Banks, Bankruptcies, and Economic Reality

Bettors, speculators, and con men have one thing in common: more often than not they forget the saying, "There's no free lunch." The phrase can be traced back to bars offering free lunch. Of course, you had to pay for liquor or beer (which might be marked up). So there really was no free lunch. Somehow, somewhere, someone paid for the meal in another coin.

To the list of believers in economic fairy tales we can apparently add a good number of businesspeople. As the Financial Times notes, Merrill Lynch has lost $14 billion, after taxes, since the beginning of 2007.

This is equivalent to about a quarter of all the profits, adjusted for inflation, made in the course of the bank’s history as a listed company since 1971 – the highest ratio of recent losses to historical profits among its peers.

That mirrors the precipitous growth in profits preceding it. Between 2003 and 2006, the bank racked up $21bn in profits, more than a third of its total between listing and the credit squeeze. Backed by a buoyant global economy, investment banks could buy up, repackage and sell on assets, while deploying little capital and pushing profitability and leverage to historic highs.

Merrill had gone looking for free lunch in the form of securitized debt obligations - turning groups of loans, like subprime mortgates, into bonds that it could sell ... at least for a while. Relatively little captial went into schemes that promised wealth beyond the dreams of avarice.

But the bill has come and someone had to pay. That payment has extended to all manners of people. Bankruptcy filings have hit the million mark this year, up 29 percent from last year. But as a society we've collectively enjoyed a spree, since at least the early 1980s, of living high off borrowed funds. Sated to a point of bursting and staggering drunk from the bar, we forgot that the bill would come.

Speculators Dominate Oil Futures

The headlines pretty much says it all, and the details are in a Washington Post story. Here are a few points to consider:

• At one time, commodity futures trading was limited to the big companies that used the goods to keep them from becoming another economic tool of wealth collection that would leave the public holding the bag of outrageously high prices.


• At one point in July, one comapny alone, Vitol, held 11 percent of all oil contracts on the New York Mercantile Exchange (NYMEX). All that control could have cost as little as a billion in cash, with the rest borrowed.


• Financial firms speculating for themselves or clients account for 81 percent of all oil contracts on the NYMEX. Their holdings have risen from $13 billion in 2003 to $260 billion this year.


• The drive to end regulation, no matter what the reason for having it, has let companies create unregulated trading exchanges, meaning that no one knows what's going on and, should things fail, it would be like setting off a match in a powder keg. (That's my view, not the Post's.)


• Yet another new exchange is opening up - in Dubai - and US oil contracts will be traded without supervision.

And people wonder why they have to go into hock to fill an auto or heating oil tank.

I Hate PR Parrots

In my work as a journalist, I often send out queries over various services to find sources. (In some of the work I do, this is often the best way to find companies that have had particular experiences or insights that have not already been widely quoted in the media.) Some of the answers from PR people can be useful, many are either slightly or completely off topic, but there is one type of answer that has come to drive me mad: the echo.

The PR person, wanting to demonstrate how perfect his or her client is for a story I'm doing, will take entire phrases of my query and use them as the answer. Here's an example of a query I just sent:

I'm writing about the challenges companies and law firms are finding in patenting and trademarking clean-tech businesses, including strategies and approaches IP lawyers find to be working. Please, this is about the actual IP strategy and not about a firm or company telling about how it is establishing itself in this new area of technology. Some topics might be handling the often interdisciplinary nature of clean-tech or getting inventors to think beyond their own area of specialty.

Fairly to the point, I think. Now here are snippets of some answers I received, with the only changes I make being taking out identifying information:

• Would you be interested in speaking with XX of YY who is chair of ZZ practice who can discuss with you the challenges companies and law firms are finding in patenting and trademarking clean-tech businesses, including strategies and approaches IP lawyers find to be working.
• I can offer you a XX expert today to speak about the challenges facing companies and law firms re: patenting and trademarking clean tech businesses. We will address the specifics around the actual IP strategy (and the various challenges).
• Both groups are working in conjunction with the IP and Trademark groups in this area and can discuss some of the challenges and difficulties companies face in patenting and trade marking clean-tech businesses.

That list of answers and one or two others represented maybe 40 percent of what I received within a few hours of the query being emailed.

It's not that I'm categorically adverse to having something repeated back, but I do expect additional information showing the proposed source's expertise in that area and how this person might add to the discussion. That could happen in a number of ways:

• examples where the person addressed the particular problem
• a few briefly cogent points on the topic
• specifics of background that show the necessary expertise, which means not just working in an area like law, but in the specific subset that is at issue

Simply repeating my words doesn't show that someone is listening. If anything, it's almost a guarantee that the person hasn't.

