Rising Tensions

May 18, 2010 Leave a comment

image from cnsnews.com

Arizona’s decision on April 23rd to make illegal immigration a state misdemeanour in addition to a federal civil violation has sparked serious controversy. The law requires state police to check the papers of anyone whose immigration status they have “reasonable” cause to doubt, forcing all non-US citizens to carry documents proving their immigration status. The new law has caused a national uproar, as Americans claim the legislation is un-American and  could lead to racial profiling. On May 1st, about a million people across the country took to the streets to protest Arizona’s legislation. The cancellation of corporate conferences, a possible tourism boycott and talk of relocating Major League Baseball’s 2011 All-Star Game worry some Arizonans.

The number of illegal immigrants in the U.S. has ballooned in the past decade to between 11 and 12 million, with most coming from Central America. Politicians often focus on the negative consequences created by illegal immigrants. As immigrants are exploited by their employers, wages are driven down. Not surprisingly then, anti-immigrant sentiment is highest in places where unemployment is highest. Historically considered a federal responsibility, the federal government has struggled to deal with this inflammatory issue. Although pres. Obama has voiced his commitment to making progress on the immigration issue, nothing of substance has been produced by the Obama administration.

America claims to be a melting pot, a country built by immigrants, and a compassionate nation. Illegal immigration presents many seemingly unsolvable problems, but it’s not going away. As states struggle to manage illegal immigration, the Obama administration has a duty to set the tone for the nation. Its silence is deafening.

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The Tale of the Fat Finger

May 11, 2010 Leave a comment

image from seekingalpha.com

Traders may need to take some typing classes. Last week, the stock market experienced one of the most eventful days in its history, with at one point the Dow Jones industrial average dropping almost 1,000 points. The plummet began around mid-afternoon and within 20 minutes, America’s top 30 firms saw their share prices plunge almost 9%, wiping out billions. Shares of Accenture, a large consulting firm, fell from $40 to one penny. P&G’s stock price was down more than 30% at one point.  As chaos ensued, reporters, traders and institutions struggled to identify the cause of such a precipitous drop in the market.

Some began to speculate that a trading error known as a “fat finger problem” at a major investment bank, where a trader had mistyped a “b” for billion instead of an “m” for million, in a trade of futures, involving Procter and Gamble, was the cause. Others dismissed this theory, arguing that the market drop was caused by a computer malfunction. Conspiracy theorists chimed in, blaming extraterrestrials, North Korea and terrorists. Today, the head of the SEC, Mary Shapiro, testified before a congressional panel about the events. While stating that the SEC had ruled out the “fat finger” theory and malicious market intervention, she admitted that her organization had not yet determined the cause of the market plunge.

This whole mess holds important lessons for market investors and regulators. The idea that a typo could send the stock market plummeting and spur billion-dollar losses proves that the market needs stricter regulation and oversight (preferably internal). Six major U.S. securities exchanges admit there is a need for a uniform system of “circuit breakers” to slow trading during times of extreme market volatility. While executives of the New York Stock Exchange and Nasdaq believe they are capable of self-regulating, they agree that changes to the system of overseeing the financial exchanges are needed. Larry Leibowitz, chief operating officer for NYSE, says “when a trading problem occurs . . . there is no central mechanism to coordinate a market-wide response.” Last week’s market plunge has few lasting consequences. Still, it should serve as a lesson to add stability and safeguards to the market.

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Valdez the Sequel?

May 5, 2010 Leave a comment

image from davegranlund.com

On April 20, 2010, an explosion on a BP drilling rig , 50 miles off the coast of Louisiana, killed 11 crew members. Two days later, the rig sank and crude oil began to leak at a fast rate. BP’s initial estimate of 42,000 gallons of oil leaking each day was dispelled by a government-announced estimate of a rate 5-times that. BP’s reaction to the catastrophe has been shaky and ineffective. The company, responsible for the 1989 Exxon Valdez catastrophic environmental disaster where a BP oil tanker crashed and spilled more than 10.8 millions gallons of crude oil, should be better-equipped to deal with such an event.

