Moon of Alabama Brecht quote
April 21, 2005

Billmon: 04/21

II.  Under the Spreading Chestnut Tree


I. In the land of Pinocchio: Liar Liar, Pope on Fire

Posted by b on April 21, 2005 at 18:12 UTC | Permalink | Comments (12)

Nike, Wal-Mart, Corporate Responsibility and Activism

An article yesterday in the Financial had an interesting take on the recent evolution of corporate responsibility  (Nike ushers in a new age of corporate responsibility), following Nike's publication of a detailed report on all of its subcontractors:

Scepticism is usually in order when companies boast how socially responsible they are, but Nike's decision to publish its entire list of contract manufacturers on the internet is harder to dismiss. Nike's move opens a new front in companies' efforts to engage with their critics.

See below for more details and some comments.

The article goes on to describe what is published, what kind of impact it will have, and what's Nike policy in publishing this. It then proposes that Nike is bring in a "third stage of corporate responsibility" as follows:

- the first stage is corporate philanthropy - companies donating money to various community projects. That's the stage where Wal-Mart is, and the article nicely blasts them to pieces.

- the second stage is reputation management and risk avoidance. Second-age corporate responsibility advocates say knowing what is on campaigners' minds is as important to a company's health as protecting it from fraud. This means that the company accepts some form of accountability towards critics and tries to avoid behaviors or policies which are seen as controversial.

- the third stage is corporate responsibility as a way of improving performance rather than just protecting reputation.

Factories that ensure workers are registered for social security benefits often become more productive as a result. Attention to one aspect of staff management often leads to improvement in others.

If other companies publish supplier lists, they can together devise common standards that help contract manufacturers cut costs, Nike says.
All this points to a strong element of self-interest in Nike's new openness - but practitioners of third age corporate responsibility see nothing wrong with that.

The logic is that, if you're going to make efforts to protect your reputation, it might as well be "positive" efforts (i.e. changing your practices altogether in order to anticipate issues and gain a competitive or marketing advantage out of it) instead of "negative" efforts (scrambling to react to outside criticism).

My question to you: how can companies be encouraged to move to that "positive" approach instead of the "negative"? Shaming companies is necessary if, like Walmart, they have aggressive practices and little reactivity to criticism, but it becomes counter-productive in the next phase, where a mixture of verification and encouragement is needed.

Activists need to be able to make the difference between corporations that make an effort only when forced (these should be shamed for their inappropriate practices) and those that are genuinely trying to behave differently (these will also require some positive feedback). Corporations per se should not be seen as evil, only their actual behavior. If the behavior shows improvements or actually brings about genuine goods, it should not be lambasted because they "do it for profit". Profit is not bad in itself. Profit generated by cutting corners is bad.

Also, remember that activists often only represent themselves or very small constituencies. As activism against corporates grows, the legitimacy of such actions will be assessed more carefully by bystanders and NGOs and activists will need to choose their targets with more care.

Nothing is worse than activists going on dead-end fights which obviously not supported by the majority, and allow all activists to be labelled "extremist". Also, corporates are slick and if the criticism directed against them is not obviously fair, they will fight back and they will win and discredit their opponents easily.

With some companies genuinely improving their acts, I think it is important to acknoweldge such efforts and to monitor them, rather than dismissing them, and to shift the focus of action on laggards.

To provide some background on my position:
As you know, I work in a bank, in relation with the oil sector, where the relationship with NGOs is a big issue. Oil companies and banks have made efforts to make sure that big projects have a less damaging impact on the environment and the local populations. Some NGOs have acknowledged these efforts and prod us in good faith to make more, and we do try to acomodate them; others are simply interested in blocking oil projects in any way they can, and after some point, you simply ignore what they are saying; in which case, it is quite possible that less care will be taken because no effort can satisfy them, so why bother making any?

If you want to compare versions on recent projects, go see the following websites:

Sakhalin Energy, the official site of a big oil&gas project in Russia led by Shell;
Equator Principles the site of the banks that have committed themselves to certain guidelines in the financing of big projects (such a Sakhalin energy);
Banktrack the site for the umbrella organisation of NGOs which acts as watchdog of the banks with respect to the Equator Principles.

As you can see, some common ground can be found through dialogue (in this case, on the definition of imporved standards), but some elements remain contentious (on the valuation of whether the standards are properly applied).

