Monday, December 28, 2009

Aussie GDP Down Under Debt

The Lucky Country has been on a me-too tear with the US stock market in 2009. Unemployment has held to normal, lowish levels, housing prices are near the highs of recent times, and Bob's her uncle. Its own stock market is looking to end the year on its high.

No worries, right, Mate??

Maybe, but ....

Australians rack up record debt
Australian households are in record levels of debt, and for the first time have surpassed American levels.

Reserve bank figures show household debt - the combination of personal and mortgage debt - is equivalent to Australia's GDP.

Credit binge sets new debt record
Reserve Bank figures show mortgage, credit card and personal loan debts now stand at $1.2 trillion, up 71 per cent from just five years ago and equating to $56,000 for every man, woman and child in the country.

Our spending binge, fuelled most recently by the Government's First Home Owner Grant, means personal debt now totals 100.4 per cent of Australia's annual GDP - one of the highest ratios in the developed world.

Mortgages account for almost 90 per cent of annual GDP, up from 17 per cent in 1990 and by five per cent in the last year alone as first-home buyers have flooded the market.

Australians are now the biggest borrowers in the world
Our “recovery” and “growth” turn out to be debt based.

What's much worse is that these figures have apparently been sitting around for a while, gathering accolades, not concern.

Australia has been blowing its own trumpet about its economic performance for a while now, but the next tune is likely to be “Taps”, unless somebody gets their finger out.

Guambat must recognize that the level of debt is a concerning matter, but cannot be assessed in a vacuum. The structure of the debt is also important.

The large sum of mortgage debt in the US was made impossibly unsustainable due to the nature of the thin finance made available to subprime, coupled with the further thinning of the finance through securitisation and indiscriminate run for return by financial intermediaries.

Australia generally did not participate in that.

But, having debt greater than GDP is a cause for concern, as it may imply an overly valued currency. If that notion takes hold, they may carry out the carry trade Aussie-$ on a stretcher, and along with it much of the froth in the economy of late.

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Baby Boom Bust Boosting Baby Burst??

Just a couple of posts ago, before the Christmas season arrival of Family Guambat to the Burrow, and the attack of the Festival of the Flu Bug, caused a hiatus to blogging, Guambat noted, as most of the world has, the Baby Boomer phenomena's effect on the market's resilient boom over the last decade.

Well, it appears the Boomer's Boom has been begetting a new Baby Burst in some places.

The Straits Times (Singapore) is reporting on a Baby boom in HK
The number of babies born has grown in recent years - from 65,626 in 2006 to 70,875 in 2007 and 78,822 last year. This is the largest number since 1983, when about 83,300 babies were born.

That article includes a side bar report of similar stories elsewhere, such as:
ICELAND: Newborns have been nicknamed 'Kreppa babies', from the Icelandic word for crisis. The number of births is up by 3.5 per cent so far this year, giving the country its highest number of deliveries in at least half a century.

CHECHNYA: More than 7,000 babies have been born in this Russian republic this year, compared with 5,000 last year.

BRITAIN: It saw the biggest population increase in nearly half a century last year, The overall fertility rate now stands at 1.96, the highest since the 1970s


Tuesday, December 22, 2009

Collateralized Delay Obligations, the new CDO's

You HAVE to read this: If Wall Street Ran the Airlines …

But start with this. In short, after horror stories of people growing too old for Medicare on the tarmac, the Govmint has lowered the boomgate on the "practice" of off-loading over- booked planes onto the tarmac.

But, back to the new CDO's -- a teaser:
The problem, experts say, is that the government rushed to create new regulations without considering how market forces could solve the problem. “Clearly, if consumers placed a value on a maximum runway wait time, they would have negotiated it with their airlines already,” said Petra Waterman of the American Enterprise Institute. “Since no airline offers such a contract term, we can assume that consumers place no value on it. Besides, if consumers were not happy with the service they receive from airlines, then a new airline would have already entered the market offering shorter wait times.”

Ella Ringding of the U.S. Airlines Association agreed that extended tarmac wait times are a problem, but said that the solution should be left to the industry. “The U.S. Airlines Association takes very seriously any issues that reduce the satisfaction of our customers,” she said. “We have drafted a model code of conduct for all of our members to address this problem. According to the model code, airlines should notify passengers whenever they happen to be on a flight that has been waiting on the tarmac for more than three hours, and should repeat that notification every hour. We believe that by providing sufficient disclosure to our customers, they will be able to make the air travel choices that best suit their individual needs.”

However, not everyone is upset with the new regulation. One Goldman Sachs derivatives trader, who asked to remain anonymous because he is not authorized to speak about company strategy, said that the firm is planning to create a market for derivatives that airlines can use to hedge against the risk of having to return planes to the terminal or having to pay fines to the FAA. Goldman is thinking of creating “collateralized delay obligations,” or CDOs, which will diversify wait-time risk by including flights from across the entire country.


Baby boom ... and bust ?

Guambat has been puzzling over the recent calculations that the first decade of the New Millenium was the worst on record for US stocks.

Drawing inferences solely from personal experience and anecdote (so hardly a "study" in any sense of the word), Guambat wonders if this is all just a Malthusian Boomer thing?

It all began with the tsunami tsurge of prices in the 1990's as Boomers, not unlike your humble Guambat, woke up to the reality of the calendar.

After all, this was the world's first generation where a college degree was the new high school diploma. Which taught all of us, if nothing else, the power of procrastination. Of "all nighters" and "cramming" and "pulling it out of my ...", well, never mind. You get the picture.

So here we are humming along and then the calendar turns and the Boomers think, "I've got to get me some retirement stuff." And off they all went, herding as they've done since before the Beatles, into the stock market.

Now most things that this demographic bulging Boomer crowd have touched have been sorely affected, and the market was not the only one. It had to go up, but it is the nature of the beast that it could not possibly stay there. The herding instinct raised it beyond fashion, beyond fantasy, into the realms of entertainment drugs: any high is followed by a crash, and stocks, like dope and booze, were no exception.

And this is the part where Guambat's puzzlement gets foggy, but not unlike most things swimming around in Guambat's thick cerebellum these days.

Was the bust that this last decade has been just the after-high crash, from which we will drag back up off the floor so we can twist again like we did last summer or party like it's 1999, or is something else broken as well?

Guambat considers it highly possible, not necessarily probable, that this is unlike the usual cyclical experience. The bulging demographics now consist of a bunch of retiring types whose retirements have been busted. Not only can they not afford to go back into the market to push it up again with their mighty collective and herding bloat, but their wholesale withdrawal from that market to live off of what is left over will be a pall on indexes of unprecedented proportion.

So, just like in the '60's, it's back to stick and seeds, again. And we are the pall bearers of our own savings.

Unless the burgeoning third world can somehow make up for and take the baton from the aging Aquarius generation, there are going to be just heaps of Boomers who, thinking they survived the '60's, will find themselves busted in their 60's.

It's nothing personal. Just a Boomer thing.

Does Japan offer us an appropriately analogous model with its aging population bulge?


Tidal wave of retirees threatens to break the bank
AUSTRALIA is on the crest of a demographic tsunami, with the first wave of 5.3 million baby boomers eligible for the age pension from next week.

The country's money box faces the double whammy of paying for older Australians who need extra care and for workers who are retiring in greater numbers than ever before.

