The Curious case of the S&P

A man is known by the company he keeps, was something told to me ages ago in a Moral Science class - a not-so-liked 8 AM class, in school. A true example of which I got to see from very interesting times in global markets! For all the dreary, sad, somber economic news doing the rounds, the least one can do is to (like self-help artists would say), 'step back and look at the situation'.

So, Obama came into office after inheriting an economy in a shambles. People believed they had not elected a President, but rather Mandrake the Magician (With the wand), Superman (out of this world capabilities) and Batman (if not anything, maybe Bruce Wayne's resources) rolled into one, to office! And so, when the economy sputtered, stalled, regressed, threatened to sink, there were cries of 'Oh No! US might default on its loans.' In the wake of PIIGS (not the cute tailed pink oink oink creature, but rather the mild name given to Portugal, Italy, Iceland, Greece and Spain  who look all set to go down under, unless Chancellor Merkel works her magic wand), everyone imagined a PIIGSU! They were afraid of uncharted territory, where risk free rate of return would no longer be treasury rates. Afraid of the face loss in case the US defaulted. Afraid of the country's debt being downgraded. So after two weeks of political tamasha, with Republicans acting like the typical 'chick flick leading ladies', who in their heart of hearts want to be wooed by Prince Charming, and yet wish to play hard to get. They did not want the accompanying face loss of default, while at the same time did not want to relent to Democrat plans! Outcome, in typical Cinderella style, the deal was signed by the stroke of midnight! Well almost, 'the stroke of midnight' was for a dramatic effect. The default was averted, Government salaries would be paid, over time prudence shall prevail. Amen - was the belief.

But then, in Munshi Premchand novel style, we have an anti-climax. S&P still downgraded the US to AA+. Note, Moody's and Fitch maintained AAA. Much ado over nothing? Clearly! 2 weeks of political blahblah, and the outcome was the same. If anything, further stimulii have been effectively canceled owing to the deal! Optimists believed that the downgrade might lead to weaker USD, better exports, and a probable recovery. But as markets are quick to reveal today, all kinds of cracks are showing up. Stocks tanked, oil stank, Gold soared. What do you do, when safe haven currency gives you the slip? Buy that which women shall covet forever. Not Adonis, but Gold!

Not just so much, but everyone associated with Treasuries is being downgraded unceremoniously too. Clearly S&P has been rubbed on the wrong side by the Government as a whole. So first the Govt was downgraded, and now anyone with a glut of Treasuries faces downgrade. The Saint of Omaha, who is famous for his own Coke story and for famously declaring in the wake of the debt crisis that US needs a Quadruple A rating, finds his Berkshire Hathway demoted from AAA. Why? Because he holds Treasuries.The question here is - what happens to the largest holder of Treasuries? As in, the mighty fire-breathing Chinese dragon? Do we downgrade the country to the level of junk?

And a bigger question is - why exactly should we believe S&P? Weren't they the ones responsible for the credit crisis in the first place? FannieMae and FreddieMac believed S&P ratings while securitizing mortgages, faced a beating, and now S&P has the nerve to downgrade them too?!!!? In summary, all one can say is that the Great Recession story just got curioser and curioser!!!

The world Bin Laden (The world without Laden)

Osama Bin Laden is dead. And it's been written about and spoken about, complete with an unwitting tweet account giving a bit-by-bit update to fake pictures up on the internet. The whole operation, looked like the 'capture-and-kill' operation in the movie 'Face/Off', with the high security house being ambushed and the main bad guy being asked to leave the world by a bullet in his head. And with this event, on May 1, 2011, Osama Bin Laden, the man who lent a face to terror, for all Americans and the world population to see and hate, left, hoping to get to the place he has been promising every gullible, impressionable, poor mind, that agreed or was coerced into becoming his foot soldier. Now whether he got there or not, is something only he can tell, and God willing, he doesn't come back to tell us of his escapades!

