From Arab Springs to austerity measures. Global calls to occupy.....everywhere. The worldwide phenomenon of highly visible and vocal popular discontent has yet to reach its final apotheosis, a future that many of its supporters are incapable of articulating in a coherent and feasible manner. (If you don't believe this statement, kindly visit you local Occupy Movement protest site and attempt to illicit an answer, the disparity of opinions and goals is actually quite fascinating.)
Nevertheless, this is not an occasion to denigrate these popular movements, which often hold some core moral and social opinions with which I personally agree; in truth, the realization that I have arrived at is that even given the multiplicity of political, social, economic and cultural opinions across the spectrum of these various movements, it is the spectre of fear that is the common factor shared by all.
This fear is not merely localized to the protestors in the streets, but it haunts the halls of the powerful as well. The assurances of extreme wealth and societal institutions which normally buffer the elite from the clamoring of the hoi polloi have been exposed for all their insubstantiality and superfluity. The reckoning of the 2008 financial crisis has revealed that the masters of finance and industry, together with the brilliant minds who determine policy and regulation are equally beholden to the gods of chance, unsure of the very ground on which they stand, caught up in a disaster that has yet to be corrected, and in actuality, may never quite be made right again.
The recent elections within France and Greece are indicative that equal parts exasperation and anxiety will inevitably result in that familiar fragrance called desperate hope. The newly elected government under President Hollande promises an intriguing approach towards the crises of popular unrest and economic instability: Growth. Though from whence this vaunted growth will come and develop into a feasible framework is anyone's guess. Even better, as in in the case of the Hellenic Republic, perhaps returning to the drachma and a massive reintroduction of the bygone currency will ease conditions, but my rudimentary understanding of fiscal reponsibilty recalls an annoying concept called hyperinflation. Then again, I am not an economist, so an injection of worthless currency may indeed prove to be the cure for Greece's troubles.
The enthusiasm and hope garnered by the popular uprisings of the Arab Spring have delivered little of the much vaunted transformation so frequently mentioned during the revolutions of 2011. Egypt remains held together by the Supreme Council of the Armed Forces, mainly staffed and led by veterans of the Mubarak era. The Libyan National Transitional Council, which toppled the regime of Qaddafi, itself faces opposition from secessionists in the nation's southern and eastern regions. Admittedly, both nations are conducting demoractic elections in the upcoming summer and progressive refoms may be forthcoming, yet the reality remains that change is far less rapid and acute than previously assumed.
Throughout the European Union and the Middle East, amongst the youth and the establishment, uncertainty reigns.
Across the Atlantic, the symptoms are somewhat more muted, but the disease is identical.
Virulent and derisive opposition between Democratic and Republican parties have all but halted the process of governance within the United States. No piece of legislation appears to be immune from the vitriolic contention that plagues Washington, nonetheless both parties share the same condition. Both are afraid of the future; equally unsure of the role of the United States in a world in which its reach is gradually being curtailed and supplanted by increasingly competitive and decidedly more pragmatic powers. The person who can best assuage the fears of the populace will be the one who ultimately sits in the White House, this is not a pleasant assessment, but one which is becoming all too obvious as economic growth and American global influence continues to falter.
As 2012 reaches its midpoint, it is undeniable that this is a pivotal year. The political, economic and social futures of nations are reaching a point of convergence that will surely have implications for decades to come. A world of uncertainty and fear will benefit very few, if any at all; and as history has often shown, those who rise to power in such times may be the most noble of our kind or epitomize the very worst of our nature.
Fear may indeed permeate through our present, however let us not allow it to determine our future.
Sunday, May 20, 2012
Sunday, April 1, 2012
Oleo et Interrete: Why the SPR will be tapped
President Obama has recently released a statement assuring that current global petroleum supplies are capable of supplementing any loss incurred due to sanctions against Iran, therefore encouraging consumer nations to significantly reduce the importation of Iranian petroleum and find other suppliers(read here Saudi Arabia). This may offer some long term ease of oil prices, but what of the immediate impact? Global supplies do not necessarily guarantee affordable gasoline at the pump. A more direct action will need to be applied to ensure lower prices and tapping the Strategic Petroleum Reserve will likely be that action.