In response to some of those emerging challenges, the Federal Government last year announced it would push out the pension eligibility age to 67 by 2023. CommSec chief economist Craig James said the pension qualifying age might have to be revisited.

"I think we may see further shifts over the next couple of years," he said.


A law unto himself

One man, under badge, with liberty and justice for none. Sheriff Joe Arpaio.

This story goes from ridiculous to ludicrous and is no longer even off-beat humour. This is really nasty stuff, folks.

Guambat first caught the wind of Sheriff Joe in this post: No mea culpa in Maricopa .

The shenanigans mentioned there were small potatoes compared to where he's got up to now. Now Sheriff Joe is snubbing his nose at the Feds and indicting the whole judicial system. Literally indicting, but maybe not the entire judicial system. Just the part that judges the Sheriff's bailiwick.

Arizona sheriff ups the ante against his foes
Joe Arpaio has escalated his tactics, not only defying the federal government on immigration but launching repeated investigations of those who criticize him.

The day after the federal government told Maricopa County Sheriff Joe Arpaio that he could no longer use his deputies to round up suspected illegal immigrants on the street, the combative Arizona sheriff did just that.

He launched one of his notorious "sweeps," in which his officers descend on heavily Latino neighborhoods, arrest hundreds of people for violations as minor as a busted headlight and ask them whether they are in the country legally.

"I wanted to show everybody it didn't make a difference," Arpaio said of the Obama administration's order.

But he has escalated his tactics in recent months, not only defying the federal government but launching repeated investigations of those who criticize him. He recently filed a racketeering lawsuit against the entire Maricopa County power structure. On Thursday night, the Arizona Court of Appeals issued an emergency order forbidding the Maricopa County Sheriff's Office from searching the home or chambers of a Superior Court judge who was named in the racketeering case.

Last year, when Phoenix Mayor Phil Gordon called for a federal investigation of Arpaio's immigration enforcement, the Sheriff's Office demanded to see Gordon's e-mails, phone logs and appointment calendars.

When the police chief in one suburb complained about the sweeps, Arpaio's deputies raided that town's City Hall.

A local television station, KPHO, in a 10-minute-long segment last month, documented two dozen instances of the sheriff launching investigations of critics, none of which led to convictions.

It was just such a Sheriff who made Robin Hood so famous.

Sheriff Arpaio Accused of More Abuses

Arpaio & Thomas: Menaces To Society

Multi-tasking Arpaio goes after deadbeats, politicians

A November poll by Rasmussen Reports said that of 1,200 likely Arizona voters, he was the Republicans' "best shot at holding onto the Arizona governorship in 2010."

See more here, here and here, with related links there, too.

Also, you might want to consider keeping up to date on this detractors and attrackees in Google News. If you have the stomach for it.


Monday, December 21, 2009

Notwithstanding the likes of Cramer and Kudlow ...

"The U.S. stock market is wrapping up what is likely to be its worst decade ever." So says this article in the WSJ: Investors Hope the '10s Beat the '00s
In nearly 200 years of recorded stock-market history, no calendar decade has seen such a dismal performance as the 2000s. This past decade looks even worse when the impact of inflation is considered.

To some degree these statistics are a quirk of the calendar, based on when the 10-year period starts and finishes. The 10-year periods ending in 1937 and 1938 were worse than the most recent calendar decade because they capture the full effect of stocks hitting their peak in 1929 and the October crash of that year.

Investors would have been better off investing in pretty much anything else, from bonds to gold or even just stuffing money under a mattress. Since the end of 1999, stocks traded on the New York Stock Exchange have lost an average of 0.5% a year thanks to the twin bear markets this decade.

Many investors were lured to the stock market ... but coming out of the 1990s, the best calendar decade in history with a 17.6% average annual gain, stocks simply had gotten too expensive.

Of course, the usual talking heads and cheerleaders in the financial news and entertainment industry didn't say so; indeed, they baited the lure. Noughty, noughty.


Partisan Hackery


Saturday, December 19, 2009

So, is US health care a sop or soporific?

There has been a nagging feeling deep in the back of Guambat head, way back in the thickest part where light don't shine, that Obama's heart was never really in the health care reform debate. Sure, it's something that, on principle, seems worthy, and many consider necessary. But, was it his fight, or Hilary's?

Guambat just can't help but feel the whole political row was just a bone tossed to Hilary to get her at least not off side, if not on.

Adding fuel to the wild speculation is the Chicago homeboy's Chicago Tribune, now tossing in the towel, hospital gown and tissues (to mop up the crocodile tears).

Time to Pull the Plug on Health-Care 'Reform'
Health-care reform is on life support now, and it's time to consider pulling the plug and letting it die peacefully.

It was a great idea, and there was and will remain a great need for the kind of radical reform that will pry the cold hands of Wall Street and the corporate boards from around the neck of medical care in our country.

There was some of that kind of reform in the first bills that began the long journey through the minefields of the U.S. Senate, but a cabal of blue dog Democrats and Republican know-nothings has pulled every tooth.

Our new president who arrived promising that he'd do everything to pass health-care reform did very little in the face of a big-money onslaught by an army of lobbyists for the big pharmaceutical corporations, the health insurance industry and other parts of the for-profit health-care industry.

His biggest mistake of all, however, was leaving it to Congress to negotiate the whole reform package in closed-door meetings of six senators here, 10 senators there, in committees controlled by senators whose votes already had been bought and paid for by the health-care corporations.

Where was the bold and courageous leadership so necessary for this badly needed initiative?

Whatever; hopefully Obama has an agenda item that he believes enough in to implement, and bring some change for the candidate who believed in it, or at least campaigned for it.

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In the confluence of fundamentals and technicals

Barry Ritholtz provides a price chart of the US dollar, with MACD technicals indicating an uptrend from a oversold position. His conclusion is that the chart "suggests a dollar rally is in the offing".

Right on cue, the real world chimes in:
Iraq says Iranians cross into disputed oilfield

Iran Forces Occupy Iraqi Oil Well, Border Guard Says (Update1)


Stratfor has been reporting that the incursion story is VERY muddied and hard to substantiate in detail. It appears more aimed by Iran to stir the pot than to add any territory. They report the US steadfastly does not want any part of this event at the moment.


Iran 'withdraws' from disputed well
Iranian troops have withdrawn partially from a disputed oil well in the border region with Iraq, the Iraqi government has said.

Ali al-Dabbagh, a government spokesman, said that a group of Iranian troops who had allegedly seized control of the well last week had pulled back in the early hours of Sunday morning.

"The Iranian flag has been lowered," Dabbagh told Al Jazeera. "The Iranian troops have pulled back 50 metres, but they have not gone back to where they were before."

Iraq considers the well to be part of its al-Fauqa oil field.

Iran's armed forces, however, issued a statement on Saturday saying that, in Tehran's view, there had been no incursion into Iraq as the oil well was within Iranian borders.

"Our forces are on our own soil and, based on the known international borders, this well belongs to Iran," the statement said.

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Still walking away

In a story that began at least two years ago, from the retail crowd anyway, the debate continues about those willing to walk away from their submerged mortgages.