Although the company acknowledges it will be judged by “the quality, intensity, speed and efficacy” of its response, there have been several slip ups so far… BP has:

* severely underestimated the scale of the leak

* been accused by the chairman of the House Energy and Commerce Committee of “the apparent lack of an adequate plan to contain the spreading environmental damage”

* taken the “early misstep” of offering Alabama fishermen jobs to help fight the oil spill through contracts with clauses agreeing not to sue BP (clauses have been since removed)

BP, originally known as British Petroleum, but more recently redubbed “Beyond Petroleum”,lost its focus on maintenace and safety early this decade. Events like a 2005 explosion at a refinery in Texas and a 2006 leaky BP oil pipeline in Alaska resulted in several deaths, hundreds of injuries and record fines (for neglecting to correct safety violations from OSHA, the Occupational Safety & Health Administration).  Since these events, BP’s new chief, Tony Hayward, has been seen as transforming the company culture to emphasize safety. Unfortunately, his efforts may have been in vain, as the current catastrophe will likely overshadow any of BP’s more recent successes.  There is still no explanation for what set off the explosion on the night of April 20. As fishermen lose their livelihoods and animals lose their lives and habitats, effective action, not PR, is needed.

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Did Goldman Sachs [enter euphemism for LIE here]?

April 28, 2010 Leave a comment

cartoon from Dave Grandlund, davegranlund.com

Yesterday’s 10-hour grilling of Goldman Sachs executives in D.C. provided for hours of entertainment. You could actually see the strain in the Goldman folks’ faces as they tried to maintain blank stares and not roll their eyes. Senators accused the executives of formulating a strategy to streeeeeetch their response times to use up questioning time. The congressional panel’s senators did not refrain from vocalizing their frustration as the executives attempted to dodge straight answers to absolutely every single question. But, really, what did they expect? Since when is fiduciary responsibility and morality expected from Wall Street? We can’t even get it from elected officials.

It seems very much like Goldman Sachs took advantage of their golden reputation and information asymmetry to profit off of “less-sophisticated” clients. That’s pretty clear from criminalizing emails that lament the difficulty of making money from deals with hedge funds who “tend to be on the same side” as Goldman on bets and “know how things work”. It was great to watch an executive explain how HE interpreted that email. Creative interpretation. They really are artistic geniuses.

Goldman Sachs played a role in the financial crisis, but probably a much smaller role than government agencies who pushed for more people to become homeowners, mortgage lenders who didn’t even verify incomes before granting mortgages, the many institutions who securitized these loans and regulatory bodies who should have seen the crisis coming. Goldman, who likes to say that its record profits and enviable performance come from unmatched human capital, took advantage of its reputation to profit from clients who knew less about the products than they should have, and probably didn’t know that Goldman was betting against them. This “expose” should be a wake-up call, no more, no less.

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Dangerous Waters

April 26, 2010 Leave a comment

cartoon from the San Diego Union

For my generation it is difficult to imagine that the Koreas were ever united. After 60 years of war (technically the two countries are still at war since they only agreed to a cease-fire armistice), the countries’ relations do not look to improve any time in the near future. After last month’s sinking of a South Korean ship, which is presumed to have been from a torpedo attack from the North, tensions have risen. Last week, the North “confiscated” five South Korean-owned properties at a jointly operated mountain resort in the North. This is sure to add to the North’s “desirability” as a destination of FDI. It is sad the North Korean people must continue to suffer under such ineptitude.

On March 26, a South Korean ship, the Cheonan, sank after an explosion broke it in two. Tragically, 40 sailors were killed and six are still missing after the unexplained explosion. After raising the wreckage from the sea, a team of international investigators are hard at work trying to determine the cause of the explosion, which is believed to be external. South Korea’s President, Lee Myung-bak, has met with the country’s former presidents, which is, apparently, common to do during a national crisis (wish the U.S. did this…).