As I imagine that there are a number of activists on the site, I imagine that my position is less aggressive than many of you with respect to corporates, so I'd be interested on your feedback on the above...

Posted by Jérôme à Paris on April 21, 2005 at 15:05 UTC | Permalink | Comments (3)

Billmon: 04/20

II. Debt to Society

"Bankruptcy should always be a last resort in our legal system. If someone does not pay his or her debts, the rest of society ends up paying them."

I. The Lessons of Munich

The Fuehrer thanked Chamberlain for his words and told him that he had similar hopes. As he had already stated several times, the Czech problem was the last territorial demand which he had to make in Europe.

Posted by Jérôme à Paris on April 21, 2005 at 5:36 UTC | Permalink | Comments (13)

April 20, 2005

For Sale


Mercedes 320 CDI, 2002 model, only 400 km, full panoramic roof.

(Isn't the new guy from Munich, thus a Beemer guy?)

Use as another B 2squaresquare thread.

Posted by Jérôme à Paris on April 20, 2005 at 22:42 UTC | Permalink | Comments (18)

Open Thread

Link to the forerunner

Posted by b on April 20, 2005 at 11:59 UTC | Permalink | Comments (63)

Left vs Right and the Economy

Graphs speak louder than words:



(From the Financial Times - behind subscription wall)

Thatcher and Blair are pretty good proxies for Republicans and Democrats, as they examplify respectively the hard "laisser-faire" deregulated economy of Reagan and Bush Jr and the centrist left policies of focusing more on inequality while fully accepting market mechanisms.

A third graph also shows how moderate Republicans do:


The conclusion: the left is much better for the economy overall. It provides increasing incomes to all, including the rich, but with a slight emphasis on the poor.

By contrast, Thatcherism is clearly class warfare: the richer get a lot richer, and the poor stay poor.

Moderate Republicans are actually the worst: they are not unfair, but they are pretty bad for eveybody.

Similar numbers for US presidents can be found in this article from Forbes. (with all the detailed statistics here):


It should be very easy to prepare similar graphs for the US economy (they probably already exist) and distribute them as widely as possible, as they show exactly what the differences between the two parties are, in an easily understandable way.

Borrow and Squander Republicans:

The rich get richer while you take on more debt.

They try to distract you from that fact by focusing on Schiavo.

Responsible, Fair Democrats:

Everybody gets richer and the economy grows for all.

One more thing - Extreme Republican policies have consequences that remain with you for a LONG time:


The inequality created by Republicans does not go away.

As a post scriptum, here are a few choice words from Martin Wolf, the senior economics editorialist of the Financial Times, about the unbalances with China, but which relates closely to this issue of economic competence:

If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has." John Maynard Keynes

If Keynes was right, the world's creditor countries have a huge problem and the US none at all. Yet the assumption that the creditors should be more terrified than the debtor is wrong if the latter needs to continue borrowing. If creditors face an endless stream of additional borrowing and a good chance of default at the end of it, they should refuse to throw good money after bad. They will then impose huge costs on the debtor.

This balance of financial terror, as it has been called, characterises the current huge flows of finance to the US. Carefully thought through economic policy is needed if the world is to extricate itself from this predicament. Alas, we can rely on the administration of George W. Bush not to provide it.


100 per cent of the fiscal deficit has been financed from abroad and about 80 per cent of the current account deficit has been financed by foreign central banks.* Biting the hand that feeds one is folly.

According to the International Monetary Fund, the US general government fiscal deficit this year will be 4.4 per cent of gross domestic product, while the current account deficit is forecast to be 5.8 per cent of GDP. At present, therefore, the American people are able to consume and invest as if the fiscal deficits did not exist. The treasury secretary of what is arguably the most fiscally irresponsible US administration since the second world war should fall down on his knees in thanks rather than indulge in complaints.

Republicans are incompetents. Bush is the MOST incompetent of all Republicans. He is a threat to the well-being of a majority of Americans, and he actually is a national security risk.

Posted by Jérôme à Paris on April 20, 2005 at 10:22 UTC | Permalink | Comments (28)

Billmon: 04/19 (2)

III. Scoundrel Time

Ann may think her cover photo was unflattering (a crime against humanity would be my term for it) but the write up was pure journalistic cunnilingus – and John Cloud appears to have a very long tongue.