In the latest WSJ article on the subject, the action was characterized as the Debtor's Dilemma: Pay the Mortgage or Walk Away . It summarizes the story with:
In Down Real-Estate Market, Homeowners Are Deciding to Abandon Their Loan Obligations Even if They Can Afford the Payments

A growing number of people in Arizona, California, Florida and Nevada, where home prices have plunged, are considering what is known as a "strategic default," walking away from their mortgages not out of necessity but because they believe it is in their best financial interests.

George Brenkert, a professor of business ethics at Georgetown University, says borrowers who can pay -- and weren't deceived by the lender about the nature of the loan -- have a moral responsibility to keep paying. It would be disastrous for the economy if Americans concluded they were free to walk away from such commitments, he says.

Steve Waldman's most recent two posts visit the debate in his worthy Interfluidity blog, here and here.

His take in Strategic default and the duty to shareholders:
Businesses walk away from contracts all the time, whenever the benefits of doing so exceed the costs under the terms by which they are bound. McArdle is certainly right to point out that companies frequently honor costly bargains they could get away with breaking, because their reputations would be harmed by walking away. But, reputational costs are economic costs. They are a part of the cost/benefit analysis that firms use in making decisions. It is not virtue that binds them to keep their word, but medium-term self-interest. Similarly, homeowners consider the hit to their credit rating and potential loss of social standing prior to walking away.

The question is whether debtors should keep paying off loans simply because it is the “right thing to do”, even when, taking all financial and non-financial costs into account, they would be better off reneging. A human being can choose to be “upright” in this way, if she wants. But under the prevailing norms of business, managers of all but the smallest firms can not so choose.

In practical terms, exhortations to individuals that cannot apply to firms leave us with what Felix Salmon aptly describes as “the world’s largest guilt trip“:

The result is a system tilted enormously in favor of institutional lenders who exist in a world of morality-free contracts, and who conspire to lay the world’s largest-ever guilt trip on any borrower who might think about joining them in that world. It’s asymmetrical, it’s unfair… no one would expect a capitalist company to behave in the way that individuals are being told to behave…

And that debate must be made in the context of real life examples, like this one, Morgan Stanley to Give Up 5 San Francisco Towers Bought at Peak (h/t Barry):
Morgan Stanley, the securities firm that spent more than $8 billion on commercial property in 2007, plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.

“This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation.”

The San Francisco transfer would mark the second real estate deal to unravel this year for Morgan Stanley, which bet big on the property markets as prices were rising. The firm last month agreed to surrender 17 million square feet of office buildings to Barclays Capital after acquiring them for $6.5 billion in 2007 from Crescent Real Estate Equities.


Tuesday, December 15, 2009

Japanese take to baseball, US to play hardball

Things are getting a bit interesting in the Japanese-American arena, an arena that is up close and personal to Guambat.

For the decades after WWII in which the LDP ran the show in Japan, there developed a certain standardized pas de due between the US and Japan that was pragmatic, commercial and static. Each could be counted upon to go no further than the dance choreographed.

Then, in August this year, the LDP finally got back-footed. In an expression of exasperation, the Japanese people voted for Anyone But LDP. The darts landed on hapless Mr. Hatoyama and his "visionary" wife, and his more inept than hapless comrades without arms coalition.

This government, elected without mandate or consensus, is struggling to define itself, let alone redefine the role of Japan in the New Millennium plus a decade. It is adrift, without mooring or bearing.

And in this context it is trying further to redefine the US/Japan relationship.


Starting with the "renegotiation" of the agreement between the US and Japan concluded in 2006 after years of hammering out, the subject of which was to relieve Okinawa of a small fraction of US troops on that formerly independent island, by way of delivering them to Guam, another place up close and personal to Guambat.

And here it begins to take on the plot of a Keystones Cops reel. Which has been made to seem more the so because the LDP, and its friendly media, didn't just go quietly into the rising sun.

The new Japanese coalition government can't make up its mind to implement the US/Japan Guam relocation agreement because nothing less than the wholesale removal of all US troops from Okinawa will currently satisfy its vision of self. Anything less than that is seen as a defeat, not a start. So they refuse to even start.

Guambat reckons there will be a reckoning. Not only will the deeply entrenched LDP find it in its Samurai past to restore its order, but the US will take the indecision on the part of the New government as a terminal sign of weakness and begin to apply pressures that have not been exercised since Guam's Liberation Day.

These will be very tense times in the coming months. Guambat only senses the tension, and guesses at the game. But the outcome is written.

Marines will come to Guam, some other adjustments will be made to mend fences and save faces, and the New Government will become a footnote in Japanese political history.

Oh, and the baseball reference in the heading? See Daisuke Matsuzaka amongst many other rising baseball heroes.

Guambat here abjectly apologizes to his family and friends who might find offense in anything said here. It is meant only dispassionately and affectionately for all concerned. Some things in realpolitik are simply hard to swallow, even when being jammed down the throat.

NB: A trio of Financial Times articles on the developments over the last couple of months, reflecting the view from across the Atlantic Pond:
October 21 2009 US raises pressure on Japan air base

November 11 2009 Okinawa outcry

December 15 2009 Japan delays decision on Okinawa base


Submerging markets

Some of the emerging market darlings are submerging, but the love may linger anyway.

Mexico's debt is downgraded to just above 'junk'
Standard & Poor's lowered its rating on Mexico's foreign-currency debt to BBB from BBB-plus, after a cut of the same magnitude by Fitch Ratings on Nov. 23.

If Mexico were to fall to a BB rating, its debt would be considered non-investment-grade, or junk. That would wipe out the progress the country made regaining investment-grade status early in this decade.

Mexico has raised taxes this year to boost revenue, but the measures haven't gone far enough given declining oil production, S&P said.

But stock and currency investors continue to give Mexico the benefit of the doubt in the short run. Some investors may well wonder why the country deserves a lower debt rating than Greece, given the latter's far more desperate budget situation.

S&P's projection that Mexico's budget deficit will average 3% of gross domestic product through 2011 looks modest compared with Greece's deficit, which is expected to be near 13% of GDP this year. S&P still rates Greece A-minus, waiting to see what steps the government will take to rein in spending.

Meanwhile, back in the USSA:

US needs plan to tame debt soon, experts say
The U.S. government must craft a plan next year to get its ballooning debt under control or face possible panic in financial markets, a bipartisan panel of budget experts said in a report on Monday.

Though the government should hold off on immediate tax hikes and spending cuts to avoid harming the fragile economic recovery, it will need to make such painful changes by 2012 in order to keep debt at a manageable 60 percent of GDP by 2018, according to the Peterson-Pew Commission on Budget Reform.

The national debt has more than doubled since 2001, thanks to the worst recession since the 1930s, several rounds of tax cuts and wars in Iraq and Afghanistan.

A looming wave of retirements over the coming decade is expected to make the situation worse.

The national debt currently accounts for 53 percent of GDP, up from 41 percent a year ago. That's likely to rise to 85 percent of GDP by 2018 and 200 percent of GDP by 2038 unless dramatic changes are made, the commission said.

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Uncle Dhabi's terms

After Uncle Dhabi stumped up the goods to get Dubai World back in orbit, the price of it's beneficence is beginning to surface, at least to the level of speculation.

Abu Dhabi May Demand More Power for $10 Billion Dubai Lifeline
Abu Dhabi’s support may come with a price that undermines Sheikh Mohammed’s go-it-alone vision for Dubai.

