Category: Capitalism

Deregulation – an expert’s view.

Once again, not everything is as it seems!

Focus warning!  This is a longer piece that usual but also a more important piece than usual.  Please find the time to read it and explore the links.  Thank you.

Many, many years ago I lived in Tamarama Bay, just East of Sydney,

Bronte Beach, Australia

Australia.  It was a very short walk to Bronte Beach which was much better experience than the famous Bondi Beach about half a mile North of where we lived.

Thus when I saw the name Bronte Capital it caught my eye because of old resonances from the word “Bronte”.

OK, to the point!

John Hempton is a principle at Bronte Capital, an Australian fund manager.  John is no slouch having been in his past a Chief Analyst for the New Zealand Treasury and Executive Assistant to the CEO of ANZ Bank in New Zealand.  John’s CV is here.

Bronte Capital have a Blog – well who doesn’t – and it was a link to that Blog from Naked Capitalism that caused me to read a recent article from John about deregulation.

Despite me not understanding many of the technical aspects, it struck me with some force, so much so that I wanted to reproduce chunks of it on Learning from Dogs.  John was gracious enough to give me written permission to so do!  Thanks John.

The article is called A Deregulation Conundrum.

John opens by writing:

I have just read Daniel Amman’s excellent biography of Marc Rich – the oil trader notoriously pardoned by Bill Clinton.  I don’t want to get into the politics and ethics of the pardon other than to note that few things in it are black-and-white when you finished reading the book.

and a couple of paragraphs later explains that Marc Rich has a rather appropriate surname – well this is how John writes:

Marc Rich exploited price fixing/import/export controls to make simply unbelievable profits trading oil.  Marc Rich & Co (the Swiss vehicle) was started with just over $1 million in capital and a couple of years later was making in excess of $200 million in profit.  This level of profitability exceeds – by far – any other trading operation I have ever seen – and was probably the most profitable trading operation in history.  Marc Rich & Co (since renamed Glencore) is possibly the most valuable business in Switzerland within the lifetime of its founder.

Just stop here for a moment.

This man, Rich, goes from one million dollars in capital to two hundred million dollars in profits in 2 years, give or take!  Read on:

A typical Marc Rich & Co trade involved Iran (under the Shah), Israel, Communist Albania and Fascist Spain.  The Shah needed a path to export oil probably produced in excess of OPEC quotas and one which was unaudited and hence could be skimmed to support the Shah’s personal fortune.  Israel – a pariah state in the Middle East – wanted oil.  Spain had rising oil demand and limited foreign currency but was happy to buy oil (slightly) on the cheap.  Spain however did not recognise Israel and hence would not buy oil from Israel – so it needed to be washed through a third country.  Albania openly traded with both Israel and Spain.  Oh, and there is an old oil pipeline which goes from Iran through Israel to the sea.

So what is the deal?  The Shah sells his non-quota oil down the pipeline through Israel and skims his take of the proceeds.  Israel skim their take of the oil.  Someone doing lading and unlading in Albania gets their take and hence make it – from the Spanish perspective – Albanian, not Israeli oil.  The Spanish ask few questions.  The margins are mouth-watering – and they all come from giving people what they really want rather than what they say they want.  We know what the Shah wanted (folding stuff).  We know what Israel wanted (oil).  We know what Spain wanted (cheap oil).  Who cares that Spain was publicly spouting anti-Israel rhetoric.  [Similar trades allowed South Africa to break the anti-Apartheid trade embargoes.]

John explains:

It also helped that Marc Rich & Co was a (highly) multilingual firm.  Rich is fluent in Spanish (it is the language he talks to his children in).  He speaks English, German, Yiddish and presumably Hebrew.  His business partner (Pincus Green – pardoned the same day as Rich) speaks Farsi amongst many other languages.  They could do this deal because they could negotiate it and – deep in their heart they hold the Ayn Rand view that trade is a moral virtue and hence they do not need to be concerned with other morality. [The only line that matters is the law – and then it might not be the law of his adopted country – Switzerland – rather than the United States where he was resident.]

My italics, by the way.  Just stay with me for a short while longer to ‘get’ John’s important message.  Here’s John again:

The regulatory regime for domestic American oil was also perverse.  Old oil (meaning wells drilled before the first oil crisis) received one price.  New oil (wells drilled after the crisis) received a higher price.  Squeeze oil (oil that was extracted from wells that ran less than 10 barrels per day) received a higher price still.  The oil could be chemically identical and the price difference over $20 per barrel.  Obviously a trader with a method (any method) of changing the oil source could make a fortune.  Again I am not commenting on legality or morality.  That was just plain fact.  Ayn Rand applies – you give a value and you receive a value.