Posted by b on April 20, 2005 at 6:01 UTC | Permalink | Comments (23)

April 19, 2005

Financial Scare of the Week: CDOs

In the past few days, the Financial Times has run several stories, including a full page article today, on CDOs (collateralised debt obligations) and the potential risks they present to the financial system.

CDOs are a way to repackage a portfolio of existing financial assets (usually bonds or loans) into new tranches, which are built so as to have different riskiness. (see more explanations below)

Last year alone, the cash value of all CDOs issued and sold to investors in Europe and America reached $120bn - nearly equivalent to all European corporate bond issuance in 2004.

The CDO market has been tested on a small scale by market jolts before - and come out relatively well - but it has never suffered a serious upheaval while so many investors hold so many highly leveraged instruments.

"We are in uncharted territory," admits one policymaker. "If a crisis hits, we think the market will absorb shocks smoothly - but the truth is that no one knows for sure."


Clouds sighted off CDO asset pool (Financial Times, today, subscription required)
A manager running a CDO borrows money from investors, via a special purpose vehicle, and buys debt-linked assets. Whether the liabilities can be repaid depends on the performance of these assets and the skill of the manager.



Unlike a mutual fund, however, the risks assumed by investors are not always equal. There is usually a tranche of equity, which can produce high returns but also carries high risk since it is exposed to any losses resulting from underlying asset defaults. A separate `senior debt' tranche carries less risk, since it gets repaid first, but offers less potential return. Between those are tranches of `mezzanine' debt.

The assets inside a CDO can be corporate loans (when it is usually called a collaterised loan obligation, or CLO). However, they can also be bonds, asset-backed securities or credit default swaps (derivative instruments that bet on the risk of corporate default). The fastest growing segment of the market is for `synthetic' CDOs (sometimes called CSOs). These are composed of credit default swaps, without cash bonds, and may not have full investor funding.

Synthetic CDOs allow investors much greater leverage and flexibility. They also solve a practical problem: demand for CDOs is growing so fast that managers are running out of cash assets to put into the funds. Another innovation, the `CDO squared', is a CDO composed of multiple synthetic CDOs. Some banks even offer a `CDO cubed' - a CDO of CDOs of CDOs.

To explain a bit, credit default swaps are instruments whereby a bank gets someone else to bear the risk on a loan it makes: it pays that counterparty a predetemined margin annually in exchange for that counterparty to cover any losses under the initial loan. Such instruments can be taylored to specific risks - the counterparty can be required to pay only if certain specific events have triggered the loss. The counterparty needs not lend money to receive its remuneration, it only has to be able to make a payment in the case of loan default. Insurance companies or fund managers in search of extra income are typical counterparties for these.


The cash value of all CDOs issued and sold to investors in Europe and America reached $120bn - (the value was $445bn if the notional value of all derivatives in these instruments is included). That lower figure is nearly equivalent to all European corporate bond issuance in 2004.

In some respects, this startling growth is a potentially positive step for global markets. After all, an instrument such as a CDO takes forms of corporate debt and repackages it to spread the risk among multiple investors - rather like a mutual fund allows many investors to share equity investment. That creates more liquidity and flexibility in financial markets, which should, in theory, help the financial system to withstand shocks.
Yet the very same traits of CDOs that can be so benign also carry potential risks. (...) The fact that CDOs disperse credit among multiple investors means that, if a nasty accident did ever occur with CDOs, it could richochet through the financial system in unexpected ways. [Also], the CDO boom has taken place amid extraordinarily benign credit conditions. And, as Mr Gibson [head of trading risk analysis at the US Federal Reserve] notes, a recent study by international investors suggests "that there is a minority of investors - perhaps 10 per cent - who do not fully understand what they are getting into". (see also Fed official warns on structured credit market)

The CDO boom has several causes:

  • tightening banking regulations (known as Basel II) are forcing banks to hold thus risk; CDO are a good way to tranfer risk off their balance sheets into the hands of other investors;
  • easy money and strong competition have eroded margins in most traditional activities. CDOs offer better returns to investors (who take the riskier tranches) and nice arbitrage (trading) opportunities to banks;
  • it's trendy and sophisticated, and thus attracts hedge funds and other new players.


But with demand increasing, prices have also gone up, thus reducing returns (yields go down when prices go up, just like for bonds). This has led to increasingly complex products (using synthetic instruments as described above) which have an increasingly tenuous link to the underlying assets and harder to understand risks.