“This isn’t no-strings-attached money,” said Jim Krane, author of “City of Gold: Dubai and the Dream of Capitalism.” “This is the big chance for the Al Nahyan family to dragoon its maverick cousins back into the union. Most of all, Abu Dhabi wanted to avoid the embarrassment of Dubai looking outside for its bailout.”

Abu Dhabi may increase its influence over Dubai’s flagship companies, such as Emirates Airline and port operator DP World, Ltd., said Emad Mostaque, a London-based Middle East equity-fund manager for Pictet Asset Management Ltd., which oversees more than $100 billion globally. They “are likely to become U.A.E. strategic assets rather than Dubai strategic assets,” he said.

Monday, December 14, 2009

Imagine Mr. Spock playing Mr. Volker

And boldly go where no US central banker has gone before, or since.
What we see is the government and the Federal Reserve pouring money into the economy. If one looks beyond that money, one sees that the economy is in fact still shrinking.

Volcker: What should I say? That’s right. We have not yet achieved self-reinforcing recovery. We are heavily dependent upon government support so far.

my overall impression is that you have not come anywhere near close enough to responding with necessary vigor or structural changes to the crisis that we have had.

If it is really true that financial weaknesses brought us to the brink of a great depression that would have ended your livelihood and destroyed a lot of the global economy, then let me explain.

You concluded with financial-services executives showing cultural sensitivity and responsible leadership.

I hear about these wonderful innovations in the financial markets, and they sure as hell need a lot of innovation. I can tell you of two—credit-default swaps and collateralized debt obligations—which took us right to the brink of disaster. Were they wonderful innovations that we want to create more of?

You want boards of directors to be informed about all of these innovative new products and to understand them, but I do not know what boards of directors you are talking about. I have been on boards of directors, and the chance that they are going to understand these products that you are dishing out, or that you are going to want to explain it to them, quite frankly, is nil.

I mean: Wake up, gentlemen. I can only say that your response is inadequate. I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy, just one shred of information.

A few years ago I happened to be at a conference of business people,and I found myself sitting next to one of the inventors of financial engineering. I didn't know him, but I knew who he was and that he had won a Nobel Prize, and I nudged him and asked what all the financial engineering does for the economy and what it does for productivity.

Much to my surprise, he leaned over and whispered in my ear that it does nothing—and this was from a leader in the world of financial engineering. I asked him what it did do, and he said that it moves around the rents in the financial system—and besides, it's a lot of intellectual fun.

Now, I have no doubts that it moves around the rents in the financial system, but not only this, as it seems to have vastly increased them.

ERAJ SHIRVANI: So, is your hypothesis that corporate bonds, the securitization market—none of these financial innovations have done anything to help the economy? What shocks me about today is the number of people in this room who have all been architects of the economy as we have it today who have now decided that all of a sudden everything they have worked on over the past 30 years is all bad and the pendulum has swung too far.

I worry when we say that nothing good can come from innovation. Have there been excesses? Absolutely. Have there been inappropriate products? Absolutely. Are there investors who should be held accountable for buying things they didn't understand? Absolutely. However, that does not make it right to say that innovation in itself is a bad thing.

I am not sure that I said innovation in itself is a bad thing. I said that I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy. Maybe you can show me that I am wrong. All I know is that the economy was rising very nicely in the 1950s and 1960s without all of these innovations. Indeed, it was quite good in the 1980s without credit-default swaps and without securitization and without CDOs.

I do not know if something happened that suddenly made these innovations essential for growth. In fact, we had greater speed of growth and particularly did not put the whole economy at risk of collapse.

If it is really true that the world economy was on the brink of a great depression that was greatly complicated by financial problems, then we have a rather basic problem that calls for our best thinking, and structural innovation if necessary. I do not want to stop you all from innovating, but do it within a structure that will not put the entire world economy at risk.

MR. VOLCKER: First, let us agree that we have a problem with moral hazard. I do not think that there is any perfect answer in dealing with it, but I would suggest that we can approach an answer by recognizing that elements of finance have always been risky and that's certainly true of the commercial-banking system.

The commercial-paper market is totally dependent on the commercial banking market. They are an essential financial institution that has historically been protected. It has been protected on one side and regulated on the other side.

I think that fundamental is going to remain. People are going to think it is important, it is important, it needs regulation and in extremis it needs protection—deposit insurance, lender of last resort and so forth.

I think that it is extraneous to that function that they do hedge funds, equity funds and that they trade in commodities and securities, and a lot of other stuff, which is secondary in terms of direct responsibilities for lenders, borrowers, depositors and all the rest.

There is nothing wrong with any of those activities, but let you nonbank people do it and you can provide fluidity in markets and flexibility. If you fail, you're going to fail, and I am not going to help you, and your stockholders are going to be gone, and your creditors will be at risk, and that is the way that it should be.

Excerpts from Paul Volcker: Think More Boldly

Volcker: We Need to Think More Boldly

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More than One-third of US stock market trading comes from unknown sources

Study Lays Bare Breadth of 'Naked' Access
The report by Aite Group, a Boston research outfit that tracks high-frequency trading, found that naked access — trading directly on exchanges using a brokerage's computer identification code — accounts for an estimated 38% of the U.S. stock market's average daily trading volume.

Naked access is one form of a more widespread practice called sponsored access in which brokers let trading firms operate on exchanges using the brokers' market participant identification codes. Overall, sponsored access accounts for half of the market's volume, according to the Aite report, which is likely to be released Monday.

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To no one's surprise, Uncle Dhabi stumps up. But what's next?

Stocks, Futures Rebound as Dubai Gets Nakheel Funds; Oil Falls
Asian stocks and U.S. index futures rebounding from losses as Abu Dhabi provided $10 billion to prevent Dubai’s Nakheel PJSC from a default. Oil fell for a ninth day, the longest losing streak in eight years, after a report on Japanese business confidence showed exporters scaling back investment plans.

This is a well expected infusion of liquidity to abort the sinking Nakheel sukuk.

But, as has been pointedly pointed out before, and without putting too fine a point on the point, the Dubai "problem" is not simply liquidity but the fragile and untested structure of Islamic finance when tested by issues of solvency.

This has not gone unaddressed by Dubaii:
The Government of Dubai, acting through the Supreme Fiscal Committee ("SFC"), today announces a set of actions in relation to Dubai World: HH Sheikh Ahmad Bin Saeed Al Maktoum, Chairman of the Dubai Supreme Fiscal Committee said:

"Finally, today the Government of Dubai will announce a comprehensive reorganization law, a framework that is based upon internationally accepted standards for transparency and creditor protection. This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations."

The devil will of course, in whatever religion or other bureaucracy, be in the details. In this particular case, the devil will have to finesse the principles of Islamic finance, as well as its religious principals. Will the more conservative Emirates be looking carefully over the shoulder of Dubai's Sheik Maktoum when its government proclaims new law on the subject?

This may get a more critical examination than implied by the statement. It is probable that what has not gone unnoticed by Abu Dhabi has not gone unaddressed by Dubai. But maybe more people will be paying attention this time around, from all sides of the debate. And likely, Islamic finance will be structured more to Abu Dhabi's scripture than Dubai's script.