Although there are historical, economical and now cultural divides between the Korean nations, North Korea’s “dear leader” still stands as the largest impediment to any peaceful progress between the two countries. His actions seem to be based on a fragile ego and extreme selfishness. It is interested to note that before the Korean War, North Korea was the industrial half of the country, while the South was agricultural.  If it is confirmed that explosion was an attack from the North, South Korea must respond in a way that punishes Kim Jong-il, without hurting the people. This will be a difficult, if not impossible, balance to achieve.

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All that glitters…

April 19, 2010 Leave a comment

cartoon from Mike Luckovich, Creators Syndicate

It was a tough weekend for Goldman Sachs. On Friday, the SEC announced it was bringing a civil suit against the Wall Street titan and one of its VPs, Frabice Tourre. The SEC claims the bank created and sold a mortgage investment vehicle that was secretly intended to fail.  In January, Goldman’s CEO, Lloyd Blankfein, testified before Congress that his bank did not “bet against” its clients, it was merely a “market maker”. The SEC begs to differ.

In February 2007, at the request of John Paulson, a Goldman client who wanted to bet against the housing market, the bank created an investment vehicle called Abacus 2007-AC1. Although Goldman told investors that the bonds in Abacus would be chosen by an independent manager, Paulson was allowed to hand-pick mortgage bonds he believed were most likely to lose value. The investment was then sold to investors, including pension funds, insurance companies and foreign banks. After the investment lost value, these investors lost billions, while Paulson profited more than $3 billion. According to Robert Khuzami, head of the SEC’s enforcement division,“the product was new and complex but the deception and conflicts are old and simple”.

After reading a letter where Frabice writes

“More and more leverage in the system, The whole building is about to collapse anytime now … Only potential survivor, the fabulous Fab[rice Tourre] … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrousities!!!”

Referring to himself as “the Fabulous Fab”, it is obvious he is a major douchebag. Possibly, a wall street stars who is still trying to live out his high school popularity fantasies and takes his”power” a little too seriously? Classic case of hubris. For the life of me I cannot understand why people have not learned to self-censor their emails. If you do not want something to be repeated, reprinted, or used against you, DON’T PUT IT IN PRINT. Obviously there will be some populist sentiment and satisfaction behind Goldman’s legal troubles. After being known as the “golden child” of Wall Street for so long and continuing to make record profits and record bonuses in spite of the financial crisis, Goldman seems to have suffered few consequences for its role in the crisis. It was obviously a major player, in the way it was tied up with institutions like AIG. Unfortunately, for Goldman, it makes the perfect scapegoat.

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A Whale of a Problem

April 15, 2010 Leave a comment

image from cartoonstock.com

Negotiations are underway to create new rules for the whale-hunting industry. As protesters, organizations like Greenpeace, and documentaries like “The Cove” illustrate, the topic is inflammatory. Since 1986, there has been an international moratorium on whale hunting. In spite of the treaty, the number of whales killed each year has risen steadily in the past couple decades, as Norway and Iceland have opted out and Japan has claimed to be taking whales for scientific study. The current negotiations address the treaty’s failure and search for a more effective compromise.

The current talks have yielded a deal that would allow the three whaling countries to continue whale-hunting, at reduced numbers, for the next decade. Pro-whale activists criticize the deal, claiming it amounts to international approval for the continued illegal  slaughter of whales. Within the 88-nation International Whaling Commission there is also intense controversy. Those who support the compromise

Currently, whaling nations have no incentive to cease the hunt, because there are no real consequences, While documentaries like “The Cove” drum up support from the usually ambivalent, apathetic masses, will that spark a real change? This is one of those cases where ethics must be put aside in lieu of pragmatic compromise. Inevitably, change must come from within the whaling nations. Japan’s youth present a hopeful opportunity. Whale meat, as a cuisine, is typically unpopular among young Japanese, in contrast with their elderly counterpart. Is it possible, then, that the whale hunt could be phased out through decreasing popularity in the next half-century? Legislating and protesting have proved unsuccessful. Anti-whaling activists need to get more innovative.

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