Self-fulfilling Prophecy

There are hedges that may bring about that against which they seek to guard their drafters.

Among these, one has to count this.  

The European Investment Bank, which is making loans to various Greek businesses (in order to fulfill a commitment to issue a total of 600 million euros of such loans by January 2013, and 1.4 billion euros by the end of 2015) has taken to including clauses that account for the possibility that Greece will resume use of the drachma.

As I mentioned in mid February of this year, the EIB is one party in a “troika” of institutions bargaining on behalf of the central Eurozone countries with the countries of the zone’s more troubled periphery. The EU itself and the IMF are the other members of said troika.

The key coming date is May 6. That is Election Day in Greece, and polls indicate that the coalition of political parties inclined to pursue the country’s dealings with the troika [roughly speaking, a center-right party and a center-left party] are in position to win a one vote majority in the next parliament. But this leaves open the intriguing question: what if anything will the electorate make of drachma clauses? Don’t they rather dent the we’re-all-in-this-together mood you’d want to foster if you wanted to save the unity of the Eurozone? Don’t they suggest that the troika and the nations by whom it is dominated are looking out for themselves and Greece ought to do so as well?

I suspect the governing coalition may not get that one-vote majority on which it is counting, and will not survive this election as a governing coalition.

Talking about Greek Bonds

The government of Greece finds itself (fittingly, if you're into the whole mythology scene) trying to navigate between Scylla and Charybdis. Thus far, it has managed to avoid running aground, though nobody thinks it has reached the safety of broad and deep waters.

Spend at least a moment to send good thoughts to the suffering prime minister, Lucas Papademos. He has to negotiate with Europe on the one hand (and "Europe" means three distinct institutions -- the European Union, the central bank, and the IMF, collectively the "official creditors" or the Troika) and with his own country's ticked off unions on the other. In principle, there is a fourth party (though that rather ruins the mythic resonance) -- the class of private/unofficial owners of his country's sovereign debt. But, as Felix Salmon has aptly observed, the bondholders as represented by the International Institute of Finance, have demonstrated that they will "agree to pretty much anything," so they don't really count as a factor and we've got the resonance back.

Dealing with the aforesaid European institutions is tricky because it means, among much else, appealing to politicians who are accountable to a German electorate which believes that it has already lost quite enough money down the Greek sinkhole.

Der Spiegel recently quoted one important German politician putting the point in these terms, "There is no money for a standstill in reforms."

But by "reform" that politician -- Horst Seehofer -- means roughly austerity, a pull-back in social-welfare spending.

Yet Papademos' own constituents have already given him a very good indication of how much appetite they have for the sort of reform Seehofer has in mind.

Meanwhile, though, Sarkozy and Merkel seem to have made up their minds to help him through this difficult passage. This week they've developed a plan  that will steer the crucial funds, apparently they'll be coming from the European Financial Stability Facility, Europe's answer to America's TARP, into the hands of both the "official creditors" and to some (cooperating) private creditors without ever putting a single coin into the hands of any Greek officials at all.

This is unkind to delusions of sovereignty, but ... so is life.
The blogger who gives himself the wonderfully Bagehotian name "London Banker" has his own take on the matter. This is what he wrote Tuesday: "If I were a Greek politician, I could probably live with this deal. While it is humiliating to have the money held and distributed elsewhere, it is still money that forestalls an otherwise certain default. And Greece can always default later anyway, should that prove convenient ... The can is kicked down the road for another quarter, and the bankers can pay themselves their 2011 bonuses."

Top Financial Stories 2011

I generally ask myself at this time of year what were the biggest stories of the past twelve months, in business/financial news.

By "stories," I don't mean themes, such as "Digital Revolution" or "EU unraveling." I mean stories, such as one might have seen in a particular newspaper on some specific day. Of course, I choose the ones I do largely because they illustrate an important theme, and in the list below (an innovation this year) I'll spell out and italicize the theme. Yet the theme itself isn't the story.

Further, I don't rank them, as in a top ten list. I assign one top story to each of the twelve months.

All that said, here is this year's list.