What all this regulation did was that it allowed people to make simply grotesque profits by thwarting regulation.  The regulation thus worked less well and it was socially unfair.  Pincus Green was good at negotiating in Farsi.  He was astoundingly brave going to Iran immediately after the Shah fell.  He was good at organising shipping.  He worked really hard – but he did not invent something that changed the world and he wound up a billionaire.   Traders make money by intermediating real business solutions – but these were real business solutions to problems made by legislation.  Bad regulation, moral indignation about “trading with the enemy” or “trading with Israel” or with racists in South Africa made people with Ayn Rand morals exceedingly wealthy because you could arbitrage your way around any of these regulations.

OK, you are probably getting the drift of this important article from John.  If any of this ruffles your hair, then read it all – it’s a very important message.  This is what John is saying:

As a plea then I want a debate about the right form of regulation – a regulation that controls agency problems but does not allow arbitrage opportunities to people with “Ayn Rand morals”.

We are not going to get that from the current Tea Party Republicans.  They simply argue that regulation (they say but do not mean all regulation) impinges on “freedom” (something that is clearly a good but hard to define).  However many of the same people want planning regulations to ban a mosque in downtown New York because it is an insult to the victims of 9/11 (and banning mosques is not a restriction on “freedom”).

If that is the level of debate we are not going to get good re-regulation – we are just going to get pandering to whichever lobby group manages to garner most support.  And that is a real risk because we will leave agency problems in place (they benefit the rich and powerful) and we will introduce the same sort of (dumb) regulation that made Marc Rich and Pincus Green astoundingly wealthy.  That sort of regulation also benefits the rich and powerful – especially those with “Ayn Rand morals”.  [The rich and powerful – if you have not noticed – are good lobbyists.  Unless we are careful many amongst them will get their way.]

You didn’t rush those last three paragraphs, did you?

John concludes thus:

I don’t know how to do this well – but I thought I would state the obvious.  The most obvious things that need regulation are things with a government guarantee (implicit or explicit).  If you have an implicit guarantee (as we now know almost all large financial institutions have) then regulation really matters.  If there are large agency problems (small shareholders, large management) then regulation should be deliberately biased to put power in the hands of shareholders not managers (eg banning staggered board elections).

Likewise other agency problems should be strongly policed and the regulation should be of the form that allows that policing.  When Elliot Spitzer found that Marsh – a large insurance broker – was participating in bid rigging against schools buying insurance that was shocking – and is precisely the sort of thing in financial markets that should be policed strongly.  But it took Elliot considerable effort to find and prove his case.  The rules should be established so that sort of behaviour is really difficult to hide.

And I do not think that I need to explain to anyone how much mortgage brokers contributed to the crisis by (a) deliberately misleading borrowers about conditions on their mortgage and (b) participating in the faking of borrowers income/assets/education level when they on-sold the loans to Wall Street.  Agency problems were at the core of the crisis.

On the other side if there is no agency problem then deregulation should remain the order of the day.  Trade restrictions create arbitrageurs – and the arbitrageurs ensure the trade restrictions don’t work anyway.

There are obviously going to be extensions to this rough rule – and this post is really to garner discussion.  But for a start I expect agents who benefit from their agency (and the abuse of their agency) to join the Tea Party.

It is difficult to get policy right.  And when and if the policy is got right we are in for a very long fight to implement it.

I take my hat off to Mr John Hempton. He’s in the ‘finance’ industry, probably doing well, and yet he has the courage to hold a mirror up to the desperately immoral happenings going on around him.

It’s a real pleasure and honour to publish this Post.

Let me close with a short piece from the Sydney Morning Herald of the 2nd January, 2010.

John Hempton ... blog locally, act globally. Photo: Domino Postiglione

WHEN John Hempton started a blog as he recovered from pneumonia, he did not expect to send shockwaves through the finance industry.

But that is exactly what the 42-year-old fund manager did through his Bronte Capital blog. His exposé of an unrelated US hedge fund would eventually lead to $426 million in investments being frozen and authorities seizing control of the Albury fund manager Trio Capital shortly before Christmas.

Fabulous! I salute you, Sir.

By Paul Handover

Tough day? Try this! Update.