Meanwhile, although it is certainly convenient to some that Abu Dhabi stumped up $10 Billion to pay off some of Dubai's debts, other debtors may be making more assertive efforts to get Uncle Dhabi to bail them out, too.

Dubai owes Japan firms $7.5 bln in uncollected bills: Nikkei
The Dubai government and its affiliated firms owe non-financial Japanese companies roughly $7.5 billion in credit that had not been
collected as of Oct. 31, a study by the Japanese government showed.

The study covered 18 projects that involved Japanese general contractors, trading companies and electric machinery manufacturers, the Nikkei business daily.

The figure includes public works projects, such as subways and roads, commissioned by the Dubai government, it said. It does not include bank loans.

It said some $1 billion of the accounts receivable have gone unpaid past their due dates, with some more than a year overdue.


Dubai adopts DIFC insolvency law for emirate
Dubai will adopt the insolvency code used in the Dubai International Financial Center for use in the emirate and establish a tribunal to hear cases submitted against its debt-laden holding firm Dubai World, the government said on Monday.

The policy change came in the form of a decree issued by Mohammed Bin Rashid al-Maktoum, the ruler of Dubai.

Guambat hasn't a clue what this means or its implications for anything. Stay tuned. As soon as Guambat hears/reads anything, he's certain to make a hash of it.


Dubai World Promises, but the Damage May Be Done
In the event that a deal with creditors can't be reached, the new law promulgated Monday could provide a legal system of arbitration, in which lenders could, in theory, pursue asset sales or other attempts at getting their money back.

The law establishes a panel of judges who would preside over debt and corporate-restructuring disputes, Dubai said.

The new law is untested, and isn't likely to reassure other bond holders.


Friday, December 11, 2009

Southern PI beginning to look like Somalia

Somalian pirates and warlords do not have a lock on that activity.

Following on from the Maguindanao Province Amputuan massacre, is this coming out of
Basilan Province:

Gunmen hold dozens of Philippine villagers hostage
Mountain tribesmen rounded up children and adults during a morning raid, authorities say. The kidnappers demand the government drop all charges against a gang. Authorities said the abductions may have been a response to police attempts to arrest the leader of the gang, Ondo Perez, who has a string of arrest warrants and is connected to the massacre of a farming family.

Authorities say the two hostage-taking episodes in Basilan and Maguinddanao are not related.

As this story develops, Abu behead hostage; college VP kidnapped
Gunmen Thursday night seized the vice president of state-owned Basilan State College in Isabela City on nearby Basilan Island, a day after the severed head of a factory worker kidnapped by the Abu Sayyaf bandits was recovered near the city plaza.

Singson, said to be in his 20s, was beheaded by his Abu Sayyaf captors purportedly because of his employer’s failure to pay a ransom demand of P1.5 million.

Only on Nov. 9, the severed head of kidnap victim Gabriel Canizares was found in Jolo, Sulu. Canizares was the chief teacher of Kanagi Elementary School in Patikul, also in Sulu.

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Wednesday, December 09, 2009

Quick: what's the currency of Dubai?


As in:
Nakheel PJSC, the Dubai World property developer, posted a first-half loss of 13.4 billion dirhams, according to a document obtained by Bloomberg News.

Debt restructuring by Dubai state-run companies may almost double to $46.7 billion as more of the emirate’s businesses need help making payments, Morgan Stanley said.

Nakheel PJSC’s $3.52 billion of Islamic bonds due Dec. 14 dropped more than 10 percent yesterday to 46.5 cents on the dollar, according to Citigroup Inc. Bonds sold by DIFC Investments and Dubai Holdings Commercial sank as low as 44.5 cents on the dollar after Moody’s Investors Service cut the credit ratings of six state-run companies. A jump in the cost of DP World’s credit-default swaps implied a 33 percent risk that the port operator will renege on debt.

OK, so you didn't quite get that currency quick enough. Here's an easier one:

What's the currency of Greece?

No, not drachma. It's the Euro, as in:
Fitch yesterday downgraded Greece’s credit rating one step to BBB+, the third-lowest on its investment-grade scale, and said the outlook for the rating is negative.

Moody’s also said that its top debt ratings on the U.S. and the U.K. may “test the Aaa boundaries.”

(From the same Bloomberg article as above.)

Some broader perspective here: Testing the AAA boundaries

OK, another one. What's the currency of Spain?

Again, the Euro, as in S&P revises Spain’s outlook to negative [UPDATE]:
Not to be outdone by its rivals at Fitch, who on Tuesday downgraded the sovereign rating of the Hellenic Republic of Greece, Standard & Poor’s on Wednesday revised its outlook on the Kingdom of Spain to negative from stable.

[Quoting from S&P report:]
The change in the outlook stems from our expectation of significantly lower GDP growth and persistently high fiscal deficits relative to peers over the medium term, in the absence of more aggressive fiscal consolidation efforts and a stronger policy focus on enhancing medium-term growth prospects.

Which, begins to sound a bit like Japan: Japan GDP revised heavily downward
Japan’s growth between July and September was revised down heavily on Wednesday, suggesting the country’s recovery is more fragile than previously thought.

Growth on the previous quarter was revised down from 1.2 per cent to 0.3 per cent. At an annualised rate the revision was from 4.8 per cent to 1.3 per cent.

A recovery in business investment reported in the first release proved an illusion.

While the revision undermined the idea that Japanese businesses have regained confidence and are preparing to expand output, private consumption was a bright spot, with growth revised up from 0.7 per cent to 0.9 per cent quarter on quarter.

[But:] “Consumer spending will probably start to decelerate in coming quarters,” said Seiji Adachi, a senior economist at Deutsche Securities in Tokyo. “People won’t keep purchasing durable goods just because the government has extended incentives.”

And Mexico: Fitch downgrades Mexico

And Russia: Russia downgrade first of many?

Meanwhile, the currency of the US (known for the last few years as the "doo doo"), may possibly be staging a bottoming, but only compared to the rest of the world's harder hit currencies:
Greenback Breakout?

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Deadly Headley Mickey Mouse in our Midst

As Mumbai carnage unfolded, Headley planned next strike
Pakistani-American jihadist David Headley hoped to bomb the offices of Danish newspaper Jyllands Posten, whose publications of cartoons of Prophet Mohammad in 2005 offended many Muslims across the world.

the 10-man Lashkar assault team used video footage he had gathered in five visits to Mumbai to stage attacks that claimed 163 lives.


Tuesday, December 08, 2009

In burrow, with pillow over head

Monday, December 07, 2009

Rembembering Apra Harbor Day

Ahhh, Berkeley in the '60's all over again

Police Surround Tehran University to Stop Protests
Thousands of riot police and Revolutionary Guard members armed with tear gas, batons and firearms were deployed Monday outside Tehran University to prevent student demonstrations

The occasion has in recent years been used by students to stage pro-reform demonstrations.

There was no word immediately available on whether demonstrations have begun inside the campus, but the witnesses said police were conducting ID checks on anyone entering the campus to prevent opposition activists from joining the students.

Khameini, the supreme leader who has final say on all state matters, accused the opposition Sunday of exposing divisions in the country and creating opportunities for Iran's enemies.

Image source

Guambat can almost smell the teargas.

Iran police clash with anti-government demonstrators at universities

Supporters of opposition leader Mirhossein Mousavi chanted "Death to the dictator" and "Do not be scared. We are all together", according to witnesses at public rallies on university campuses.