January: Isolating Iran. After the Central Bank of India, under pressure, withdraws from the Asian Clearing Union (which had been a crucial conduit for payments to Iran for petroleum), Indian companies that import oil from Iran scramble to find another way to send their payments and keep the flow going. Their substitute arrangement involved payments through the Hamburg, Germany based EIH Bank. The isolation of Iran would become a bigger theme for many industrialized nations later in the year, but we may as well use this as the kick-off.  

February:  food versus fuel. The US Department of Agriculture announces deregulation of one strain of genetically modified corn -- a strain designed for use as ethanol, the gasoline substitute. This announcement feeds into several ongoing stories -- one of them is the widening perception of the failure of ethanol (at least the traditional "first generation" sort) as an instrument of policy.

March: Banking for the poor. The central bank in Bengaldesh dials up the conflict over microfinance, ordering that the Grameen Bank cut its ties with its founder, Yunus. Arguments in that country's high court Monday, March 7.

April: Nuclear power. Continuing crisis at Japan's Fukushima I nuclear power plant forces advocates of nuclear power generation world-wide onto the defensive. On April 11, Japan's Nuclear and Industrial Safety Agency rated the disaster as a "major accident" or a level 7 event on an internationally recognized scale.

May:  Exchange consolidation. Nymex OMX Group and the Intercontinental Exchange (ICE)  withdraw their hostile bid for NYSE Euronext, apparently leaving a clear path for NYSE's friendly merger with Deutsche Boerse. 

June:  Political scandal. Oops. Time reporter Michael Grunwald writes this month, "reports of Solyndra's death have been greatly exaggerated." But they weren't. The company, an Obama administrration  favorite, would file for bankruptcy two months later.

July:  Digital revolution.   Bankruptcy of famed bookstore chain Borders turns into a liquidation proceeding as re-org plans fall apart.  Bricks-and-mortars retailing takes another in a series of hits.

August.  Fiscal policy. US Congress and President seek to resolve long-running debt-ceiling soap opera.  S&P downgrade of US Treasury debt. End up just perpetuating the soap opera.

September:  Banking. UBS Rogue trader Kweku Adoboli arrested, September 15, 3:30 AM London time.

October: Allegations of naked-shorting conspiracy and pushback.  Ali Nazerali brings a libel suit in Canada against Deep Capture and affiliated entities.

November.  Retailing turmoil. Releases by Amazon and Barnes & Noble unleash the dogs of war, against each other and Apple, in the retail market for tablet computers.

December. Fiscal policy.  France and Germany develop an ambitious joint plan to turn the eurozone -- or perhaps the whole of the EU -- into a fiscal union. Cameron, for the Brits, keeps his distance.

Yes, there is a hometown bias to this compilation. Seven of the twelve top stories are North American in character, six of those are US based. The five that one might attribute to the rest of the world are divided among western Asia (two), eastern Asia (one), and Europe (two).

I have no proposals as to what you might make of that.

Happy new year, everyone.

Top Financial Stories 2009

I generally ask myself at this time of year what were the biggest stories of the past twelve months, in business/financial news.

By "stories," I don't mean themes, such as "Doubts about efficacy of SEC regulation" or "US/EU relations." I mean stories, such as one might have seen in a particular newspaper on some specific day. Of course, I choose the ones I do largely because they illustrate an important theme. But the theme itself isn't the story.

Further, I don't rank them, as in a top ten list. For the first couple of years that I did this I simply gave one "top" story from each of the twelve months of the year now ending. Last year was so wild, especially in its second half that I couldn't stick to the one-a-month presentation. I ended up with a list of 18 big stories, two per month starting with July.

This year, for the sake of balance I suppose, I have produced another list of 18 stories, twice a month this time for the first six months, then just one a month from July.

All that understood: Here we go! The list is dominated this year by a meta-theme. We might call it: the triumph of experience over hope.

January. (a) The inauguration of a new President of the United States, and Barack Obama's choice of Timothy Geithner to head Treasury. Geithner's presence in the new administration is not a sign of change, but one of continuity. During most of the Bush years, Geithner was the very visible President of the Federal Reserve Bank of New York.

(b) Financial crisis in Iceland brings street protests, shake-up in government there. Iceland, on the one hand, has long been a free market economy, with taxes lower than those of most other OECD countries. On the other hand, it has maintained a Nordic welfare system, including universal health care and post-secondary education. Whatever may be true of Las Vegas: what happens in Iceland, is widely watched elsewhere.