And that's the problem: these instruments have been created in a fairly benign financial period (no crisis, a lot of money and investors), and it is not clear (i) how they will behave if things turn sour, and (ii) what kind of consequences this will have on the financial markets and financial institutions in a time of crisis.


The CDO market has been tested on a small scale by market jolts before - and come out relatively well - [but] it has never suffered a serious upheaval while so many investors hold so many highly leveraged instruments.

"We are in uncharted territory," admits one policymaker. "If a crisis hits, we think the market will absorb shocks smoothly - but the truth is that no one knows for sure."

No one knows for sure. That's nice to know...

Banks are full of people who worry about whether the previous crisis will happen again. They never seem to catch the guys who take new kinds of risks, make tons of money while the going is good (for the banks and for themselves), think they have found a new Graal - until some new circumstances bring these risks to the fore and wipe out all the gains previously made. The banks clean it up more or less painfully, tighten their controls over these risks, and the cycle starts somewhere else...

Further references:

A selection of articles on CDOs

Bankers are dangerous people (a diary from a few months back)

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb

Posted by Jérôme à Paris on April 19, 2005 at 23:00 UTC | Permalink | Comments (5)

Bendictus XVI

Cardinal Ratzinger of Germany Is New Pope

Thank god for him already being 78.


also Billmon's post: Heil Ratzinger

Posted by b on April 19, 2005 at 17:01 UTC | Permalink | Comments (115)

Billmon: 04/19

II. Heil Ratzinger (discussion on Ratzinger in the above thread)


I. A Falling Out Among Thieves

Posted by b on April 19, 2005 at 16:44 UTC | Permalink | Comments (5)

"The Real Fight"

The Nelson Report is a Washington D.C. political insider brief written by Chris Nelson. Yesterdays brief includes a strong essay copied on the blogs of Steve Clemons and Laura Rozen.

It is frightening and deserves a serious bar discussion:

    BOLTON BATTLE...the real fight

    If the fight over John Bolton's UN nomination were just about John Bolton, he'd be history already. But this isn't about Bolton, it's about the exercise of power. Same thing with House Majority Leader Tom DeLay.

    If this was even 5 years ago, hed be toast.

    We are at the point now where the Republican Leadership refuses to allow the possibility of a loss on anything, regardless of the merits. This renders "debate" meaningless, since nothing said actually matters, so truth is irrelevant.

    "Science" depends on faith; everything is a test of power. Oppose something the President wants, and you aren't just wrong, you are betraying the Party. The underlying message is that you are also offending a very particular definition of God.

    The sad, sorry Bolton/DeLay spectacles are about total war, the kill-the-prisoners exercise of power that national US politics has become since the 2000 election. If it were merely about power, it wouldn't be so terrifying. Washington is used to that. . .it's what we exist for. But the fear, the self-loathing, the pathetic, cowardly, sniveling, excuse-making drivel from such "leaders" as Lugar, Hagel, Chafee, the entire House Republican Leadership under DeLay. . .and the ever-so-very carefully expressed angst of the Democrats. . .is about something far more dangerous to the Republic than mere political power.

    What we are seeing is a fight for the political soul of the nation. We've had these before, in the existential sense. . .in my political lifetime, the civil rights movement, the anti-Vietnam war movement, the women’s rights versus, to a certain extent, the right to life movement. But this time it's totally and completely a fight about God. . .specifically, whether God is going to rule in the United States.

    The Constitution says that would be illegal, and any serious expert can tell you that not only were the Founders liberal in their interpretation of the Deity, but they intentionally enshrined a purely secular civic government, including the courts. They didn't think that Jesus had an official plan for us, much less did they think that politicians who defined their duties in secular terms were defying the word of God.

    Tom Delay manifestly believes this, and it sounds like any number of Senate Republicans either agree, or lack the imagination or moral courage to disagree. . .why else would some endorse threats against Republican-appointed judges who dare to interpret the law in secular terms? This is what the Bolton fight is really about: you can't dump him, because that lets the Democrats win on both the facts and principle. . .fatal notions to a desire to pack the courts with religious and secular policy extremists.

    Why else would there be the constant drumbeat of attacks on the "liberal media", except to undermine public trust in the Constitutionally provided mediator between the politicians and the people?