It would be unpalatably rude to shout "off the pig".

PS to Iranian secret police reading this (that's obviously a joke, as Guambat's actual readership is pretty much limited to maybe 2 people): Guambat is not associated in any way with Iran.
Iranian Crackdown Goes Global

The regime has been cracking down hard at home. And now, a Wall Street Journal investigation shows, it is extending that crackdown to Iranians abroad as well.

In recent months, Iran has been conducting a campaign of harassing and intimidating members of its diaspora world-wide -- not just prominent dissidents -- who criticize the regime, according to former Iranian lawmakers and former members of Iran's elite security force, the Revolutionary Guard, with knowledge of the program.

Part of the effort involves tracking the Facebook, Twitter and YouTube activity of Iranians around the world, and identifying them at opposition protests abroad, these people say.

Before this past summer, "If anyone asked me, 'Does the government threaten Iranians abroad or their families at home,' I would say, 'Not at all,'" says Nasrin Sotoudeh, a prominent lawyer inside Iran. "But now the cases are too many to count. Every day I get phone calls and visits from people who are being harassed and threatened" because of relatives' activities abroad.

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The Sultan's new clothes

The fable of the Emperor's new clothes is the theme here.

Guambat has tried to develop the plot line in previous posts that the real breakdown in the Dubai World meltdown is not the liquidity or support provided by UAE, and Abu Dhabi in particular, but the emerging realization that much of modern Islamic finance is structured in ways that only resemble Western bond finance, when, in truth, its structural features are untested by Western legal precepts of financial fault, particularly bankruptcy.

So, now, from plot line to punch line:

IMF cites Dubai debt in trimming its outlook
The debt restructuring at Dubai World will hit economic growth next year, the IMF said, as credit rating agencies downgraded more Dubai companies.

“Our anticipation is that there will be a significant reduction in that growth rate, down from 3 per cent, probably somewhere between 1 per cent and 3 per cent,” said Masood Ahmed, the director for the IMF’s Middle East and Central Asia department.

“Dubai World’s debts do not affect the economic performance of Dubai or the UAE, and it is a matter of time before the company restructures its debts and honours its commitments as per a scheduled plan,” said Sultan al Mansouri, the Minister of Economy.

The Future of Islamic Finance


Saturday, December 05, 2009

Chavez 3 more, US 150

Chávez Seizes Three More Banks
Venezuela's government took over three more banks Friday, adding to a growing list of smaller banks in the oil-rich country that have been seized by the government this week on charges that its owners illegally used deposits for their own enrichment.

Many analysts say the interventions aren't a reflection of a larger banking crisis

However, a policy of nationalizing banks can get out of control if not handled with care.

"By themselves, these banks are not big enough to be a problem," said Alberto Ramos, a Goldman Sachs economist who follows Latin America. "But I do not trust this government to manage the process well."

Regulators Pull Plug on Bank
Federal regulators on Friday seized AmTrust Bank, a battered Cleveland thrift kept alive this year after local politicians pleaded with the government for a second chance.

The family-owned AmTrust, with $12 billion in assets and roots back to 1889, had been in trouble for more than a year.

AmTrust's deterioration over the past year likely resulted in the bank selling for a lower price than it would have fetched if the thrift had been seized earlier, said people familiar with the government-led auction.

AmTrust has been riding a regulatory rollercoaster for the past year. Last fall, its primary regulator, the Office of Thrift Supervision, rejected AmTrust's requests for aid through the federal government's Troubled Asset Relief Program.

The OTS then slapped AmTrust with a cease-and-desist order, citing "unsafe and unsound banking practices," and required the thrift shore up its capital, stop making certain loans and rein in the rates being offered for customer deposits.

But AmTrust benefited from the advocacy of politicians, including Rep. Steven LaTourette (R., Ohio), who pleaded with Treasury and White House officials not to kill a second Cleveland bank. Cleveland's Democratic mayor, Frank Jackson -- a critic of National City's forced sale -- also sought to protect AmTrust.

The OTS and FDIC eventually agreed to plans by AmTrust to aggressively shrink its balance sheet, sell branches, and thicken its capital cushions, according to people familiar with the matter.

Some banking experts were surprised, since AmTrust appeared in worse shape than National City. Critics viewed the disparate treatment of the two Cleveland banks as an example of inconsistency by regulators.

People close to AmTrust blame federal regulators for some of the troubles. In recent months, OTS examiners demanded that AmTrust write down the value of loans far more aggressively than bank officials thought necessary, these people say.

The OTS also required AmTrust to beef up its reserves to levels that executives regarded as excessive, these people said.

A total of 130 lenders have collapsed in 2009, the highest number of failures since 1992 as regulators intensified their push to rid the industry of weak institutions.

Requiem for the Dollar
There's no business value in financial safety when the government bails out the unsafe. And by bailing out a scandalously large number of unsafe institutions, the government necessarily puts the dollar at risk. In money, too, the knee bone is connected to the thigh bone. Debased banks mean a debased currency (perhaps causation works in the other direction, too).


Wednesday, December 02, 2009

With one eye on the PI

With the Philippines being the nearest major port of call to Guam (Japan a close second, and Taiwan in the heat), Guambat has been alert to this story, which has been developing over the last few days.
Philippine Massacre Prompts Removal of Entire Police Department
The Philippines is an archipelago of diversity maybe not in the extremes of New Guinea, but a close second if not. It was certainly the cross roads of modern civilization as it made its way south and eastward from lower Asia into Oceania over several thousands of years. As such, it is a hodge podge of people, facts and fictions that remain hard to reconcile:
Stone Age Tasaday



The Making of a Massacre in the Philippines

Ampatuans locked in their own mansions in S Philippines

Philippine police convoy ambushed in martial law province


The horrifyingly most non-event in currency news today

North Korea revalues currency, destroying personal savings
Chaos reportedly erupted in North Korea on Tuesday after the government of Kim Jong Il revalued the country's currency, sharply restricting the amount of old bills that could be traded for new and wiping out personal savings.

The revaluation and exchange limits triggered panic and anger, particularly among market traders with substantial hoards of old North Korean won -- much of which has apparently become worthless, according to news agency reports from South Korea and China and from groups with contacts in North Korea.

The currency move appeared to be part of a continuing government crackdown on private markets, which have become an essential part of the food-supply system in the chronically hungry North.


And so the world's most worthless currency becomes more worthless. It's not like the US currency has lost favor, is it?
Renewed Appetite for Risk Drives Dollar to 15-Month Low

Yen Could Extend Rally after Post Dubai Stabilization


On the dilemma of a Horn

Occupying the Horn of Africa, Somalia presents some pointy problems of piracy and lawlessness that seem to defy all civil community.

The sea piracy has often been newsworthy in the last few years, e.g. these two stories from just the last few days:
Pirates now hold 70 RP sailors

Somali pirates attack two ships, hold North Korea crew hostage

Pirates Holding 11 Ships, 264 Sailors Off Somalia

Somalia: Pirates Attack Oil Tanker

Whilst Somalia does not own the monopoly on this type of piracy (e.g., this and this), and does not always get its way (e.g., this and this), it does seem to have the lion's share of the booty, and in doing so inflicts more than mere money wounds (e.g.).