The White House is certain that sanctions will bring Iran to the negotiating table and Israel believes that threats of military action will frighten the rest of the globe into taking more demonstrative steps against Tehran. Unfortunately, both governments have, so far, been proven mistaken. The unintentional result of these policies has in fact created a petroleum speculator's dream. Despite the ample amount of oil on world markets, and sufficient refining capacity, the spectre of fear continues to manipulate the price of petroleum on commodities markets. At the close of this year's 1st quarter, the WTI benchmark is floating comfortably at approximately $103 per barrel on the NYMEX. While not the the exorbitant prices of the summer of 2008, it is conceivable that given the current trajectory that such prices could be approached by the summer of 2012.
In an election year, one need not be an ardent student of politics to understand that prices of $145 to $150 per barrel will irrevocably harm the President's campaign and disrupt what appears to be a strong resurgence in the American economy. American consumers are feeling the pain of high gasoline prices, and will surely express their discontent at the polls if actions are not taken to alleviate this pressure. The Strategic Petroleum Reserve will and must be utilized in order to mitigate rising domestic prices. The United States is not alone in this realization, as other Western nations which rely directly on Iranian petroleum imports, must also prepare to tap their reserves in order to stabilize domestic markets and ameliorate the damage of high oil prices in what is an apparent economic recovery.
Whether the sanctions against Iran are ultimately effective or not is somewhat irrelevant in this matter, what is of vital concern in the realities of politics and economics is that prices come under control. This statement may be somewhat crass, but in an election year, the importance of foreign policy will almost always lose something of its luster. In the days of the Pax Romana, panem et circeses kept the masses pleased. As this current period is percieved by some as the Pax Americana, let us add oleo et interrete to that ancient advice.
President Obama, keep the people happy. Tehran will still be there after November.
The White House is certain that sanctions will bring Iran to the negotiating table and Israel believes that threats of military action will frighten the rest of the globe into taking more demonstrative steps against Tehran. Unfortunately, both governments have, so far, been proven mistaken. The unintentional result of these policies has in fact created a petroleum speculator's dream. Despite the ample amount of oil on world markets, and sufficient refining capacity, the spectre of fear continues to manipulate the price of petroleum on commodities markets. At the close of this year's 1st quarter, the WTI benchmark is floating comfortably at approximately $103 per barrel on the NYMEX. While not the the exorbitant prices of the summer of 2008, it is conceivable that given the current trajectory that such prices could be approached by the summer of 2012.
In an election year, one need not be an ardent student of politics to understand that prices of $145 to $150 per barrel will irrevocably harm the President's campaign and disrupt what appears to be a strong resurgence in the American economy. American consumers are feeling the pain of high gasoline prices, and will surely express their discontent at the polls if actions are not taken to alleviate this pressure. The Strategic Petroleum Reserve will and must be utilized in order to mitigate rising domestic prices. The United States is not alone in this realization, as other Western nations which rely directly on Iranian petroleum imports, must also prepare to tap their reserves in order to stabilize domestic markets and ameliorate the damage of high oil prices in what is an apparent economic recovery.
Whether the sanctions against Iran are ultimately effective or not is somewhat irrelevant in this matter, what is of vital concern in the realities of politics and economics is that prices come under control. This statement may be somewhat crass, but in an election year, the importance of foreign policy will almost always lose something of its luster. In the days of the Pax Romana, panem et circeses kept the masses pleased. As this current period is percieved by some as the Pax Americana, let us add oleo et interrete to that ancient advice.
President Obama, keep the people happy. Tehran will still be there after November.
Wednesday, March 7, 2012
Syrian Paralysis
No one can argue that what is happening within Syria is not a tragedy, but let us not deceive ourselves any further, no one is going to do anything about it. This is a pessimistic view, undoubtedly, but ultimately it appears that the plight of the Syrian people and the significance of the state of Syria simply don't matter in an election year. This is not a diatribe directed at the President of the United States, nor at the recently elected President of the Russian Federation(an unexpected outcome?) or any particular administration or political personality, but a genuine attempt at unbiased analysis of a thoroughly confusing state of affairs.