    The Founders knew how to protect what they intended; this crowd has figured out how to undermine the very rule of law in the United States. Listen to what DeLay is arguing...that his excesses have nothing to do with his "persecution", interesting choice of word, by the Democrats and their "liberal press allies". If a majority of Congressional Republicans don't, in their hearts, see the hypocrisy of all this, the Republic is doomed.

    The real story behind Bolton and DeLay is obvious, to anyone not already seduced by the dark side.

    Connect the dots. There's still time.

Posted by b on April 19, 2005 at 9:30 UTC | Permalink | Comments (20)

April 18, 2005

Billmon: 04/17-04/18

III. Eva Braun - Woman of the Year


II.  Playing for Keeps

Frist and DeLay and the rest of the Rove gang may not have any kind of grand design for a GOP Thousand Year Reich, but rather may be acting like the Easter Islander I talked about in an earlier post -- the one who cut down the last remaining tree on the island.


I.  See the thread below on the Billmon piece: Fuel Shortage

Posted by b on April 18, 2005 at 17:31 UTC | Permalink | Comments (28)

After a Sherry

by diogenes (lifted from a recent comment)

I will provide you with a very rare glimpse into my personal life and experience. I usually reserve such digressions for more intimate audiences, but but this is a very good bar and the topic demands it. So I will abandon the academic I am now and part time humorist to tell you of Diogenes the preacher of many years ago. After a sherry, of course.

In the early 1970's, ...

... at the odd cross roads of the free love and Jesus movements, that I came of age with an undying curiosity about spiritual things. A nun at my church tried to convince my I was a psychic, my older sister had me send a month at a commune of American Sufi Movement, and I began reading the Bible. The Bible (and a pile of, at that time, very convincing tracts) won my young soul and I became a solo Christian (there are solo Wiccans, so why not?), unsure of any church or movement and very much interested in developing my faith. I bounced from prayer group to church as a 19 or 20 year old. taking it all in and I was as ignorant as the day was long. For example, convinced that I needed to be baptized, I stopped at a Baptist Church in New Hampshire I had never been to before because "that's what you guys do, it says so on the door!" Believe it or not the elderly pastor baptized me that night. I was as innocent as any Christian Candide in a very confusing world and there were plenty of Panglossses to help me along, especially the Pentecostals!

I was as sincere as naitivity can make me with the intellectual power of a high school education and a year of college (where I watched at least two professors sleep with the one girl I had a consistent crush on). But a Christian I was now. I read the Bible through numerous times (It takes around 15 hours to read the New Testament). The Old Testament/Hebrew Bible I took on one book at a time. I was a pest at all family gatherings. And I explored almost every kind of church from fundamentalist to Greek Orthodox, trying to understand how this faith worked.

So at the ripe old age of 21, I settled on a non-denominational church that had a pastor as young as I was and stayed there for almost 8 years. Now why share this with you? Well for one thing I got to meet many of these religious right bigshots back when they were little shots and more importantly, I witnessed the afterbirth of the Religious Right early in the Reagan Years.

Back then we met at Yale University in one of the lecture halls. And this church grew. Rare in the inner city. Rarer still was the amazing mix. Rich folks from Woodbridge and Hamden, Blacks from Congress Ave and Dixwell Ave who were burned out of the Cadillac cult and needed something different, Hispanics, old Catholic ladies from a Charismatic Catholic church, recovering drug addicts, Muslims from various countries curious about Chritianity, gays and lesbians, the mentally ill seeking exorcisms (my claim to fame: I led George Bush's cousin in a exorcism where we all coughed out our demons in paper bags back in 1979!)and a host of folks in various stages of drug and alcohol recovery or relapses. It was slice of the whole world and about 350 people meet twice a week to figure out what it meant to be a Christian (Oh yes, and a number of Yale Divinity School students and undergraduates). I often wonder if Bush was around Yale at that time.

The thing that characterized this church and fascinated me was the complete lack of condemnation towards those who were different. Lesbians embraced men during the greeting part of the service. Blacks hugged Hispanics. We all knew that no one was perfect, that all lives were characterized by struggle and that the goal of a Christian was to help others along the Way. We were politically inactive, having concluded that voting and prayer were two personal matters best left to individuals and that politics, being the pandering profession that it was, was too "carnal" or "of the flesh" (yes, those were the words we and many others used back then)for a Christian to get involved with. It required deception as well and that was dangerous.