And, of course, the Somali piracy does not end at water's edge:
Joy as Australian released from brutal Somali kidnapping

Emotional relatives of Somalia kidnap victim Nigel Brennan expressed joy on Thursday at his release from more than a year of brutal captivity, when he was pistol-whipped and spent months in chains.

Sister-in-law Kellie Brennan fought back tears as she recounted the family's nerve-wracking vigil since the photojournalist's capture along with Canadian reporter Amanda Lindhout in August 2008.

Australian media have said Brennan was kept in a dark room away from Lindhout and surrounded by armed men. They said he was suffering severe abdominal pains and passing blood, probably due to being fed contaminated food and water.

Speaking after her release, Lindhout said she spent her captivity "sitting in a corner on the floor 24 hours a day for the last 15 months. There were times that I was beaten, that I was tortured."

"It was extremely oppressive," she told Canadian broadcaster CTV. "I was kept by myself at all times. I had no one to speak to. I was normally kept in a room with a light, no window, I had nothing to write on or with. There was very little food."

She said the kidnappers told her that they beat her because the one million dollar ransom "wasn't coming quickly enough."

Reports also said Brennan and Lindhout had managed in January to escape and take sanctuary in a nearby mosque, only to be recaptured at gunpoint.

One kidnapper, who did not want to be identified, told AFP that a one-million U.S. dollar ransom was paid to free the pair

Notwithstanding the dramatically critiqued and re-written history of the US involvement in trying to "impart" some order in Mogadishu in the 1990's (see this and this, for starters), order, as viewed from beyond Somalia, seems incapable of gaining any traction.

But order is as order does and has done since the dawn of mankind, and the honor and code of conduct amongst thieves lives on inside Somalia in ways that both mimic and, by doing so ridicule, the structures of order elsewhere.

Bandits' ‘bourse' now up to 72 ‘companies'; backers who invest cash, weapons receive shares entitling them to a share of the booty
These scourges of the Gulf of Aden have been attracting dozens of investors over the course of the last four months, according to a Reuters returns. The burgeoning exchange, located in the coastal town of Haradheere, Somalia, started with 15 “companies” and is now up to 72 entities, the news service found.

A wealthy former Somali pirate named Mohammed told Reuters that shares in the exchange are open to all who would like to participate. Investors receive shares in a pirate company by taking part in a raid on a ship. Backers who don't want to go that far can also get shares by providing cash or weapons to the pirates. Investors are paid dividends – a cut of the ransom money.

Business has been booming.

Somali Pirate Haven Is the Ultimate Deregulated Free Market
Yes, the pirates carry weapons, but "the pirates' treatment of the hostages is relatively humane, and their reputation for turning over the ship, cargo, and crew…upon receipt of the demanded ransom has been cited as a reason for their continued success in having their demands met." Bernard Madoff doesn't appear to have shot anyone, but the fallout from his Ponzi scheme hasn't been bloodless, either. And whose word is more reliable? That off Madoff, Alan Stanford, Scott Rothstein, or the pirates?

Yes, the pirates employ coercive tactics to extract large sums of money from victims whose only fault was to be in the wrong place at the wrong time. Their haul, however, is just a fraction of what AIG and Dubai World have extracted in recent days from investors who were caught in the crosshairs of their drive-by debt-for-equity swaps. Those hapless investors—which, in the case of AIG, includes the U.S. government—had little choice but to come to terms or risk unknown global financial and economic consequences.

Somalia is about as open and as deregulated as a market can be. There are no regulations. It is a "lawless Horn of Africa nation," in the words of a gripping dispatch filed by Reuters correspondent Mohamed Ahmed, who convinced the pirates to give him guided access to their home base in the port city of Haradheere. "Somalia's Western-backed government of President Sheikh Sharif Ahmed is pinned down battling hard-line Islamist rebels and controls little more than a few streets of the capital," Ahmed reports. The administration has "no influence" in Haradheere. What market could be freer than that?

If interested, a larger history of Somalia is at these links:

The US Library of Congress Country Report

The Wiki history, starting from earliest known times

An African perspective on Somalia's history by the South African Institute for Security Studies

The UN's perspective

And a smaller history of the current situation:

Somalia al-Shabab Islamists deny causing deadly bomb


Somali pirates' ill-gotten wealth driving up prices for everyone


The dawning of Islamic finance

It is beginning to dawn on the financial press, ever so slowly, that there is a fundamental difference between Western finance and Islamic finance, as Guambat has railed on about of late.

The WSJ has a story today
that, when read far enough down into it reveals:
Because Islamic law forbids the paying of interest, a sukuk isn't organized like a traditional bond. Instead, it is set up to collect a stream of income from a group of underlying assets.

At issue is whether the holders of the sukuk can take possession of the underlying assets, or whether they are simply entitled to the cash flows those assets produced.

Because there is no real precedent for this type of situation in the Dubai courts, and because the sukuk holders are effectively taking on the government, they will have to tread carefully as they try to protect their interests.

The NYT Dealbook has also reported similarly, but more expansively and first person, on the same notion during the last day, noting Dubai World was not just a one-off event but the leading edge of what was expected to be the development of new fields of global finance, and harvests of banking and legal fees, nearly as large as the oil fields of Arabia:

A Financial Mirage in the Desert
It was about two years ago, and I was in Dubai to cover an investment conference at a hotel along Jumeirah Beach. Hundreds of Western bankers dressed in Savile Row suits were packed into an enormous room to bone up on the intricacies of the next new thing in financial products: Shariah-compliant investments.

They wanted to sell them to wealthy, oil-rich Muslim investors who needed a way to increase their fortunes but whose options were limited. Any investment vehicle needed to conform to the spirit of the Koran, which forbids any investments that pay interest. No mortgages. No bonds. No clever derivatives. Just tangible assets in the so-called real economy.

It was a big honey pot — worth as much as $1 trillion that could yield billions in fees — and the bankers were determined to find a way in.

One discussion was led by a British banker from Barclays who had moved to the region to create an entire Shariah-compliance team. He shared tips about various ways to create “structured products” that would pass muster with Muslim investors. (To me, the investments looked like bonds, walked like bonds and talked like bonds — but he never called them that.) Some of the bonds that Dubai World is in jeopardy of defaulting on, by the way, are Shariah-compliant sukuk. Just don’t call them bonds.

With the benefit of hindsight — and you didn’t need much — there were plenty of other signs back then that Dubai was building a financial mirage in the desert.

And what became of all those Shariah-compliant financial instruments that were the hot topic of that panel I attended? It turns out that many of them that were sold prior to the crisis weren’t compliant at all.

The Shariah Committee of the Accounting and Auditing Organization for Islamic Institutions, which is based in Bahrain, ended up changing the rules to make them stricter because of widespread abuse. As Mr. Buiter described them on his blog, “these were window-dressing pseudo-Islamic financial instruments that were mathematically equivalent to conventional debt and mortgage contracts.”

Blessings, alas, can do only so much.
It's a great read. Please do.

Additional readings:

What can Nakheel sukuk holders expect in a default? This article is one post in a blogsite that has extensive coverage of the current Dubai crisis. In this post the blogger discusses in minute detail the structure and undertakings of the Nakheel sukuk that shookuk Dubai, concluding:
there are a tremendous number of uncertainties about the procedure for investors to enforce upon the various guarantees and collateral provided in the sukuk structures that would appear to give investors a claim on more than just the unsecured pledge of Nakheel and Dubai World, but in all cases, there is a lot of doubt about whether they will end up being legally enforceable.