Let’s all pray to keep the flame of hope burning brightly for these guys.

On the 24th August, Learning from Dogs published a piece about 33 Chilean miners trapped underground.  I’m sure many read that.

Well the BBC are still covering the event and their news web site has an informative update on what is happening.

The plan to rescue the 33 men trapped 700m (2,300ft) underground in the San Jose copper mine in Chile is a complex undertaking that could take engineers until the end of the year to achieve.

In a similar operation in 2002, American rescuers spent two days drilling a hole just wide enough to fit a man to rescue nine miners trapped underground.

The Americans had to drill down just 74m. By comparison, the plan to rescue the 33 men in Chile nearly three quarters of a kilometre underground is a much greater challenge. But, says John Urosek, who took part in the 2002 Quecreek mine rescue in Pennsylvania, it is not “mission impossible.”

“I would put this at the tough end of things. It’s not mission impossible but it’s a difficult mission,” says Mr Urosek who is now chief of mine emergency operations for the US Mine Safety and Health Administration.

The key to the operation is the use of a specialist drilling machine, designed to bore deep narrow holes through any rock to a depth of just over a kilometre.

Strata 950 raise bore machine

Do read the article in full on the BBC site.

RUC Cementation in Australia have an interesting website that includes pictures of the Strata 950 bore machine that will be sinking the rescue shaft.

Best of luck to all involved and to all the families and friends having to sit this out!

By Paul Handover

House prices!

A spotlight on some tough truths

I have long subscribed to Baseline Scenario and the latest article from James Kwak is a great example of why.

On August 23rd James published a Post with the compelling title of, “Housing in Ten Words”.  Here’s a flavour:

By James Kwak

“Housing Fades as a Means to Build Wealth, Analysts Say.” That’s the title of a New York Times article by David Streitfeld. Here’s most of the lead:

“Many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.

“The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.

“More than likely, that era is gone for good.”

I’ve been telling my friends for a decade that housing is a bad investment. These are real housing prices over the past century, based on data collected by Robert Shiller:

Robert Schiller is, of course, the well-known Yale University professor who wrote the book, Irrational Exuberance.   From Wikipedia:

Irrational Exuberance is a March 2000 book written by Yale University professor Robert Shiller, named after Alan Greenspan‘s “irrational exuberance” quote. Published at the height of the dot-com boom, it put forth several arguments demonstrating how the stock markets were overvalued at the time. Shiller was soon proven right when the Nasdaq peaked on the very month of the book’s publication, and the stock markets collapsed right after.

The second edition of Irrational Exuberance published in 2005 is updated to cover the housing bubble, especially in the United States. Shiller writes that the real estate bubble may soon burst, and he supports his claim by showing that median home prices are now six to nine times greater than median income in some areas of the country. He also shows that home prices, when adjusted for inflation, have produced very modest returns of less than 1%/year.

Shiller proved right again as witnessed by the fall of the housing bubble which was in part responsible for the Worldwide recession of 2008-2009.

Anyway, do read the full article from James on Baseline Scenario as it has plenty of messages that are still critically important for those trying to work out where it’s all still heading, economically.

For my money, I still think that slowly but steadily we are reverting to the old mean of home prices being about 2 to 2.5 times average annual salaries. With the added proviso that I think that it is more than likely that average salaries will slowly decline on both sides of the Atlantic over the next few years.  Tough times indeed!

By Paul Handover

The Verdict!

A nearly 30-year old film has real relevance for today!

Those of you that read yesterday’s Post right through to the end will have picked up on the fact that after completing that article last Friday, Jean and I watched the movie The Verdict.

Amazingly, this powerful film was released on the 8th December 1982.

So why the connection between the film and the Post written yesterday?

Well yesterday I wrote about two recent examples of, at best, a terrible lack of integrity, or, at worst, blatant examples of powerful institutions lying to us.  It troubled me greatly and I found no adequate way of closing the Post expressing my troubles in a succinct and fitting way.  Stay with me for a few moments.

In the film The Verdict, Paul Newman plays Frank Galvin – here’s the synopsis from the IMDb website:

Frank Galvin is a down-on-his luck lawyer, reduced to drinking and ambulance chasing. Former associate Mickey Morrissey reminds him of his obligations in a medical malpractice suit that he himself served to Galvin on a silver platter: all parties willing to settle out of court. Blundering his way through the preliminaries, he suddenly realizes that perhaps after all the case should go to court: to punish the guilty, to get a decent settlement for his clients, and to restore his standing as a lawyer.