An example literally happened while I was typing this. One of the above respondents mentioned a lawyer who seemed to focus on financial deals in cleantech - certainly interesting, but not useful when I need to get into nitty gritty IP issues. I answered, noting the person's expertise seemed to be in finance, not patent work. The reply? "Would you be interested in speaking with him and one of his colleagues?"

No, I wouldn't, because you're not listening and don't care what I'm trying to do or whether you potentially make your client look like a horse's ass. If he doesn't have the background to answer the question, don't reply in the first place. If he does, then say so. But don't ignore my question and act like an incompetent. Or does it not matter because you'll bill the client for the time spent on the interaction anyway?

Toxic Banks: Not Just US Problem

I've heard some people remark that the credit crunch has shown the weakness of US banks as compared to the rest of the world (which generally means Europe, when it comes to the financial industry). I found that hard to believe, because it seemed that some of the names hit hardest were European banks. So I was interested to read in the Financial Times Lex column (sorry, no free link) that sub prime credit write downs by banks have totaled $493 billion worldwide. Of that, $250 billion was in the US, but $221 billion was in Europe, with $22 billion elsewhere.

And yet, the European economy has not taken the same hit as that of the US. The housing bubble in the US has been one factor, but there's been a similar bubble in many parts of Europe - Spain, Denmark, the UK, and Ireland. I'm guessing that the relative strength of the euro has been the reason. But it seems that won't be lasting long:

The US and European economies are of similar size, as are their banking industries, which both have market capitalisations of about $1,000bn. Yet European banking stocks have outperformed since the credit crisis began. So far, US banks have suffered most. The worst is yet to come in Europe.

Those in the US looking for economic salvation by investing overseas are likely to find that the safety is only temporary. Ah, well, misery loves company.

Home Prices Fall - No Surprise

Two major housing price indexes, a 20-city and 10-city compilation by Standard & Poor's and Case-Shiller, both hit record declines. But there's no surprise if you've been even cursorily following the economic churn in the country.

The "value" that people perceived was a result of demand, over-supply of money, speculation, and a general economic hysteria. Not being grounded in anything truly substantial, it was waiting to evaporate, and now we're seeing that happen. But I actually think this is good news for the economy, getting back to a more realistic state that might allow more moderate but supportable growth.

There's an interesting article in the Washington Post about oil speculation and transparency. The impact of speculation has become enormous:

Big Wall Street firms representing the interests of pension funds, endowments and wealthy individuals around the country have grown in just a few years from minor participants in the oil markets to their most dominant force.

These financial firms -- whose holdings of oil contracts are now larger than the collective demand of airlines, trucking firms and other companies that need oil to run their businesses -- have become the focus of an intense debate in Washington over whether their exponential growth is contributing to the surge in oil prices.

And, apparently, such people as Ben Bernanke are claiming that speculation has no effect on oil prices because about half the people bet that it will rise and half bet that it will fall. That sounds nice, but my bet is that is a "normal" pattern and not what we've been seeing, because then about half the people at any given time would be losing money. When the swings are as big and violent as we've seen, and fueled by margin buying, those losses will be enormous, pushing a lot of people out, which means you now have a mechanism that is leaning one way, not balanced.

Even if the bets were even, it's the mass of investment that causes the problem, because it has no balancing interest, like the organizations that actually want to use oil, and hence are interested in stability and lower prices. According to Bernanke's theory, at least have the people who are taking positions in oil - which means buyers, not sellers - want the price to go higher, a very different mindset than ever before. I'm guessing that's enough to cause the fluctuations and price surges we've seen.

The Commodity Futures Trading Commission has been tracking some of the investment activity, but is keeping the information secret, claiming that it doesn't want to reveal too much proprietary information about the traders, and that the complexity of the information alone, if made public, could have misled the commodities markets. But wouldn't you think that the people who wouldn't be misled would be the people who actually do this for a living - the traders in the commodities markets?

It sounds like the CFTC is dominated, as one might expect, by the biggest trading forces, which means the speculators. The organization does claim that it "always been and continues to be committed to market integrity and to market transparency." It just has an idiosyncratic way of showing it.

Norway's Sovereign Wealth Fund and Ethical Investing

It's always nice to think that you could maintain an investment portfolio while strongly taking ethics and social justice into account. Apparently Norway is doing just that. It's pulled out of Wal-Mart (labor issues), BAE Systems (nuclear weapon production), and almost two dozen other companies whose behaviors it has found wanting. And yet it's worth almost $406 billion. Nice work if you can get it ... and, apparently, you can.