Syria has been the beneficiary of geographical serendipity given its' proximity to Israel, Iraq, Jordan, and Turkey , though it may very well be a victim of this circumstance as well. Nonetheless, Syria remains a regional heavyweight at best, with negligible natural resources and comparatively slight clout on the global stage. The current regime's closest ally, Iran, is powerless to address concerns of stability under President Assad as it scrambles to maintain economic parity during a period of directed sanctions determined to undermine its plan for independent nuclear development(sanctions which this author believes will be ultimately ineffective). Despite continous protests throughout the globe in regards to the Syrian government's ruthless suppression of rebel activities, there remains a complete failure on the part of protesting governments to conceive a feasible and implementable plan to actually do any of either two scenarios:
1) Provide humanitarian aid and safety zones to Syrian populace subjected to government suppression or;
2) Employ military force to topple the regime of President Bashar al-Assad.
In both East and West, the political powers that be will merely step aside and for all intents and purposes let the dice fall where they may. The West is completely overwhelmed with rising energy prices, a reemergent but still thoroughly volatile economic outlook, and an uncertain domestic political future in many cases, while the East is willing to ignore domestic political affairs in pursuit of favorable trade conditions with whoever happens to be in power. The key to this situation is stability, this is what all concerned parties truly want. If President Assad remains in power, this is a situation that all can accept as this has been the status quo, if he is overthrown than a free for all between the Free Syrian Army, Syrian ex-pats, and a series of unknowns will ensue in a situation reminiscent of Iraq, minus the American investment in blood and treasure.
Wait and see is the mantra of the hour. Unfortunately, the people of Syria have also been forced to accept this as a reality. Their suffering reduced to a mere political bellwether, the most recent of states for which we have so much compassion, but so little reason to take any consumately decisive action.
Syria has been the beneficiary of geographical serendipity given its' proximity to Israel, Iraq, Jordan, and Turkey , though it may very well be a victim of this circumstance as well. Nonetheless, Syria remains a regional heavyweight at best, with negligible natural resources and comparatively slight clout on the global stage. The current regime's closest ally, Iran, is powerless to address concerns of stability under President Assad as it scrambles to maintain economic parity during a period of directed sanctions determined to undermine its plan for independent nuclear development(sanctions which this author believes will be ultimately ineffective). Despite continous protests throughout the globe in regards to the Syrian government's ruthless suppression of rebel activities, there remains a complete failure on the part of protesting governments to conceive a feasible and implementable plan to actually do any of either two scenarios:
1) Provide humanitarian aid and safety zones to Syrian populace subjected to government suppression or;
2) Employ military force to topple the regime of President Bashar al-Assad.
In both East and West, the political powers that be will merely step aside and for all intents and purposes let the dice fall where they may. The West is completely overwhelmed with rising energy prices, a reemergent but still thoroughly volatile economic outlook, and an uncertain domestic political future in many cases, while the East is willing to ignore domestic political affairs in pursuit of favorable trade conditions with whoever happens to be in power. The key to this situation is stability, this is what all concerned parties truly want. If President Assad remains in power, this is a situation that all can accept as this has been the status quo, if he is overthrown than a free for all between the Free Syrian Army, Syrian ex-pats, and a series of unknowns will ensue in a situation reminiscent of Iraq, minus the American investment in blood and treasure.
Wait and see is the mantra of the hour. Unfortunately, the people of Syria have also been forced to accept this as a reality. Their suffering reduced to a mere political bellwether, the most recent of states for which we have so much compassion, but so little reason to take any consumately decisive action.
Monday, February 13, 2012
The politics of bluffing, posturing and how sanctions will only make Iran stronger
Self delusion is an intriguing phenomenon that seems almost inherent to foreign policy. In the latest round of sanctions against Iran it seems to have once again worked its all-encompassing spell. History has repeatedly shown that sanctions without the force of multinational disinvestment are woefully impotent, nonetheless the United States and European Union have embarked on a course of action that will likely prove to be a disruptive, but temporary obstacle to Tehran, and perhaps even an unexpected benefit.