As one might have guessed, Galvin wins the case against all the odds, which doesn’t in any way reduce the power of the film.  Newman was brilliant.

Tackling a medical malpractice case that could revive his once glorious career, attorney Frank Galvin (Paul Newman) questions a key witness, Dr. Thompson (Joe Seneca), in the compelling courtroom drama The Verdict.

At the end of the hearing Galvin rises to give his summation.  Technically the case appears utterly lost to his side.  Galvin slowly stands, hesitantly looks as his notes, cast the sheet aside and reluctantly addresses the jury.

You know, so much of the time we’re just lost.

We say, “Please, God, tell us what is right; tell us what is true.” And there is no justice: the rich win, the poor are powerless. We become tired of hearing people lie.

And after a time, we become dead… a little dead. We think of ourselves as victims… and we become victims. We become… we become weak. We doubt ourselves, we doubt our beliefs. We doubt our institutions. And we doubt the law.

But today you are the law. You ARE the law. Not some book… not the lawyers… not the, a marble statue… or the trappings of the court. See those are just symbols of our desire to be just. They are… they are, in fact, a prayer: a fervent and a frightened prayer. In my religion, they say, “Act as if ye had faith… and faith will be given to you.” IF… if we are to have faith in justice, we need only to believe in ourselves. And ACT with justice. See, I believe there is justice in our hearts.

Now go back and read my Post of yesterday.  Read of the Citi executives paying token fines for lying to investors.  Read of the allegation that the 2009 data set in the US GDP report was a “bald-faced lie”.

Now read again, aloud to yourself if you can, the first few sentences of Galvin’s summation.  Here they are again (my emphasis).

You know, so much of the time we’re just lost.

We say, “Please, God, tell us what is right; tell us what is true.” And there is no justice: the rich win, the poor are powerless. We become tired of hearing people lie.

And after a time, we become dead… a little dead. We think of ourselves as victims… and we become victims. We become… we become weak. We doubt ourselves, we doubt our beliefs. We doubt our institutions. And we doubt the law.

I firmly believe that this is where millions of ordinary, hard-working, caring citizens of many countries have arrived today because of the lack of integrity, the lack of honesty and the lack of grace shown by so many in positions of power and privilege.

But do not despair because if we do that, then all is lost.  No, believe in the power of good men.  Back to the summation from the film:

In my religion, they say, “Act as if ye had faith… and faith will be given to you.” IF… if we are to have faith in justice, we need only to believe in ourselves. And ACT with justice. See, I believe there is justice in our hearts.

Exactly!

By Paul Handover

Of the people, for the people – huh!

It’s enough to make one weep!

Gettysburg Address

Just a couple of items from disparate sources came together last Friday to demonstrate just how possibly corrupt it has been over the last so many years!  But there is a golden lining to this stuff.

That is the ever increasing spread and reach of all forms of digital communications, from the humble email through to Wikileaks, is making it increasingly difficult for those that wish to cheat and lie their way through their lives, at the expense of others, to do so without detection.

Anyway, back to the theme of the Post.

The first item is from here (thanks to Naked Capitalism for the link):

Under the article title of – The Wages of Sin: Former Citi Execs Pay Token Fines for Lying to Investors

A news story today provides further confirmation of the rule by the banking classes in the US, with only token gestures to the rule of law.
(and after an in-depth review closes with:)
The message seems pretty clear. Sarbox [Sarbanes-Oxley Act. Ed]was intended to curtail phony corporate accounting in the wake of Enron. But why resort to complicated transactions like the energy company’s famed Raptors when Citi shows that mere lying will produce the same results with much less fuss?

The second from Karl Denninger, from which closes with these words are offered: GDP Report: Liar Liar Pants on Fire:

All three years of the revision period were revised down. Again, if a mistake or inaccuracy (as opposed to intentional falsehood) is responsible for errors, one would expect them to be normally distributed – that is, some would be positive, some negative.  This is obviously not the case.

Is there any good news in the report?  Well, yes – there was a material uptick in non-residential fixed investment, centered around equipment and software.  How much of this is a normal replacement cycle (deferred last year) and how much signifies real expansion is an open question and one not easily answered.  However, I wouldn’t call this particularly “robust”, despite the pump monkey characterization this morning in the media.

The drops in some of the previously-published numbers were, however, simply stunning.  For example, PCE (personal consumption) was previously reported for Q1/2010 as 2.13.  The revision is 1.33, a thirty percent downward revision.  That’s not an error, it was a falsehood.