The bigger point though, is that this means the end of nothing actually. The man was supposedly frail, reportedly needing dialysis to keep him alive, albeit with a razor sharp brain, nonetheless. Agreed, this heir to billions founded Al-Qaeda as a retaliation to US setting up defense bases in Saudi Arabia to assist Kuwait against Iraq, and ever since he has been the one man who took it upon himself to cleanse the world of all things not Islam, a diktat that perhaps would make Prophet Muhammad's blood boil! The issue is that this man has managed to build ranks and ranks of lunatic foot soldiers, capable of inflicting horror on millions on their own, without the need of a larger lunatic! The funding might still continue, since over at least 10 years, OBL has managed to incite thousands of millions into the 'Jihadi cause'. Rumor has it that he was a very strong orator with a strong tongue to guile many an impressionable mind. What happens to that network? Those fund routes? All those millions leading Al-Qaeda offshoots, with a framed picture of OBL hanging on their cave walls?

Secondly, will anything be done about Pakistan being a terror haven? That nation is in a state of utter chaos, such that their President could have done nothing, had OBL been plotting his next move, right in his own backyard! Although in reality, that did happen, since OBL was captured barely a 100 kms from Islamabad and more glaringly a mere 800 meters from a large Army training camp! Army - ISI - Taliban - Al Qaeda, anyone? The relationship is too blatant to dismiss as mere coincidence.

This may be a moral victory. Placards of '9/11 victims may RIP' flashed through TV screens all of yesterday. A small voice in me asked, "what about the victims of 26/11 in India?" OBL was elusive, living in caves in South Waziristan, maybe, Pakistan, Afghanistan for a while and so on. The capture operation went on for a long time, and the forces were diligent in their quest. Qasab, the man who inhumanly killed scores of people at CST station is alive on Indian tax payer's money in a prison in Mumbai. Wouldn't the blood of victims' families boil each time they cross the prison road that houses that monster? What about the souls of these victims? What about the souls of the victims of the 1993 blasts in Mumbai? We have had a face to terror long before OBL even broke into the terror fraternity! So, why do we lack the will and wherewithal that the US possesses? Is our PM's mandate any different from the mandate of the US President in issues of terror, given that both are democratically elected?

It is indeed high time our own people were taken less lightly and their lives and souls given their due. Even the body of someone like Osama Bin Laden is given a burial, albeit at sea, in adherence to Muslim convention of disposing of mortal remains within 24 hours. If only our elected leaders felt for those who elected them and were serious about bringing them justice!

The Goldman Story

The whole Goldman story has been nothing short of a Bollywood potboiler over the past couple of years. And the best part is that there are no good guys and bad guys here. The more the saga unfolds, the more interesting it looks! But it has brought to the fore the very duplicitous nature of business and regulation, both!

When the whole sub-prime season was on, Goldman beat the Street, so to say. And suddenly people were looking to Goldman to lead the way and show the world how business is done despite a slump in the sector, and a slump in the economy. The CEO was lauded, the world looked in awe as Citigroup was brought down to its knees and almost nationalized and Merill was rescued by the Government and BofA, while in the midst of this carnage, Goldman kept looking extremely strong.

And while all this has been happening, comes news that the CDOs that Goldman had been marketing had underlying instruments that had been chosen by Paulson & Co. a hedge fund that had intentions of shorting these same securities. The implication? Imagine sailing on the high seas in a boat knowing that the boat had a hole in the hull! And now, after the SEC has sued them and there has been sufficient hue and cry over the lack of governance laws, there has been an out of court settlement of sorts. The heads won't roll, the penalty will be at $550 million, and the core issue has now been reduced to a lack of completeness of marketing materials. All this, after Goldman initially denied any of these allegations. How then suddenly did they acquiesce to a settlement at all?

And then comes the insider aspect. Stephen Friedman, former Goldman Chairman and then audit committee chairman was accused of picking up Goldman shares when he was chairman of the Federal Reserve. All this while the Government was busy bailing out AIG and paying people caught in AIG's tentacles. So while the Fed clearly perhaps knew that such a bailout was imminent, they perhaps also knew that Goldman would be a key benefactor! How then could Friedman pick up shares that resulted in him netting a cool $3 mn in paper profits? The case is feeble, since they are looking at a possible exception. But reasoning begs that one understand how a legal exception can preclude common sense! Even if the law allows it because of a loophole, wouldn't a Fed Chief who knows about an imminent windfall not be making use of this inside information when he nets a cool profit through this benefactor? Another lapse in judgment came when another former director let slip news of Berkshire Hathway's $5 bn investment in Goldman. At least he didn't stand for re-election to the board!

