Tuesday, December 2, 2008

Q & A: Walt Bogdanich. Investigative journalist.

Interview: Walt Bogdanich, assistant editor, Investigative Desk, New York Times, a three-time Pulitzer Prize winning journalist.

I had a great opportunity to meet Mr Bogdanich to discuss his prize-winning series on how counterfeit glycerin – in this case ethylene glycol produced in China found way into the pharmaceutical supply chain in many countries causing death for hundreds of unsuspecting patients. He spoke about putting the pieces together across four continents with a Jake Hooker, a colleague in China.


Q1: How did the germ of the story develop?

In 2006, as patients in Panama were dying in droves from counterfeit cold medicine, I looked on with one overriding thought: this epidemic looked disturbingly familiar. A decade earlier, I had reported on a similar poisoning in Haiti where at least 88 children died from counterfeit fever medicine. In that case, the poisonous ingredient was traced to China, but the government there blocked any further investigation. No one was ever charged, much less punished. The incident was filed away in my memory.

I told my editor Matt Purdy, that I wanted to investigate the Panama deaths even though none of the victims were American. I had a hunch that China might be involved, just as it was a decade earlier in Haiti. Tracing the poison back to its manufacturer would reveal how counterfeiters operated in a globalized economy and China’s role as a major supplier of fake drugs. I wanted to know who would do such a thing. Did they know the consequences of their actions? And why did regulators not do anything about it?


Q2: How did you plan and execute the story?

Reporting in Panama was not without its challenges. When I went there the situation was still playing out. I had never visited the country, had no sources there. In addition, government officials were embarrassed about their role in distributing the lethal cold medicine and were reluctant to discuss the case. I did not lie but we manage to sneak into hospitals. We tracked a person who had consumed the poisonous ethylene glycol – but managed to survive.

I wanted shipping and sales records to document precisely how the poison moved from manufacturer to patient. I eventually got the records - from non-governmental sources - and they confirmed my suspicions: the Panama poison had indeed come from China, passing through a toxic pipeline that stretched across three continents. The poison had been falsely labeled and exported by a trading company owned by the Chinese government. I found that traders outside of China sold and resold the lethal ingredients without verifying that the products were safe, similar to the Haiti incident.


Q3: Describe the how you made connections with the developments in China for your story?

I got in touch with the Times’ foreign desk that put me to Jake Hooker in China. I asked Hooker to find out about the manufacturer in Hengxiang in the Yangtze delta. How did the poison slip into the drug supply? Was the Chinese government aware of the situation? Was the manufacturer certified to sell pharmaceutical ingredients? I sent him a couple of questions, he sent back 40 pages of reporting full of color and detail! I trusted him.

Hooker spoke to many people outside the factory - truckers, farmers living beside factory, salesmen among others. He could speak Chinese. He therefore had access to public records.

Companies must file reports with the local branch of the State Administration of Industry and Commerce, and these reports have names and addresses of employees, a list of licensed products, and annual inspections from regulatory agencies. Chemical plants must also declare the main ingredients they use to make their products, as part of environmental assessments.

The clinching moment was when Hooker managed to get in touch with another counterfeiter. We had an opportunity to look into his mind to know how he operated.

We found that these counterfeiters and manufacturers used a route across various countries where inspections at ports and custom checkpoints were the least. The Free Trade Areas (FTAs) were used for this purpose.


Q4: How difficult is it to gain access to public records – medical reports, judicial proceedings and customs information – that was used in the story?

Public records are the heart and soul of what I do. That is the beauty of public records. There are always underlying documents to support your story. I checked the internet and culled out information. We made our own databases. I could access websites of those Chinese companies that were in English. I found the names of companies, the products they sold, those that were licensed or regulated. Although I am not a numbers person, I knew there was a way of quantifying the problem. We had to be specific.

Q5: What kind of impact that the stories have?

It brought the attention on to goods from China. The U.S. administration had new regulations for Chinese made goods and issued import alerts at borders. Something as ubiquitous as toothpaste was known to have contamination. This elicited a lot of concern. There were high level negotiations between both the countries on this issue.

In China, although most of the culprits got away, the factory that produced faulty glycerin was shut. The company was owned by Chinese government officials and no one was prosecuted.

Q6: For a three-time Pulitzer Prize winner, how does it feel when you crack into these stories?

It is very gratifying. There is a joy in being able to put together all pieces of a story. There is a sense of accomplishment. Here was a 5000 words non-American story in an American newspaper done by Americans. There is a difference between whipping up fast food and laying out French cuisine. It is worth the effort and is memorable.

--------------------------

It was my first day at NYU, when Mr Bogdanich came to speak to us about his experiences. His speech was very inspiring, reminding us about the true responsibility of a journalist - to keep important issues alive by asking simple questions even when they disappear from public memory, to dig deep into questions left unanswered in everyday reporting. Meeting him one on one for a class assignment was a humbling experience. I strongly feel that every journalist must possess these two qualities - empathy and humility - Mr Bogdanich has both in abundance.