February. (a) Obama signs the stimulus act, a/k/a the American Recovery and Reinvestment Act (ARRA). The full title seems better to convey the almost cartoonish Keynesianism involved: "An act making supplemental appropriations for job preservation and creation, infrastructure investment, energy efficiency and science, assistance to the unemployed, and State and local fiscal stabilization, for the fiscal year ending September 30, 2009, and for other purposes."

(b) Zimbabwe asks African states for $2 billion in aid -- Mugabe vows to continue brilliant policies. I'll simply offer a link here.

March. (a) Bernie Madoff pleads guilty without a plea deal, claims to have acted alone. Of course, he did not act alone, but by taking the fall and keeping mum on confederates, he appears to have earned some necessary prison cred.

(b) UK Financial Services Authority adopts new rules on derivatives. In London as in Washington, complicated and insufficiently regulated derivatives are widely blamed for the crisis of 2008. That diagnosis is jejune, but is to be expected. The particular derivatives that draw fire in the UK are known as "contracts for difference."

April. (a) Dow Chemical finally closes on its Rohm & Haas deal. The idea of this merger was to craete a "leading specialty chemicals and advanced materials company." Its logic would have been more powerful, and the deal would have gone through smoothly, had the timing been a bit better.

(b) Chrysler files for bankruptcy This is the first of three headline events on our list of 18 that may stand in for a single momentous theme -- the frog-marched restructuring of the US automotive industry in general. And we won't bother listing separately that GM too passed through a bankruptcy court proceeding.

May. (a) China-Brazil oil/loan deal The Brazilian oil company Petrobras finalized a deal with the People's Republic of China. Petrobras got a (US)$10 billion loan and PRC got a long-term supply of 'black gold.' This is a straw in a lot of different winds -- the rise of China to global prominence on the back of its huge dollar reserves is one of them.

(b) Obama announces new CAFE/ emissions standards. This is our second auto industry headline of the year. The program is projected to reduce oil consumption over the period from the 2012 to the 2016 model years by approximately 1.8 billion barrels. (As you probably would expect, dear reader, I think such projections warrant skepticism.)

June. (a)US Supreme Court decides Traveler's Indemnity v. Bailey. Asbestos is one of the big "mass tort" issues that have rocked our civil legal system in recent decades. Travelers thought it had a deal that limited its exposure via a settlement trust established by order of the federal district court in Manhattan back in 1986. Unfortunately for them, state law claims and "collateral attacks" made that trickier than they had expected.

(b) Elections to Euro parliament strengthen the center-right parties. For purposes of the italicized statement, anyway, we may understand the term "right" to mean the group of parties or factions that are suspicious about the role of the Parliament they are joining, either on behalf of separate sovereign nationalisms or on behalf of EU-regulated global commercial concerns or both. The "left," which lost this round, consists of those that see a need for a more activist EU.

From here on we are presenting just one headline per month.

July. Cash-for-clunkers program in the US. This is our final US-auto-industry headline. There was always an ambiguity to the plan. Was it designed chiefly to stimulate the auto industry, or to improve fuel efficiency? The goals aren't obviously in harmony. Still, any critique of its efficacy in one respect could be deflected by pointing to the other.

August. Settlement of US/Swiss Dispute over UBS Confidential Client Information. The relationship between Switzerland and the US seems to have grown closer in a number of respects over the last year.

September. Target Corp. declassifies its board Reform has come to the field of corporate governance, though what over-all impact such reforms may end up having it is hard to say.

October. Ireland votes in favor of Lisbon Treaty, effectively secures the new continent-wide government It is difficult to tell where Europe is headed. The Lisbon Treaty would certainly seem to be a step toward closer political integration. But the European Parliamentary elections, as noted above, were won by parties skeptical thereof, and there are a lot of centrifugal forces at work.

November. What is patentable? SCOTUS hears arguments. My own expectation is as follows: (a) the Justices will uphold the court below in its finding that Bilski's 'process' is really an abstract idea and thus not patentable; and (b) they will work harder than the court did below in order to define what is or isn't an abstract idea.

December. Two crucial bills advance through the Houses of the US Congress -- the health care reforms and the financial-regulatory system overhaul.
It seems very likely that something will be enacted into law in both of these areas sometime early next year. But I could be wrong even about that.