Worse was the services false report.  The previous reported number for Q1/2010 was 0.69.  Revised was 0.03, a downward revision of ninety-five percent.

The services revision backward was truly sickening – the entirety of 2009 was negative with the exception of the fourth quarter, where all but the first was previously reported positive, and the changes were ridiculous.  First quarter was revised down from -0.13% to -0.75%, second from +0.09% to -0.79%, and so on.  Again, that’s not an error, it’s a lie.

Needless to say when I get all my graph source data updated, it’s going to look worse than it did – including my “government ponzi support” graph, one of my favorites.

The futures are diving on the report, as well they should.  Not because it’s bad – but because the entirety of the 2009 data set was a bald-faced lie.

Frankly, I’m much less interested in what is happening to Western economies – my views have been regularly reported on Learning from Dogs.

What appals me is how far we seem from those famous words in the Gettysburg Address given by President Abraham Lincoln on the afternoon of Thursday, November 19, 1863 (my emphasis):

It is rather for us to be here dedicated to the great task remaining before us—that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion—that we here highly resolve that these dead shall not have died in vain—that this nation, under God, shall have a new birth of freedom—and that government of the people, by the people, for the people, shall not perish from the earth.

Pres. Lincoln's words

P.S. As it happens, after finishing this article last Friday, Jean and I watched the film The Verdict in the evening.  The words used by the lawyer Frank Galvin (Paul Newman) in his summation struck me so powerfully that I have made them a separate Post for tomorrow.
By Paul Handover

Is thinking going out of fashion?

Another Yves Smith special!

Many will know that Naked Capitalism is a wonderful Blog and what Yves does is truly amazing.  (And a big ‘thank you’

Yves Smith

to Richard Smith who so ably stood in for Yves on her recent European trip.)

On the 29th July this year, Yves reran an article that she posted on May 11th, 2007.  It’s spot on, in my opinion.

Here’s how Yves starts the Post:

I am beginning to suspect that many are reacting to the over-stimulation of the modern world – the accelerating pace of change, data overload, time pressure, work and relationship instability – by turning off their brains. The rise of fundamentalism and the “family values” push, both efforts to turn back the clock, is one set of responses.

Another is the rise of sound-biting, of using pithy communications to cut through the clutter of the daily information assault. But sound biting is inherently reductionist. It doesn’t permit nuanced argument, or pointing out fuzziness in data, or shades of grey. Sound bites are great for simple, emotional appeals, lousy for policy development (which is one reason why this country seems incapable of having an intelligent discussion on important topics like health care. The public has been trained out of having a long enough attention span to listen to alternatives).

That is so true. Just re-read the sentences, “But sound biting is inherently reductionist. It doesn’t permit nuanced argument, or pointing out fuzziness in data, or shades of grey.” (My italics.)

We live in such a complex world that reducing any important idea or concept to a headline or to an executive summary is, in its own way, significantly short on integrity.

That article from Yves concludes thus:

Most businesses operated in competitive environments far too complex for a terse phrase to be a useful guide to action. Yet a magic incantation, a talisman, a battle cry is terribly appealing. But those who can resist the temptation of relying on a simple playbook and face the complexity and uncertainty of their environment are likely to steer a better path. But understanding risk and adapting also demands far more courage that trusting simple ideas.

Ironically, if one reflects for a moment, that closing sentence is a pretty good executive summary! “…… understanding risk and adapting also demands far more courage that trusting simple ideas.”

Precisely!

By Paul Handover

Our economic outlook – where to?

The fundamentals always win, in the end!

Those that know me or have followed Learning from Dogs for the last year (and thank you!) know that I am pretty pessimistic about the economic future for North America and Europe (at least!).  I speak not as an economist, far from it, but as someone sufficiently old to think that many millions of individuals and their countries have been living on borrowed time for decades.

David Kauders

Twenty years ago I didn’t really do anything than feel uncomfortable when friends announced another new house with mortgages far in excess of the old ‘rule’ of 1.5 to 2.0 times one’s annual income.

Then I came across David Kauders of Kauders Portfolio Management who explained in fundamental ways why this was all going to end in tears, so to speak.  Wasn’t he right!

Thanks to David, I am moderately more well-off than I would have been – without a doubt.  Not only did David manage my private pension, he greatly influenced my modest personal investments outside his portfolio.