Saturday, November 29, 2008

Econoblogosphere and the state

Real Time Economics , WSJ's blog took note of Peter R Orszag's appointment by Obama. The blog said that Orszag's appointment means that the econoblogosphere has lost an important voice since he spent time correcting media's wrong interpretations to the lightening changes in regulations over the last few months. Orszag put up a post at the Congressional Budget Office's blog that he would miss the CBO. He has been appointed for the Office of Management and Budget job. Mr Orszag has an interesting view on why the $ 700 billion bail-out package may not have a lasting fiscal impact on the government's balance sheet - depending on whether the transactions are a net gain or a loss to the government.
I think this is an interesting development when key future budget officials are in touch with the junta (for all non-Indians, 'junta' is a word used in Hindi to describe the common man.) I think it says as much about blogging as a medium as it does about the new generation public official.
I cannot conceive of Indian budget makers being so open to the media and the world at large! They are usually sequestered in the finance ministry both before and after the annual budget exercise. To be fair, there have been many officials who take it as their mission to educate government/economic reporters on the actual consequences of a budgetary allocation or accounting changes, but they are few and far in between.
This culture of speaking to the media - by the rank and file of the administration stems very much from the top. Many senior journalists in Delhi tell me, if the minister in question is 'open' to the media, it comes across with the way bureacrats in revenue, expenditure and economic affairs deal with the media. Have strong reasons to believe that the current administration is far from being courteous to economic journalists.
Coming back to the Obama administration, am sure American journalists are looking to having access to a more open government over the next few years, given that it was preceded by the most all-inclusive Presidential campaign.

The politics induced liquidity crunch

That we live in bizzare times has long been accepted, but I guess never fails to surprise us ever so often. Here is a report on how banks on the Gaza strip are facing a liquidity crunch as a result of sanctions by Israel. The Associated Press reported, "The Israeli shekel is a widely used currency in the Gaza Strip, and the territory needs at least 400 million shekels, or about $100 million, each month in new currency to replace aging notes and to pay salaries......The main source of currency is the moderate Palestinian President Mahmoud Abbas' government in the West Bank, which sends in currency shipments each month to pay its civil servants. The government dominated by the Fatah faction still claims authority over Gaza, despite losing control of the territory last year to the rival Hamas militant group." Gazans are pushed to using tattered notes. One newspaper noted that the term 'financial meltdown' has taken a whole new meaning here.

This is even when Israel's banks will be infused with $2.75 billion to shore up the banking sector to ensure credit availability. Merrill Lynch cut earnings estimates for Israeli banks by 40% in 2009. A MarketWatch article critiques the measures taken by the Treasury Department in Israel.

Saturday, November 22, 2008

Capital Losing Color

Taking stock of currencies:
1. The Chinese currency has remained virtually unchanged because it is contained within a narrow trading band. China's currency has a 'crawling peg' to the U.S. dollar but is still not fully convertible.
2. The Singapore Dollar - among Asia's worst performing currencies this quarter after the central bank - the Monetary Authority of Singapore (MAS) shifted a 'zero-percent appreciation' stance last month. It has fell 6.2% against the dollar since October.
3. The Indian Rupee: This currency has shed 21% this year trading over Rs 50 to a dollar. The RBI has been selling dollars in the currency market either directly or through government-onwned banks to prop up the falling rupee
4. Of all the currencies in the world, the worst performing is the Icelandic Krona because the country essentially went bankrupt. The currency is down 55.70% year to date.
5. The Russian Ruble has already fallen significantly this year but the Argentinian Peso has only dropped 5%. But weakness is expected in both. Russia used up a quarter of its forex reserves (fell by $144.6 billion) since August as the central bank struggled to contain its worst financial crisis since 1998. The ruble slumped 15% against the dollar since July 31 and 5.5% versus a basket (which comprises of 55% dollars and the rest Euros)
6. South Korean Won has lost 40% and touched a 11 year low last week. One investment bank sent out the following note to investors : "We painfully realised that our 1.1 percent growth forecast for Korea in 2009, while being consistently the lowest on the street, is just too optimistic if our deleveraging theme plays out. Thus we are lowering the 2009 GDP forecast to minus-3 percent."
7. The Citigroup news is putting the dollar in a spot today, it is helping both the Yen and the Euro. But overall there is still confidence in the greenback despite fundamentals.
8. Relative to the dollar, the euro is weakening. Investors have lesser confidence in the Euro than in the dollar. (Notwitsdtanding the current scenario)
9. The yen rose against the dollar. It also gained against the Australian and New Zealand dollars on the speculation the carry trades will be reversed as the credit squeeze hurts profits of companies.