These factors probably point towards some type of restructuring of the sukuk, rather than an outright default and legal challenge by investors.

Any restructuring would probably avoid a large mess, but would do nothing to clarify how the legal system would react in a similar situation in the future

From back in 2007:

Islamic Banking-Sukuk and Murabaha By Maurice Shohet 08/20/2007
Islamic banking is based on Islamic law and principles known as shari'a. It is equivalent to traditional banking in that payment for the investor, and for that matter collection for a borrower, is done through a share in profit rather than through interest. Islamic banking prohibits investment in companies, or lending to companies, that do business or trade in pork, alcohol, gambling, pornography, and entertainment.

Islamic banking has expanded considerably in recent years, and it is no longer restricted to banks owned or operated by Muslims. Increasingly, multinational banks have opened their own branches or windows dedicated to practicing Islamic banking. Some financial experts believe that as businesses diversify their investor base, Islamic banking will move to the mainstream as a viable financing option.

A recent "Standard & Poor's" report indicated that the current Islamic financial institutions can only provide services to 15% of the market needs (for financial services) of Muslims around the world. The report estimates the volume of financial assets compliant with Islamic law stands today at about $400 billion.

Islamic finance includes stocks, real estate investments, insurances, currency swaps compliant with shari'a, sukuk (Islamic bonds based on profit sharing rather than interest payment) and "Murabahat al-Sil'a" (a trading transaction where a bank sells a specific commodity at a price plus a specific profit agreed upon in advance).

The Islamic financial bonds (sukuk) are relatively new instruments and only came into existence during the past five years. They comply with Islam's ban on lending on interest and the trading of debt, and are backed by physical assets.

In the world of Islamic economies sukuk are equivalent to the financial bonds in the traditional world of the financial industry. They are tools used by financial institutions to raise cash.

The sukuk are proof of ownership title in a particular asset. They are distinguished by the need for the actual existence of the asset, as well as by their circulation potential in the Islamic financial markets.

Today's sukuk volume is estimated to be about $70 billion. The proceeds from Islamic financing are estimated to be $3 billion/day via London-the main center of the short and medium term financial transactions that are consistent with the provisions of shari'a. About 65% of the total value of the Islamic financial industry flow through the Gulf states and Malaysia

The term murabaha is derived from the Arabic word ribh which means profit. It is also known as mark-up or cost-plus financing.

This financial technique is the most popular and common mode of Islamic financing. It involves a contract between a bank and its client for the sale of goods at a price that includes a profit margin agreed upon in advance by both parties.

The process starts when a bank, at the request of a client, purchases for cash a certain object or commodity which the bank, in turn, sells to the client who requested the purchase at a profit. Since the client has no cash, otherwise he would not have resorted to the bank, the client buys the item on deferred payment. Repayment, usually in installments at certain intervals, is specified in the contract.

One important requirement of the murabaha sale process is that the sale contract through which the bank acquires the commodity and the sale contract through which it sells it to the client, are separate transactions.

Some critics have questioned the alleged religious foundation of murabaha because the profit margin attached to the total amount of the sale is tantamount to riba or interest in disguise. However, experience teaches that in theological disagreements on matters of finance, reality always gains the upper hand.

Islamic Sukuk & Capital Markets, A 3 day intensive course Venue: Dubai, UAE, 3 - 5 December 2007


Tuesday, December 01, 2009

Past performance and Shakespeare

Macbeth came to mind when reading the posts from a couple of regular spraying spots in Guambat's rounds.

First, Felix Salmon had a couple of posts, reiterating what Guambat has felt, thus finding those particular posts insightful and brilliant.

Mutual fund charts of the day
For the vast majority of actively managed funds, true alpha is probably negative; that is, the fund managers do not have enough skill to produce risk adjusted expected returns that cover their costs.

Which comes as no surprise, but it’s still good to see some relatively solid empirics here. Anybody wanting to make an intellectually-credible case in favor of investing in actively-managed mutual funds is going to have to attack this paper head-on.

Why bonds aren’t good investments
If you think it is reasonable to get a 5% return on top of inflation without taking risk, I have some oceanfront property in Nevada to sell you.

Investing is not about loaning your funds out to a government, completely abdicating responsibility for finding meaningful uses for the capital and then expecting a substantial return above inflation. Our governments are nearly bankrupt.

If you lend to a nearly bankrupt and profligate entity, you deserve to lose a lot of money. You are like a bartender serving a drunk who is drinking himself to death. You are not innocent. You are part of the problem, and your investments are making the world worse. You don’t deserve a good return for that
The points here, Guambat mulls, are not that neither stocks nor bonds are good investments, it's just that expectations of above average returns from either is too speculative to pay off for most of us. Therefor, rein in those horns or expectation and protect capital.

Which is the general line that John Hussman espouses. As he put it a couple of weeks ago, "we're doing our best to maintain equanimity about market direction, while keeping defense as our primary concern."

He's back this week trying not to get too disturbed by ("maintain equanitmity about") the consequences of not being in the chase in the stock markets that started last March and has not really let up since:
our year-to-date returns might now be into a second digit had I recognized that investors have learned utterly nothing from the bubbles and collapses of the past decade. That recognition might have encouraged a greater weight on trend-following measures versus fundamentals, valuations, price-volume sponsorship, and other factors.

Whether or not I have focused too much on probable “second-wave” credit risks is something we will find out in the quarters ahead – my record of economic analysis is strong enough that a “miss” on that front would be an outlier. What I do think is that over the past decade, investors (including people who hold themselves out as investment professionals) have become far more susceptible to reckless myopia than I would have liked to believe. They have become speculators up to the point of disaster.

Frankly, I've come to believe that the markets are no longer reliable or sound discounting mechanisms. The repeated cycle of bubbles and predictable crashes over the recent decade makes that clear.

But what's the Macbeth link?

Obviously, that past performance or stocks and bonds is no guaranty of future performance, nor is the pursuit of today's alpha a promise of tomorrow's returns. Shakespeare of course put it this way:
"Tomorrow and tomorrow and tomorrow,
Creeps in this petty pace from day to day
To the last syllable of recorded time,
And all our yesterdays have lighted fools
The way to dusty death. Out, out, brief candle!
Life's but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more: it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing."

But, back to Hussman:
One of the fascinating aspects of the past few months is the lack of equilibrium thinking with respect to what happened to the trillions of dollars in government money that has been spent to defend the bondholders of mismanaged financial companies.

Almost by definition, money given to corporations will show up most quickly as improvements in corporate earnings, and then slightly later, as executive compensation.

A few pieces came across my desk last week, hailing the ability of the corporate sector to bounce back from the recent economic downturn even though revenues have continued to suffer and employment has been steeply cut.

Why is this a surprise? Where else could the money have gone?

Labor compensation?

It is truly mind-numbing that a moment after a temporary surge of trillions of dollars, borrowed and tossed out of a helicopter (though to specific corporations and private beneficiaries), analysts would hail a subsequent improvement in corporate results as evidence of “resilience.”

What matters is sustainability, and unfortunately, it is clear that credit continues to collapse.