Where’s this heading?  This Blog is an attempt to show that integrity in all that we all do is not only the best personal strategy, it is the only viable course for mankind in bringing us back from the brink of global disaster.  So a couple of recent items about economic matters from people of great integrity underlined the value of mentioning them in this Blog.

The first is a talk given by Elizabeth Warren two years ago, in January 2008, entitled The Coming Collapse of the Middle Class.  It’s nearly an hour long but very well worth watching especially in the way that Ms. Warren shows how counter-intuitive is our understanding of how family costs have risen over the last 30 years.  Although it applies to the US, it certainly has relevance for British viewers.  Do watch it.

Here’s how the video is described:

Distinguished law scholar Elizabeth Warren teaches contract law, bankruptcy, and commercial law at Harvard Law School. She is an outspoken critic of America’s credit economy, which she has linked to the continuing rise in bankruptcy among the middle-class.

Next is that stalwart Karl Denninger.  How he finds the energy and enthusiasm for publishing his Market Ticker is beyond me.  He’s not subtle but his personal integrity is beyond reproach in my opinion.

Karl was recently interviewed by Bill Still (Bill produced the highly acclaimed film The Money Masters) and despite the videos being heavily edited Karl says “and for the most part accurately captures my views on the topics covered.”

Again these interviews are not short but, again, if you want to understand how dangerous the fundamentals still are – then watch them.

Karl Denninger, author of Market Ticker and winner of the 2008 Reed Irvine Accuracy in Media Award explains the roots of the current crisis and why real economic growth is impossible. He explains why the stock market rebounded in 2009 and why that can’t continue. He explains what needs to be done with the banks and predicts that all the big banks will fail.

Part One:

Part Two:

Finally back to David Kauders.  He also publishes an opinion website Contrary View. Here’s what David wrote in February 2010.

No. 73 22nd February 2010 Predicting lost decades

There is plenty of evidence from Japan about lost decades for investments. Japan has now lost two decades in equity and property investment, during which time only Government Bonds provided any sanctuary. All policy options failed, because none tackled the real problem, which is that there is already too much debt. What lessons can be drawn for Britain?

Shares here have certainly had a lost decade. On the Japanese evidence, they may well suffer another lost decade. Property has only hit minor bumps, so the Japanese experience suggests that property may suffer a long decline for two decades. In the UK, the Bank of England’s support for mortgages will be withdrawn over the next two years, which itself threatens prices. Why, though, the hysteria about Government debt?

It is questionable whether pundits appreciate the extent of the private sector debt problem, which explains why two groups of economists can offer totally contradictory remedies. In a world with no Gold standard and therefore no anchor to the monetary system, Government debt is relatively safe. The global economy is perched on a knife edge, with a permanent loss of output that must cause income loss and therefore restrict the capacity of households to service their debts. Seeing the commercial risks, banks are still restricting lending, which means there can be no sustained recovery.

There is a misconceived demographic argument being touted at present, which completely ignores the real driver of the post-1945 expansion, namely increased credit. That credit growth has simply gone too far and now brings its own problems. For those people who neither saw the credit crunch nor the long fall in interest rates and inflation coming, to now be credible in predicting a lost decade for bonds, is itself unbelievable.

You see how it all makes sense – the fundamentals are in charge, and always will be!

You be safe out there!

By Paul Handover

Anniversary message from Paul

Learning from Dogs has been running for one year.

On July 15th, 2009 a post called Parenting lessons from Dogs started what has now become a bit of a ‘habit’.  But more reflections tomorrow.

Reach for the Skies

Today I want to voice something that has been running around my mind for some time.  It is whether we give in to the mounting doom and gloom at so many levels in our societies (and it can be a very compelling draw) or whether we see this as a painful but necessary period where slowly but surely the desires of ordinary people; for a fairer, more truthful, more integrous world are gaining power.

And I’m going to use Richard Branson to voice it for me!

(Now this is an unusually long Post so I’ve inserted the Read More divider to prevent the Post visually swamping your browser.)

Read the rest of this article

Pass the parcel

Congratulations to Martin Wolf of the Financial Times

An article was published in the FT on the 29th June that beautifully describes the ways in which we are all being so beautifully ‘screwed’ by the world of finance.  (Note, you may need to register to see this article, but please do.  Registration is free and the FT is full of great content.)