Tuesday, November 18, 2008

Degrees of crises

Indicators of financial market stress: Bank credit default swap rates
(An average of 5 year CDS rates on bank's senior debt)

COUNTRY---------ROUTINE -------TURMOIL-------CRISIS---------NOW
PERIOD-----------AUG 07-----------SEP 08----------OCT 08---------NOV 08
1. USA-------------21-----------------158--------------271-------------142
2. EURO AREA----13------------------79---------------170-------------127
3. U.K.-------------10-----------------97----------------177-------------115
4. 3 MNTH--------39-----------------125---------------321-------------189
TREASURY
EUR-$ SPREAD

Source: OECD

Sunday, November 16, 2008

Crystal Ball

A brief gist of a seminar at the Stern School of Business last week - 'On advising the next president on global finance' :

*China’s stimulus package has set the tone for other emerging economies where there is a realization that they cannot export their way out of the problem. External deficits for some of these countries have stopped growing. The issue is that some economies are net borrowers that worsens the situation. So there is a dire need to ensure liquidity to these economies particularly Eastern European ones.

*It was pointed out that we are not living in an era of free floats of currencies after all, lets stop deluding ourselves – the yuan is pegged to the dollar, Russia’s currency is pegged to the euro and the dollar, the Japanese Yen is not a free float currency, nor is the Indian Rupee.

*An interesting observation was that 75% of the total banking assets in the country are across six bank-holding companies. Economists did not agree with each that it was a good thing. Some suggested that such is the situation that GMAC may become a bank soon!

*The International Accounting Standards Board (IASB) is being persuaded to give greater discretion to banks on how they must account for the value of the assets on their books.

* Pace of new regulations - Technically the Fed is not supposed to do unsecured lending, it is precisely doing that by stepping in for institutions it does not regulate. Will these widespread changes in regulatory policies prove to be costly mistakes in future?

*Can IMF help? With $200 billion to spare to ‘help’ out economies, that’s a pittance, panelists felt.

*A member of the Roubini camp – painted a worst case scenario –
1. Oil at $30 a barrel
2. Commodity exports contract further
3. Eastern European economies do worse
4. China’s stimulus does not work
5. Current account surpluses go up
6. Deflation feeds into the U.S.

Monday, November 10, 2008

No Credit No Food

Even as developing countries struggle to feed their millions, developed countries are witnessing a fall in their food inflation.
In Pakistan for example, the Consumer Price Index (CPI) inflation rose by 25%, mainly on the back of unprecedented increase in the prices of essential food items during the month of October in current fiscal against the same month of previous year. Contrast this with the falling food inflation in economies like the U.K.
The World bank has said that despite weakening global demand that has pushed food and fuel prices down, many governments continue to pay a higher price than before to feed their starving millions. The global food import bill will rise 23% in 2008, with developing countries mostly bearing the brunt of increased import costs. Agricultural output will be affected to due to the slowdown in these countries that have been affected by drop in export demand, remittances and lower commodity prices.
The Food and Agriculture Organisation (FAO) has said in a report this week that a recent fall in food prices should not create "a false sense of security". It has said that the credit crisis could deepen the food crisis by next year. This will increase the number of hungry people in the world from the current estimate of 923 million, it said.
The World bank has said “For the very poor, reducing consumption from already very low levels, even for a short period, can have important long-term consequences.”

Scary picture this.

And Life Goes On....

While revolution swept the United States – here’s whats been happening in the rest of the world...
1. China's 4 trillion yuan ($586) billion economic stimulus plan – How will China finance this? Well, it will have to sell large number of U.S. securities including treasuries that it holds. This is estimated at $1 trillion. This will add pressure when the U.S. government is trying to issue more securities to finance its own stimulus plan. This will impact bond yields which will fall since borrowing costs will now go up.
2. U.K. - The biggest cut in the history of the Bank of England. (ECB and Swiss National bank followed). As a result of which the LIBOR fell to a 4 year low to 2.29%.
3. Japan - Registered a 10 year low when its machinery orders plunged to 10.4% last quarter, as manufacturers cut investment plans in line with the global slowdown. This is at a time when Japan's 0.3% target lending rate is the lowest among major economies.
4. India – The central bank abandoned the "inflation vigil'' Bloomberg said. "For the first time since 1997, the Reserve Bank of India on Nov. 1 deployed all three of its main tools to shore up growth after inter-bank lending rates climbed to 21%". (Signs of preparing for elections? After all inflation is still twice as high as the central bank target)

ADVICE FOR THE NEW PRESIDENT - TAILPIECE:
The Irish Times says the President has to address common interests across Washington, Tehran, Baghdad, Kabul and Islamabad. The Jerusalem Post quotes Israel's foreign minister Livni "STAY TOUGH ON IRAN" . Interestingly the website of the Post has a permanent link called The Iranian Threat. So many voices....Force be with The New White house Man.

