

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.

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!

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?

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.

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.