The primary consumers of Iranian petroleum have been the European Union and the developing markets of Asia, particularly India and China. The EU consumes appoximately 18% of Iran's petroleum exports and the recent policy decision to completely halt the importation of Iranian oil as of July, will have an undeniable impact on the Iranian economy. However, this is far more superfically ominous than realistically capable of bringing Tehran to the negotiating table.
This internationall drama, for all its political posturing and empty threats of embargos and military action, fails to impart the realities of the new geopolitical order. Iran desires commerce and trade with the West, but it does not need the West. It does need revenue. The true beneficiaries of the West's political admonitions will not be in Washington or the EU, but in Moscow and Beijing. Europe's markets require inexpensive and reliable sources of petroleum and with the failure of the Nabucco pipeline plan, greater importation of Russian energy resources will presumably compensate for unavailable Iranian product. Iranian petroleum will expectedly be dumped upon a market in which the consumer can dictate the terms of price and production. China and India are prepared to balance the fine line of economic necessity and political sensitivity, enjoying increased importation of cheaper Iranian oil while neither condoning nor criticizing Iran's nuclear development program.
If the West accomplishes anything through its' policies, it will inadvertently create a stronger East. Neccesity can breed accomodation, a concept sufficiently demonstrated by the Chinese strategy of international investment and development. The West has legitimate reason to fear a possibly nuclear Iran and the threat this poses to Israel, however there appears to be an inability to recognize that Iran is conceivably utilizing the tactics of feigning and posturing that are being so heavily deployed by its critics. Sanctions will weaken Iran, but only for a brief time. The final consequences of these decisions may not be a cowed and concillatory Iranian government, but one reinvigorated by stable markets willing to ignore its political inclinations. Tehran will no longer have to pretend that it can survive and thrive without the West, it simply will.
The primary consumers of Iranian petroleum have been the European Union and the developing markets of Asia, particularly India and China. The EU consumes appoximately 18% of Iran's petroleum exports and the recent policy decision to completely halt the importation of Iranian oil as of July, will have an undeniable impact on the Iranian economy. However, this is far more superfically ominous than realistically capable of bringing Tehran to the negotiating table.
This internationall drama, for all its political posturing and empty threats of embargos and military action, fails to impart the realities of the new geopolitical order. Iran desires commerce and trade with the West, but it does not need the West. It does need revenue. The true beneficiaries of the West's political admonitions will not be in Washington or the EU, but in Moscow and Beijing. Europe's markets require inexpensive and reliable sources of petroleum and with the failure of the Nabucco pipeline plan, greater importation of Russian energy resources will presumably compensate for unavailable Iranian product. Iranian petroleum will expectedly be dumped upon a market in which the consumer can dictate the terms of price and production. China and India are prepared to balance the fine line of economic necessity and political sensitivity, enjoying increased importation of cheaper Iranian oil while neither condoning nor criticizing Iran's nuclear development program.
If the West accomplishes anything through its' policies, it will inadvertently create a stronger East. Neccesity can breed accomodation, a concept sufficiently demonstrated by the Chinese strategy of international investment and development. The West has legitimate reason to fear a possibly nuclear Iran and the threat this poses to Israel, however there appears to be an inability to recognize that Iran is conceivably utilizing the tactics of feigning and posturing that are being so heavily deployed by its critics. Sanctions will weaken Iran, but only for a brief time. The final consequences of these decisions may not be a cowed and concillatory Iranian government, but one reinvigorated by stable markets willing to ignore its political inclinations. Tehran will no longer have to pretend that it can survive and thrive without the West, it simply will.
Friday, February 3, 2012
Case Study of Moody's Corp and Subprime Mortgage Meltdown
According to the Bureau of Labor Statistics, American unemployment has decreased to an encouraging 8.3 percent.
Not fantastic progress, but respectable. Before we get lost in the euphoria of this recovery, let's not forget the reasons why we need one.
In 2010, I wrote a case study on Moody's Corporation and the general role of ratings agencies in the mortgage meltdown, and while I am not singling out any particular entity or corporation as the sole cause of the crisis, I think that a thorough analysis of these institutions and other components of the "shadow" banking industry, is absolutely necessary.