Saturday, November 8, 2008

The Far Left is the Far Right ?

Pardon the preoccupation with politics. It will wear off sooner than later. Always fascinating to see an administration in transition. Newspapers are awash with changes in Washington. A superb article in the Wall Street Journal talks about the changing dynamics of power But beats me, why it should make a story. Its a great story alright, but there is a lot of scrutiny on who will be a part of the coterie. The country is having such conversations aloud, trying to come to terms with the magnanimity of the change it just ushered in. As an outsider just two months into the old country, I am amazed how connected I feel the new country.

On that positive note - please read this phenomenal piece in the FT, that says how The Election has punctured anti-Americanism. Phillip Stevens says in this article "In demonstrating the infinite capacity of the US to reinvent itself by rediscovering idealism, Mr Obama robs friend and foe of their alibis....." Then goes on to conclude : "The world may be disappointed. One of Mr Obama’s most dangerous enemies will be the impatience of our age: the ever present demands that tomorrow’s problems be fixed yesterday. Perhaps the new president will lack the decisiveness that is an essential partner to careful deliberation. But this is a moment for optimism. Once in a while, politicians do change the course of history."

An Indian newspaper has reported that the one of the advisory members of the Obama team has close connections with a Hindu right-wing organisation. I was in denial for at least 30 minutes. Very troubled if you ask me.

I remember walking into a new government soon after elections in 2004 in New Delhi when popular vote threw out the right-wing ruling party. One could easily sense the change just walking around in north bloc on Raisina Hill - how quickly power equations change. The brokers of the erstwhile government now powerless. But these things change so quickly. The more they change, the more they remain the same. Wait for incumbency to gather under the new administration. No one knew what the Left brought to the table five years ago, when they became the ultimate power brokers in the coalition government holding every reform and every piece of legislation to ransom.

Wait and Watch Washington.

Investors as citizens

I was curious to see how the markets reacted to the Obama moment on Tuesday. Regret that this post comes so late in the day. I guess I was too overwhelmed by the event itself!
Am asking a rather naive question. When do investors cease to become citizens/voters. What does it mean when they say markets had priced in the results of the elections?
That a new President heralds a transition and brings in optimism is too passe for the markets. The policies of the newcomer may not have a favourable effect on certains sectors of the economy, but the direction in which the governance and the economy would move, I thought was sufficient to spread optimism. Clearly not. There is some dispute if the markets do better under a democrat. Forbes had a story 'Has Obama’s Rise Caused the Markets to Fall?' mapping each time the market fell - discussing causality and correlation.

That the week brought in dark data on labour, unemployment and manufacturing did not help the markets despite witnessing one of the most sublime moments in recent history. Jobless rate jumped to a 14 year high of 6.5% in October, number of people receiving unemployment benefits rose to a 25 year high. Instead of adding 100,000 jobs per month, the economy shed 240,000 jobs monthly. Manufacturing growth fell to a 26 year low to 38.9 on the index of national factory activity, even as productivity rose 1.1%. Not surprising then that amid such gloomy data, investors could not help but be pessimistic.

Tailpiece: Here is an interesting development in Singapore, when investors became more politically awakened in the aftermath of the financial crisis.

Sunday, November 2, 2008

The Day The Oracle Sighed - Atlas Shrugged ?

Not many imagined that they would see The Oracle apologise for his prophecies. Most newspapers carried the larger-than-life picture of the grim-faced octagenarian. When Alan Greenspan acknowledged his role in the current crisis in a Congressional hearing last month, it was a shock for the markets - after all his tenure spanned the greenest years in American Capitalism. That (no) regulation did not keep pace with market innovation is hardly an excuse. Aren't regulators supposed to be ahead of the curve? Of the realms and realms written about this once-in-a-century event, this piece in The Guardian was funny. But the unfair thing was those who spoke highly of him, have now gathered to boo him. In my conversation with a senior banker recently, he admitted that while rest of the world stood in awe waiting for the next pronouncement, he often thought that The Oracle was an "empty suit" as he put it. But the point, is more and more people will claim to have felt the same way. I think it has a lot to do with the way the media makes a hero of personalities just as quickly as it would strip any one of the aura it bestowed. Or may be the contrarians are never heard loud enough.