It starts like this:

This global game of ‘pass the parcel’ cannot end well

By Martin Wolf

Published: June 29 2010 23:31 | Last updated: June 29 2010 23:31

Paul here. Pass the parcel is a game for kids’ parties that involves passing a multi-wrapped ‘present’ around where the kid holding the parcel when the music stops gets to unwrap one sheet, then passes it on, etc., etc., until the kid holding the parcel with just one wrapper on it when the music stops gets the present.

Martin continues:

Our adult game of pass the parcel is far more sophisticated: there are several games going on at once; and there are many parcels, some containing prizes; others containing penalties.

So here are four such games. The first is played within the financial sector: the aim of each player is to ensure that bad loans end up somewhere else, while collecting a fee for each sheet unwrapped along the way. The second game is played between finance and the rest of the private sector, the aim being to sell the latter as much service as possible, while ensuring that the losses end up with the customers. The third game is played between the financial sector and the state: its aim is to ensure that, if all else fails, the state ends up with these losses. Then, when the state has bailed it out, finance can win by shorting the states it has bankrupted. The fourth game is played among states. The aim is to ensure that other countries end up with any excess supply. Surplus countries win by serially bankrupting the private and then public sectors of trading partners. It might be called: “beggaring your neighbours, while feeling moral about it”. It is the game Germany is playing so well in the eurozone.

It’s an article that really does need to be read in full. Martin concludes thus:

Yet it is quite clear that an isolated discussion of the need to reduce fiscal deficits will not work. These cannot be shrunk without resolving the overindebtedness of damaged private sectors, reducing external imbalances, or both.

The games we have been playing have been economically damaging. We will be on the road to recovery, when we start playing better ones.

Now I really don’t want Learning from Dogs to focus on ‘doom and gloom’. There’s more than enough of that to go round twice and thrice.

But when someone writes in such a great clarifying way – then it deserves the widest promulgation. The more we all know about the games being played, the better we can change the rules to benefit society.  Well done, Martin.

By Paul Handover

BP – where lies the truth?

‘Among the calamities of war may be jointly numbered the diminution of the love of truth, by the falsehoods which interest dictates and credulity encourages.‘ (Samuel Johnson, from The Idler, 1758)

I have used this quotation simply because we need to remind ourselves that the media, politicians, journalists and many ordinary folk find it easier to be extreme, opinionated, outlandish and provocative (ergo, ignorant) than to be thoughtful and reflective about an incredibly complex situation.  Rant and blame, while making for great reading or viewing, is not helpful.

This all came to mind from reading a recent article in The Financial Times (you may need to register to view it) which was titled:

Britain should back down over BP

By Clive Crook

That article starts like this:

A week ago I criticised the US media for childishly demanding that President Barack Obama “just do something” about the oil spill in the Gulf of Mexico, observing there was much to be said for a leader who stayed calm in a crisis. Next day, no doubt as a result, Mr Obama became pointedly less calm. He called for some “ass to kick”, a very Bushian sentiment, and dialled up the invective against BP – which he likes to call by its old name, British Petroleum, to underline the company’s alien perfidy.

The US outcry against the company is still building, and the administration, intent on deflecting its critics, has put itself in the vanguard. Criminal investigations and efforts to remove a statutory cap on the company’s liability are under way. It is ominous that lawyers are working hard, with the administration’s blessing, to enlarge the very concept of civil liability.

And concludes thus:

The question of whether even this company’s mighty resources are adequate to meet these demands cannot be dismissed. In such circumstances, I cannot see why BP has hesitated to suspend its dividend. The idea that it can take this calamity in its stride and proceed on the basis of business as usual is absurd, and politically foolish too, since it is a provocation to critics intent on vengeance.

The Gulf disaster will have far-reaching economic and energy-policy implications. The right liability and mandatory insurance regimes for deepwater drilling are high on the list. No doubt the White House should worry less about kicking ass and more about thinking these questions through. But British complaints that BP is being “scapegoated” will not help reason to prevail. Let us not add insult to injury.

Frankly, I don’t have either the knowledge or the competence to judge the validity of Mr Crook’s article and, as so often in cases like this, took to reading the comments as they can frequently shed more light on a particular issue.

And that is how I came across the following comment from RiskManager. Whoever you are, well done on taking the time to put what feels like some badly needed balance into this issue. This in no way lessens the terrible harm being metered out on innocents, just as in any ‘war’, but this is not about winning – it is about learning.