Case Study of Moody’s Corporation and the Subprime Mortgage Meltdown
Not fantastic progress, but respectable. Before we get lost in the euphoria of this recovery, let's not forget the reasons why we need one.
In 2010, I wrote a case study on Moody's Corporation and the general role of ratings agencies in the mortgage meltdown, and while I am not singling out any particular entity or corporation as the sole cause of the crisis, I think that a thorough analysis of these institutions and other components of the "shadow" banking industry, is absolutely necessary.
Case Study of Moody’s Corporation and the Subprime Mortgage Meltdown
To lay at the feet of Moody’s Corporation or any of the other major credit ratings agencies the primary responsibility for the 2008 global financial crisis would be a simplistic and ultimately erroneous determination. However, one cannot deny their active facilitation of a systemically flawed financial structure that was buttressed upon illusory assets and ineffective, and perhaps even unwilling, regulation. The nature of the activities that permitted the financial crisis to flourish and finally implode beggars the question that perennially arises in the discussion of matters both societal and economic; Is what is legal necessarily ethical?. In the case of Moody’s Corporation, there was no clear violation of any regulation or law that the enterprise was bound to abide by, nonetheless, was there a moral and professional obligation held by the company that transcended mere legality? If so, how culpable is the company for its actions, if truly responsible at all? This author hopes to discuss these inquiries and others throughout the subsequent analysis.
- What did Moody’s do wrong, if anything?
Legally, as was previously stated, Moody’s committed no crime or infraction, yet one cannot overlook a somewhat lax stance in regards to its’ ratings on residential mortgage backed securities. Chairman and Chief Executive Officer of Moody’s, Raymond McDaniel, testified before the Financial Crisis Inquiry Commission that while Moody’s did observe a trend in the declining quality of mortgage-backed securities as early as 2003, that it is not the role of Moody’s nor any other credit rating agency to serve as the “gate-keeper” of the securities market and that their ratings are merely opinions, not definitive advice or recommendation on the stability or substantiality of a particular financial instrument.[1]
- What stakeholders were helped, and which were hurt, by Moody’s actions?
Clearly, the immediate beneficiaries of Moody’s ratings were the securities issuers, those institutions which provided these securities profited immensely from their continued distribution throughout the market, as did Moody’s who received sizeable fees to rate said instruments.[2] One Moody’s employee indirectly described the competitive pressures which led to the lapses in the ratings systems,
“He described RMBS(residential mortgage backed securities) as the worst team to work on at Moody’s. It’s difficult to maintain market share in a market that has become commoditized and where Moody’s expected loss analysis means higher costs for issuers. “[3]
The investors, placing great confidence in the quality of Moody’s credit ratings, received these securities with the full belief that the ratings attributed to them were analytically sound and unbiased in any way. These investors however would be the most severely affected by the eventual downturn of the market, discovering that their investments were in reality of far less value than had originally been determined.
- Did Moody’s have a conflict of interest? If so, what was the conflict, and who or what were the principal and the agent? What steps could be taken to eliminate or reduce this conflict?
The current credit ratings agency business model, in the opinion of this author, is by nature one in which the conflict of interest is unavoidable. Moody’s CEO Raymond McDaniel states however that conflict of interest will arise whether rating’s agencies utilize an issuer or investor-pays system.[4] Each party has an interest in influencing the determinations of the credit ratings agencies; issuers are seeking to distribute securities and higher credit ratings allow these securities to appear more attractive to investors, on the other hand, institutional investors will always attempt to improve their investment portfolios and understandably would seek better ratings for securities in their possession. Additionally, the distinctions between issuers and investors have grown nebulous as parties in the present-day global financial system now actively participate in both roles. While this author believes that stronger government regulation with legal ramifications for purposeful inaccuracy is the only way to decisively mitigate or even eliminate the damage which this business model can cause, some economists have suggested delayed payment schedules for ratings agencies and investment quality ranging, rather than grading, in order to prevent a reoccurrence of this magnitude.[5]
- What share of the responsibility did Moody’s and its executives bear for the financial crisis, compared with the home buyers, mortgage lenders, investment bankers, government regulators, policymakers, and investors ?