While all this has been happening, people have wondered about the law. On one hand, one can see glaring errors of judgment. But they can also see massive loopholes in the law that allow one to simply commit the transgression and still skip away free. So who is the bad guy here? The transgressors themselves, for not having a conscience? Or the lawmakers for leaving laws so lax? We can argue both ways. One can say that transgressors will always exist. And it is up to the regulators to ensure that they don't run riot. But then, what happened to the Classical theory of Economics, that needs the least Governmental intervention? Can that theory effectively be put to rest having fallen prey to the machinations of the human mind?

The debate will forever go on. But till then, the media will have a circus to pry on. Had Merill not gone under, someone would have covered John Thain's multi million dollar loo as a Wall Street Heirloom, rather than glossing over the 'John Fiddled while Wall Street burned' image of Thain. But I guess this is indeed the flip side of capitalism - amazingly good as long as the going is great, but at the ebb of gloom when things go a bit awry.

The questions SPILL on....

A Thought on a Thursday

A friend of mine was cribbing the other day about how her mischievous cat had jumped on to her cooking table and knocked over a pan of cooking oil that she'd kept there. The oil spilled all over the table and the sink, leaving a clean, polished surface all slick and sticky. I kept quiet, since I really couldn't say anything. You can't ground the cat, she just won't understand. You can' tell the cat that the kitchen is off limits; dogs understand, cats don't care! Neither can you banish cooking oil from your life!

The present BP oil spill off the Gulf coast is a classic story. And somehow I get hit by a sense of deja vu. Oil spills happen all the time, it appears. Not even half way into 2010, and there have been 2 already - the big BP oil spill or Deepwater Oil spill as it is called, caused by an explosion and subsequent sinking of a drilling platform off the Gulf of Mexico and another caused by the collision of a light crude tanker and a bulk carrier in the Singapore Strait. There were 3 spills in 2009, 2 of which were in Australia, losing a maximum of 30230 tons of crude. In 2008, again there was a spill in New Orleans, and just one spill for the year. Maybe the recession put a plug on drilling work too, for there seems no reason why carelessness dropped that one year, only to balloon up again. Over history, US has had the notoriety of 27 oil spills. Can't blame them, since they perhaps drill the most too! The worst ever oil spill though was the Gulf War oil spill in 1991, but then all is fair in love and war and so that can perhaps be disregarded.

So, what's the big deal this time? Why such hue and cry over some oil spilling on some water? My friend's cat isn't getting so much of attention anyway; in fact she is getting the silent treatment from my friend. Anyway, this spill has brought to light technological nightmares that can occur in case of a Black Swan effect in a field other than finance. All the methods of mitigation known and used so far are best suited for surface spills not deep water oil well bursts! The crude here is a sticky kind, that emulsifies easily, meaning it forms an oil-water mixture after which dispersants that disintegrate the oil cannot be used. Every method they have tried so far, after the ping pong blame game that is, has floundered, well, literally. Be it placement of an underwater oil recovery system - which failed because it formed methane hydrate crystals that clogged the system; or even using a smaller containment dome. At last, a permanent closure of the well is the only solution in sight. And how? Using the traditional method of stuffing heavier drilling fluids which push the oil down. Again, it will take 3 days before we know with certainty that the solution has worked.

In the meantime, the arguments have been plenty. And everyone has had more than their 15 minutes of notoriety. From BP vs Transocean, over who goofed up, the lessor or the lessee, to an argument over whether the government was acting fast enough or were they goofing off, lost in a mire of bureaucracy. And then came the numerous questions over why the safety systems especially the 'dead man's switch' which was supposed to have sealed the well, had communication between the drilling platform and the well failed died just when they had to work. Just as in the case of the Bhopal Gas Tragedy in India, where Methyl Isocyanate escaped off a failed safety valve, in just the way it shouldn't have. Why was a special nitrogen foamed cement, which was characteristically more difficult to handle used here? Why was the final capping not done? Who is to blame? Why was an independent assessment of the spill not allowed? What was being covered up?And what can be done to prevent this in the future, or is every spill unique? How can the fish and birds be protected? And what about all that oil lost?

Just like the 2008 crisis was a lesson in finance, over how things could go wrong and how best to brave such situations, I guess this spill is a lesson on how to expect the unexpected. Only that finance perhaps heals faster, but nature is cracked forever, literally. And this is one helluvan expensive lesson indeed.