From RiskManager

Unlike ANY U.S. company EVER in a similar situation (Exxon, Union Carbide, Accidental Petroleum, etc. etc. – its ALL of them), BP has indeed done the right thing since the blowout by immediately admitting its liability/responsibilities. It has mobilised the largest containment and clean up operation ever and immediately issued compensation to those affected. The effort to stem the well, something never done before at this depth, has seen the assembly of the best experts in the world and the greatest concentration of sub-sea equipment perhaps ever seen. That efforts have failed so far to stem the leak is a fact that testifies to the challenge of the task, a challenge that cannot be understood until the failed Blowout Preventer (BOP) is recovered and we find out why the accident happened and why the top-kill did not work. What is going on inside the BOP?

And there it is. Today we just do not know. The failsafe in place, a modern BOP, failed. We don’t yet know why. BP may well. Transocean and Cameron the same. When we do recover the failed BOP which is under subpoena already all the questions will be answered. Until then it is fatuous and unhelpful to go round looking for bottoms to boot.

Why the gas kick happened down the well seems to me to be secondary. Things happen. That’s why we have a failsafe, that’s why there was BOP installed and paid for by BP, the failsafe device.

An editorial in The Daily Telegraph of yesterday said….

“It should not be difficult to rewrite the rules to make sure that no deep-water drilling is permitted without a fail-safe arrangement in place from the start,…..”

No, these are the current rules. The fail-safe arrangement was the blowout preventer, the one that failed. Note how BP always refer to it as the “failed blowout preventer”. Always.

The BOP has multiple (five I think) valves, of varying types with at least one that is meant to shear the casing, the drill pipe and anything else.

One valve was operated from the surface by the tool pusher who testified as such, indeed he operated it before the Offshore Installation Manager gave permission as mud circulation had been lost. That failsafe BOP valve failed.

The next I believe is a failsafe that shuts when contact is lost with the rig, like a dead mans handle on a train. As the Deepwater Horizon rig sank and contact was physically broken (or before), it also failed.

The others (three ?? ) are I believe all meant to be operable by sub sea vehicles (ROV’s). The first days after the blowout were spent trying to shut these valves as per the design of the failsafe device, the blowout preventer. All these valves failed.

That’s a lot of failure. Why??

Now, if BP should have known about whatever is found to have happened in the failsafe BOP then it is their fault. If sub-contractors installing and operating the BOP or is manufacturers lied or were negligent it is there fault.

If the blowout preventer had worked as intended, as the failsafe final defence device, there would have been no loss of life and no oil spilled.

Given the sums of money involved I suggest the UK immediately prepares to seize US assets of potentially liable companies or associates in the event that BP is found to be the victim of its supplier’s negligence. Unlike BP these companies have already sought protection of US law, are paying dividends and are saying nothing at all as BP gets a kicking

At the end of the day, we (you and I) need the deepwater oil as the worlds easy and cheap to produce oil reserves are controlled by the OPEC cartel and restricted to about a 40% of global production from 80% of reserves. But however many failsafes, however many regulations, human activities entail risk. The deep water drilling was thought to be safe with a modern BOP. It wasn’t. Now we need a BOP and inspection/testing regime that really is failsafe and expertise in responding if that fails. I would have thought the facility to install a new shear ram at the well head below the BOP after a blowout would do the job, or a fitting at the top of the LMRP that a ready built new valve could be installed on top of post blowout would do the job..

Ironically BP will certainly be the world experts in these matters after this accident and response.

P.S. Shortly after completing this Post, I read the following from the BBC. (Extract provided only – see link for full BBC article.)

Barack Obama calls for clean energy push

President Obama

US President Barack Obama has called on his Democratic Party and other supporters to back a government campaign for clean energy.

In a statement aimed both at paid-up Democratic Party members and at millions of individuals who backed his 2008 presidential bid online, the president asked his network to lend their name to a campaign to change the way America produces and consumes its energy.

“We are working to hold BP accountable for the damage to the lands and the livelihoods of the Gulf Coast, and we are taking strong precautions to make certain a spill like this never happens again,” Mr Obama said.

“Beyond the risks inherent in drilling four miles beneath the surface of the Earth, our dependence on oil means that we will continue to send billions of dollars of our hard-earned wealth to other countries every month – including many in dangerous and unstable regions,” he said.

“In other words, our continued dependence on fossil fuels will jeopardise our national security. It will smother our planet. And it will continue to put our economy and our environment at risk.

“We cannot delay any longer, and that is why I am asking for your help.”

Let me close as I started, by using an old saying:

“It’s an ill wind that blows no good.” (John Heywood (c.1497-1580))

By Paul Handover