Half a world way - another regulator is being celebrated. In my brief stint as a journalist, I had the great opportunity to be writing on the Reserve Bank of India when governor Dr Y V Reddy was quelling inflationary pressures and talking down irrational exuberance(s). Reckoned as the king of conservatism, he was pretty unpopular with the bankers and a government that was gloating on higher growth and a less tight monetary policy. Friends back in newsrooms in India tell me how everyone is now singing eulogies for Dr Reddy. Known for being upright, Dr Reddy was transferred more than half a dozen times, as a young bureaucrat. His appointment itself, may have been political - but what a great choice! Dr Reddy loved surprising the markets (not a good thing?!). He raised risk weights for real estate loans, that went a long way in tackling "overheating" as he called it. Prime Minister Manmohan Singh had once remarked that the job of a central banker as "the loneliest job in India". Dr Reddy whose term concluded in September this year, will also be remembered for his wit. He would always have journalists in splits during his post-monetary policy press conferences (so much so that I would sometimes, actually scribble some of his witty remarks!). Of course, he was extremely tight-lipped about what would be going on in his mind - except smile the Buddha-smile. His take on the current crisis - “historically significant redefining of the concept of the central bank”.

Autonomy of central banks, has long come under pressure. Political pressures from governments on central banks are unavoidable. Barring exceptions like Dr Reddy, very few can stave off pressure from governments.

Monday, October 27, 2008

Roland Barthes on The Election

Every morning, I am a little disconcerted about some newspapers not supporting Senator Obama. But this morning, I was happy to read the FT. In a break with from its short tradition, this blog will take a step aside this week and speak of the election - for I strongly believe there is no commodity like the apolitical business journalist.

Here is something interesting that I have been reading - I was struck by the relevance of it today as it was when this book was first transated from French in the 1950s.
From Mythologies - by Roland Barthes - Photography and Electoral Appeal.
"Some candidates for Parliament adorn their electoral prospectus with a portrait. This presupposes that photography has a power to convert which must be analysed....Photography tends to restore the paternalisti nature of elections , whose elitist essence has been disrupted by proportional representation and the rules of parties (the Right seems to use it much more than the left). Inasmuch as photography is an ellipse of language and a condensation of an ineffable social whole, it constitutes an anti-intellectual weapon and tends to spirit politics to the advantage of a manner of being....Look at me, I am like you.
Electoral photography is therefore above all an acknowledgement of something deep and irrational co-extensive with politics. What is transmitted through the photograph of the candidate are not his plans, but his deep motives, all his family, mental circumstances, all this style of life of which he is at once the product, the example and the bait.....what we are asked to read is the known , it offers to the voter his own likeness, but clarified, exalted and superbly elevated into a type. This glorification is in fact the very definition of the photogenic: the voter is at once expressed and heroized, he is invited to elect himself, to weigh the mandate which he is about to give with a vertiable physical transference: he is delegating his race.
The conventions of photography are themselves replete with signs. The three-quarter face photographs are ascensional, the face is lifted towards a supernatural light which draws it up and elevates it into the realm of higher humanity...all political contradictions are solved: peace and war...social progress and employers' profits , so-called free religious schools and subsidies from the sugar-beet lobby, the Right and the Left : all these coexist peacefully in this thoughtful gaze, nobly fixed in the hidden interests of the Order."

Friday, October 17, 2008

World is Flat

IMF’s Strauss-Kahn this week has called for Bretton Woods 2 ! (Bretton Woods – the hotel incidentally was sold a couple of years ago, but has now been turned around and restored). Many countries dependant on capital inflows have been facing tremendous pressure. Repatriation of private capital by foreign investors or the reduction of credit lines from foreign banks is pushing these countries on the brink of bankruptcy.

1. Hungary’s problems stem from foreign currency loans and big budget deficits.
2. Ukraine’s banks face difficulties repaying foreign credits as the current account is widening.
3. Pakistan is seeking $4 billion in assistance. It is facing a financing gap of $10 billion this year – a crisis in its balance of payments. The Pakistani Rupee has crashed to record lows and its foreign reserves can pay for only two months of imports. Its sovereign rating is a couple of notches above the default level.

Some governments in emerging economies may be looking smug a little too soon. They are after all not that safe and far away from the chaos happening on American shores. This is only one way of diverting attention away from their own domestic problems of inflation, supply side mismanagement, lack luster growth in industrial production, stalled reforms among others. Economic weaknesses will not disappear – intrinsic problems within the economy will continue even as fundamentals remain strong.

Funny That - Central banks across the world are facing unusual activity – but in India its worse. Read an amusing story in the FT – “Industrial action at central banks is rare even in calmer times.” That’s right employees at the Reserve Bank of India are going on strike on pension issues! Not surprising – India badly need pension reforms, sooner than later the unfunded pension liability will blow up in the most unlikeliest of times.

Wednesday, October 15, 2008

Banks backed by the Big Stick

Capital injection in banks – will it make them more or less efficient? Will it open a can of worms with politics interfering in commercial lending decisions of banks. I can easily draw a parallel from what happens in India, where politics routinely interferes in the everyday functioning of banks – be it small cooperative banks facing pressure from small time local politicians, or large banks that have to appease the majority shareholder – in this case the government from time to time. There has been many a distressed lender crumbling under direct or indirect political interference. A New York Times report in 1999 warned of the interference of the Clinton administration in the affairs of Fannie Mae, that was under pressure to lend to a new category called “sub-prime loans”. But that does not really mean, we must expect the worst. Considering there was no other alternative, this will be a Damocles sword for banks going forward. How will future investors in these banks perceive the presence of the sovereign on the boards of these banks? Much has been said that the government was shortchanged in terms of the kind of equity stake that it will have in these banks.