To quantify the exact contribution of Moody’s to the crisis is an undertaking well outside the realm of this case study, yet the conduct of Moody’s as well as the other credit ratings agencies was undeniably symptomatic of a fatally defective paradigm in regards to the structured finance market. The credit ratings agencies, despite the contention that they are not financial advisers, are remiss to believe that institutional investors do not look to their determinations as trusted and valued resources. While they may legally be capable of denying their culpability within the crisis, the agencies ultimately failed in their responsibility to provide their customers with accurate information and committed a true injustice by continuing to provide such information despite internal misgivings.[6]
- What steps can be taken to prevent a recurrence of something like the subprime mortgage meltdown? In your answer, please address the role of management policies and practices, government regulation, public policy, and the structure of the credit ratings industry.
Industry transparency and regulation, both governmental and self- imposed, are the areas that must be addressed if the mortgage crisis is to be prevented from reemerging. The Financial Crisis Inquiry Commission’s investigations have revealed to the general public the existence of a little understood “shadow” banking system. This refers to the operations of financial entities that are legal, yet so under regulated, that they escape the scrutiny and criticism to which their commercial banking counterparts are subject. [7] The combination of this practically unmonitored and unregulated banking sector with a mortgage lending environment that was delving deeply into what would come to be known as the subprime market, representing those borrowers with poor credit histories and normally unsatisfactory debt to income ratios, were primary components in the creation of the financial crisis. Considering these factors, one can carefully follow the chain of events which would eventually upset the global financial system:
1) Lenders originated mortgages to customers with doubtful ability to repay the loans
2) Investment banks purchased securities based on the mortgages, whose value was dependent on the perceived ability of borrowers to repay their debts, these securities became numerous and highly popular with investors and were vigorously provided to the market
3) Credit rating agencies who rated such securities gradually relaxed their standards as the competition to maintain market share grew fierce and issuers desired better credit ratings to more easily promulgate their securities
4) Lastly, investors, reliant on credit ratings agencies and the apparently limitless profitability of mortgage backed securities, assumed greater and greater quantities of these securities, with little to no government regulation of any portion of this process, the private sector had no controls other than those imposed by the financial market.
The market, unbridled and allowed to exercise itself to its utmost capacity, proved to do what it has done unfailingly and cyclically throughout the economic history of the United States, it fell into crisis. While this occurrence has effectively ended the investment banking system as we have known it[8], it has only further proven that government regulation of banking institutions, credit ratings agencies, and investors is indispensible. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 directly addresses the vulnerabilities of the financial services industry and strengthens regulatory authority, specifically in the areas that exacerbated the near collapse of the financial system.[9] Thought the efficacy of this law has yet to be seen, this author believes that is only through concise and enforceable legislation that an industry can be regulated in order to protect the consumer and ensure quality and accountability in corporate operations. This most recent disruption of the financial system simply reinforces the well documented guiding principle of corporations that are left to their own devices; that profitability is the primary concern, even at the expense of responsible and ethical corporate citizenship.
[1] Financial Crisis Inquiry Commission, Testimony of Raymond W. McDaniel, Chairman and CEO of Moody’s Corporation, June 2,2010, 1-2
[2] United States Senate Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, Exhibits, Hearing on Wall Street and the Financial Crisis: The Role of Credit Rating Agencies, April 23, 2010, Exhibit #1d
[3] Ibid, Exhibit #1b
[4] Financial Crisis Inquiry Commission, Testimony of Raymond W. McDaniel, 7
[5] Martin Mayer, “Credit Ratings Agencies in the Crosshairs” The Brookings Institution, August 2010, http://www.brookings.edu/articles/2010/0831_ratings_agencies_mayer.aspx
[6] United States Senate Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, Exhibits, Hearing on Wall Street and the Financial Crisis: The Role of Credit Rating Agencies, 10-11
[7] Financial Crisis Inquiry Commission, Shadow Banking and the Financial Crisis, May 4, 2010, 7
[8] Ibid, 40
[9] Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010, Public Law 111-203, 111th Congress, 2nd Session, January 5, 2010
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