Tailpiece: So much for capital adequacy - but what ever happened with all the stress testing that Basel norms provide? I guess the stress test was not designed to register a stroke in the credit market as it were. How closely were the capital adequacy norms being implemented. Banks were supposed to maintain a minimum of 9% as Capital Adequacy Ratio as per Basel norms. The costs of implementing these norms have been tremendous for some of the smaller banks. I guess we will see greater emphasis on capital adequacy – something that will discourage unviable leverage in future.

Thursday, October 9, 2008

The U.S. housing map

Where are the most expensive houses in the U.S. ?

Wednesday, October 8, 2008

Why not just throw bucketloads of money out of ice cream trucks?

Joe says "Why not just throw bucketloads of money out of ice cream trucks?" (a comment left on a blog). Why not indeed? Especially if this is the way things are going to turn out.

What are the cultural implications for American borrowers and consumers? Will it really be so bad, that it can impact on how a section of school going kids perceive of their country and their economy in the future? The pace of changes in the past one month will give enough work to economic historians, academics updating textbooks and future policymakers. There has barely been an opportunity for all of it to be recollected at tranquility - as one senior editor remarked.
How are policymakers dealing with the changes - even as they overhaul and initiate historic decisions - as a WSJ article recounted said there is no time for second guessing. "The test for all political leaders now is whether they can rise to the priorities this bewildering time has thrust upon them..." - a Guardian edit has said.

A thought or two on the monolithic multilateral organizations -
Always in times like these, we wonder why multilateral institutions like the World bank and the International Monetary Fund could not move faster and more decisively on systemic risks threatening global economy or bubbles in the financial markets? And what about the Bank of International Settlements? When central banks come together in a rare coordinated fashion to cut rates to stem the crises - we can expect the BIS to put its thoughts on the unprecedented turmoil in recent history - it is a little odd that we haven't seen any specific comments from Basel in the light of the current crisis. As the world's oldest financial organisation established in 1930, one would have expected BIS to remain ahead of the curve as it were, at a time when 'trust' is the biggest casualty in a crisis of such proportions. The BIS is a forum to promote discussion and policy analysis among central banks and within the international financial community, a prime counterparty for central banks in their financial transactions and a trustee in connection with international financial operations.

Tail piece: In my opinion bigger economies should show more sophestication in handling crisis than the smaller ones. The British government invoked the Anti-Terrorism Crime and Security Act 2001 to freeze the British assets of Icelandic banks. Read a Guardian edit called Icelandic Storms on the same. Instinctively I feel that classifying a country under a terrorist legislation may not be the most graceful way to address the situation. After all there is a diplomacy angle to the issue here.

Friday, October 3, 2008

Coagulation of credit

Our economics professor threw open the class to vote for or against the bail-out package. While the majority supported the package, self-styled contrarians said "we must bear the pain for a few years and not give in to moral hazard". Going with the contrarians, there could be lot to regret about. After all in hind sight everything is a mere should-have-done-possibility.

The most pressing concern that emerged is the fact that even big companies (some examples given were GE, McDonalds) are not able to borrow in the commercial paper market. Nobody is being able to lend anything other than overnight funds. So in effect the bluest of the blue-chip companies are turning blue, struggling for working capital.

The point is that the cost of money is increasing for everyone - including for those who had nothing to do with Wall Street. What will happen to municipalities for instance? Hospitals, schools are all getting affected.

Pick of the week -
This was in interesting read from The Economist dated November 1929.
Impact of crisis on the Balkans - a reuters report from Zagreb/Belgrade

Labor over Libor

Is the LIBOR correctly reflecting the true nature of the unfolding credit crisis? Every once in a while skepticism would give way to discussion, only to be forgotten later. The rate is now under scanner again.

Usually, overnight LIBOR is a little over the Federal Reserve's benchmark rate - the Fed Funds rate. The prevailing LIBOR is now 400 basis points above Fed’s target rate of 2% - reflecting that the banks are not lending to each other and whats more interest rates may adversely impact borrowers. These are historical highs ever since the British Bankers Association has started tracking it since 2001.

Like this Bloomberg story says “Libor, set every morning in London, is what banks pay to borrow money from each other. That in turn determines prices for financial contracts valued at $393 trillion as of Dec. 31, 2007, or $60,000 for every person in the world, and helps set consumer interest rates on everything from home loans to credit cards.”

The spread between the 3-month LIBOR and the overnight indexed swap (OIS) rate was less than 15 basis points. Since August the spread has increased as much as five times. A recent report by Merrill Lynch said that following the Lehman Brothers bankruptcy filing, the spread has moved up to 166 basis points, and has now been above 200 basis points for four straight days.

An indicator of whether the ‘near-term’ crisis has passed will be if the spread cuts by 100 basis points according to Merrill. “We do not expect to see a move back to the 11 basis point norm anytime this year or next," it has said.

Another crucial barometer in the on-going crisis is the TED spread - the difference between the benchmark London Interbank Offered Rate and US Treasury Bill rates. The success of the bail-out package will be judged by how this barometer jumps since it reflects inter-bank counter-party risk.

Saturday, September 27, 2008

Follow the money


How They Stack Up. Since am clearly enjoying it, take a look at the visualisation I made on how much money are central banks across the world pouring into to give life support to the financial system.

Mutual Fund Assets in the World.


Click here to see the visualisation I created on Many Eyes.

Source: Investment Company Factbook

Monday, September 22, 2008

Behind the motives of The Bail-Out

Authors of the book of Too Big To Fail: The Hazards of Bank Bailouts (2004) - Gary H. Stern, Ron J. Feldman of the Federal Reserve Bank of Minneapolis had this to say -
Many of the existing pledges and policies meant to convince creditors that they will bear market losses when large banks fail are not credible and therefore are ineffective. Blanket pledges not to bail out creditors are not credible because they do not address the factors that motivate policymakers to protect uninsured bank creditors in the first place. The primary reason why policymakers bail out creditors of large banks is to reduce the chance that the failure of a large bank in which creditors take large losses will lead other banks to fail or capital markets to cease working efficiently. Other factors may also motivate governments to protect uninsured creditors at large banks. Policymakers may provide protection because doing so benefits them personally, by advancing their career, for example. Incompetent central planning may also drive some bailouts.

For the history of bank bail-outs in the US, read here.

Do we see the return of the ‘essentiality doctrine’ of the 1980s? Authorities then forged a criteria to deal with various bank failures. The doctrine was also an explanation to the public on why the government was doing what it was doing. It feels strange now that officials then were overwhelmed by "lightening-fast removal of large deposits from around the world by electronic transfer."

Sunday, September 21, 2008

State of the Fisc

We just finished living through history this week. Seven days that changed the contours of American capitalism as it were. The American economy came to a tipping point - close to a credit freeze. Even as Treasury's desperate proposal of a $700 billion bail-out that essentially seeks to raise the ceiling on national debt to $11.3 trillion, awaits ratification, the crippling impact it will have on government finances is yet to be fully known.

How will this impact the expenditure of the government. Will this move see many justifiable social expenditure taking a back seat? After all, the headroom available for expenditure has now been squeezed because of the massive bail-out for financial institutions at large.

US government fiscal deficit :
2005-06 - $248 billion
2006-07 -$162.8 billion
2007-08 -$161 billion
2008-09- $407 billion (estimates)
2009-10- $438 billion (this figure will now balloon)

According to a report by the Congressional Budget Office dated September 9, the deficit is expected to rise from 1.2% of GDP in 2007 to 2.9% in 2008. The projected deficit for this year is more than twice as large as the deficit recorded for 2007, which was $161 billion, or 1.2 percent of GDP. After the final bail-out figures are frozen, the new bill may cost upto $1 trillion or 7% of the GDP.

Cost of wars - $858 billion
Cost of bail-out-$600 billion (Bear Stearns, AIG, F&F, money market funds)
Cost of total clean up - $500 billion to $1trillion (estimated)
Impact per capita $2000 (estimated)

A lot will depend on how the mechanism of the bail-out will manifest on government's balance sheet. Governments resorting to off-balance sheet exposures as an effort to keep fiscal deficit in check is common to developed and developing countries alike. But then, as one commentator, the fiscal profligacy of third world countries is childs play compared to what is unravelling around us. Also, bailing out poor farmers under a populist scheme may be less harmful than protecting greedy bankers who precipitated this systemic risk.

Monday, September 15, 2008

Economy in slow motion

Even as economists agree to disagree on the definition of recession, for America recession is here, or is it? http://www.economist.com/finance/displaystory.cfm?story_id=12207987

The problem is there are no broad measures that estimate industrial production. The rate of GDP is the only measure and that’s too broad. Smaller number of industries were responsible for a larger output. Today the economy is much more diversified. Even if some of the industries were performing slower it did not impact the overall economy too much. When the financial services industry is in recession like today, it is generally leads to a multiplier effect and there is an decline overall output. The National Bureau of Economic Research may declare this as a recession with a lag (like it did last time). We do not need two continuous quarters of negative growth to have recession.

In a conversation with Markus Schomer of AIG investments last week, he pointed out something interesting. He said the way recessions manifest themselves has changed. It is hard to see. There are no people crowding at employment exchanges! He had a different point of view for recession catch-words like “job losses” and “credit crisis”.

Excerpts -
In the case of an industry like the auto sector, a slowdown has been going on for years. But processes around this industry has been able to adjust itself to this pace. So does it not stand out. Nobody says it is a dying sector, although there has been sustained job losses over the years.

Manufacturing is laying off people. But today companies are far more nimble in managing inventories than before. For example, companies like Wal-Mart for example monitor the demand and adjust inventories real-time. There is no sudden build-up of inventory, that leads to a decrease production and even job losses. There is a more calibrated approach.
Earlier recessions were really brutal. Companies are now getting better at managing expectations and human resources. There are actually not many companies laying off employees as before. The American economy is largely driven by the services sector, so there is not much scope for laying off people.

On credit crisis -
The test now is how well corporate America does under the current circumstances. There is a problem with access to financing. The companies that are facing difficult financing conditions are dependant on their banking relationships. Default rates are going up. There is finance, but the traditional ways of accessing finance have become difficult. Companies can still manage to get access the public market through bond issuances. And there are been cases where such issuances have been oversubscribed.
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Official Unemployment Rate : 6.1%
This rate does not take into account illegal migrants that work in sectors like construction which has been laying off people. This means that the actual unemployment rate can be much higher.

Wednesday, September 10, 2008

Changing Risk Profile

In the previous post, we spoke about the risk of sovereign debt. The risk profiles of various countries forecast by the Economist Intelligence Unit (EIU) throws up some interesting results. For countries such as China and India, though fairly high, the risk rating has been consistently decreasing, the reverse is true for the U.S. On most parameters the risk profile for the US has increased. The same holds true for UK as well. Look at the table below -

Country overall currency sovereign debt banking political economic structure
Brazil 40 38 41 41 38 35
China 41 38 31 54 54 35
India 39 37 36 44 39 38
UK 23 25 17 28 7 18
US 24 28 15 30 14 23

While the table above does not show the risk rating over a period of years, EIU data shows that on most accounts, the risk profile of the US has increased in the last decade. For sovereign debt risk, the rating jumped from 3 to 15 in a decade. For China, banking sector and political risk has remained almost constant for a decade.

(For a long-term forecast like this one, EIU develops a framework based on supply side indicators. In such a case output is determined "by availability of labour and capital equipment and the growth in productivity," the EIU states.)

The Wall Street Journal says Asian investors, including the Chinese prevailed upon Treasury officials. http://www.livemint.com/2008/09/10235808/Calls-from-Beijing.html

Monday, September 8, 2008

When should the state step in?

Although the mega F&F bail-out package spread cheer in most economies, there was unmistakable cautiousness that it will not keep the markets bouyant for long. Banking stocks in general rose, but scrips of those Asian banks that have a higher exposure to the F&F debt are faring better than the others.

That it was inevitable for the US government to intervene is taken, but the practice of governments (UK-Nothern Rock) of bailing big firms raises questions. Is it a good regulatory practice to bail out ailing financial institutions (FIs)? A decision like this one will have to be done keeping in mind the consequences of not bailing out those FIs that could pose a systemic threat.

The broader point still emerging out of all discussions in print and on-line how soon should government get out of playing an active role in the mortgage business. And how healthy is sovereign debt? Should there be a more comprehensive policy that lays down conditions under which governments are authorized to step in. The short term goal of giving the markets a shot in the arm will be served by this bail-out, but what remains to be seen is the long-term impact on the U.S. exchequer and world in general.

p.s. Its funny, we live in times where there are sponsored links that say "Is your bank in trouble? Click here to check out the list of banks doomed to fail" and so on. Well as they say, there is a season for everything.

Sunday, September 7, 2008

The Perfect Storm

We are on a rather slippery stretch now! The Mobius Strip was born on a landmark day in the history of United States - on a day when the two biggest mortgage companies were taken over by the U.S. government. The Financial Times, (http://us.ft.com/ftgateway/superpage.ft?news_id=fto090720081413418980) painted a picture of a hurricane ready to wreac havoc in its way, as it spreads to other parts of the global economy. The way Americans and American banks bought and sold homes, has just become history.

Tax-payers will be called on to pay for massive capital injections into Fannie and Freddie. Credit rating company S&P has already downgraded F&F stock to junk after the government took over. As United States goes to sleep after the largest government bailout that made the treasury secretary Henry Paulson a hero, rest of Asia wakes up to tumbling US treasuries and rallies in its stock exchanges.

At a time when there is very little leeway for central bankers across the world to devise a truly autonomous monetary policy, this blog will try to explore the pressure points for economies. While its too early to speak about the death of decoupling, we will try to understand how connected economies truly are. In short it will try and answer the question of how rising prices in one part of the world, can lead to higher cost of money elsewhere?

Welcome to The Mobius Strip.