That ended early in 1982, when our young pastor was invited to a three day Ronald Reagan "prayer breakfast and conference" in Washington D.C. He was flattered and went with the church's blessing.

The Sunday after he returned, the world turned upside down. No one expected it. A usually kind hearted (if not long winded) pastor turned into a right wing hate machine, repeating in his sermon (several times in case we missed them) the most outlandish and insulting language I ever heard. I remember portions well. I didn't hear things like this again until the early days of Rush Limbaugh and Ann Coulter.

"God has called us as a church to destroy the evils of the liberal welfare state and its hand outs for laziness."

"God has annointed this church to stand as a wall and defense against the evil manipulations of the hairy legged lesbo-feminists of the teachers unions and the secular humanist educators."

There were then cracks about blacks being on welfare, welfare laziness, the ungodliness of Democrats in general, and "taking the country back for God." And within two weeks, almost every black, Latino, homosexual (though they were not singled out in the sermons), poor person, and student was gone. For good. The church split two or three more times in the next few years, leaving me a lost and stranded soul. My view of the church was increasingly assaulted by demands of 1000% loyalty, shameless pandering and financial matters that I will not elaborate upon. When I think of the turning points of my life (and there have been many), nothing determined the course of the next 23 years as that one out of the blue offensive right wing sermon.

From there I drifted from church to church over the next few years and then decided to sell my businesses and continue my education (I thank God for women who push you on to do this (my late mother) and bear the consequences of that decison (one hell of a mate). Though I originally considered studying for the ministry I soon declared a double then triple major (theology, history, linguistics). And I did well. Then I got talked into grad school and a Ph.D program. I progressively moved to the left (contrary to Horowitz, I was a Republican grad student and never encountered discrimination in grad school. We all got our asses kicked by professor after professor). I completed my Ph.D in 1998. I now teach Ancient History (primarily Church and Roman history and World History. Once in a while when I get the bug I teach a Greek or Coptic class for fun.

I didn't become a Democrat until I was teaching at a fairly well known southern institution in 2000 and George Bush's goons roughed up two of my students who simply brought a sign into an open meeting that read, "Mr Bush: What is your position on the Environment?" It was one of two dozen questions on signs that students brought in. They were knocked to the ground, their sign was ripped up and they were ejected. There was quite an uproar since me department had invited the chimp to campus. I am now a moderate Democrat, but anger is moving me further to the left. It is not the best motivation, but it has made me politically active.(Sherry #3 now). I now teach in a northern state hard hit by Bushanomics and very happy as a liberal Methodist in an open and affirming church.

Why am I writing this? I think because I enjoy the illusion of the bar and miss the many good conversations and stories of grad school. But more seriously the idea of Frist's "Judgement Sunday" has brought flooding back into me that sea of faces shocked by the relentless right wing semonizing/demonizing back when the religious right was young and Sun Myung Moon wasn't funding it. That shock and my reaction to it defined my life to this point more than other personal event. I can only hope that when this travesty of both government and faith is perpetrated upon congregations across America that honest people will react with the kind of revulsion and disgust that I felt two decades ago. Good night friends and bar keep. Say hi to Billmon.

Posted by b on April 18, 2005 at 9:22 UTC | Permalink | Comments (78)

Billmon: Fuel Shortage

A big picture economy review: Fuel Shortage

For the financial markets, last week had a ugly feel to it, both on Wall Street and globally. It wasn't a crash, certainly, but also more than just a garden-variety correction. It felt like the preliminary stages of a sea change in sentiment -- the kind that either accompanies the popping of a bubble, or causes it, depending on your economic point of view.

Posted by b on April 18, 2005 at 8:12 UTC | Permalink | Comments (59)

April 17, 2005

Your News, Views and Visions

Open thread and a link to the elder one

Posted by b on April 17, 2005 at 17:16 UTC | Permalink | Comments (43)

Frist They Came for the Jews

I see a theme in the following diaries read on dKos or elsewhere:

Forced Confessions: Third Time The Charm (by bellatrys on why the Salem Witch Trials hold a key to our present disaster)

Bush Administration tells girls to sit down and shut up (by lorraine, one of the more thoughtful diarists on dKos)

An Ex-Theocrat Speaks: They're Crazy Like Foxes (by bellatrys, this link was posted in one of the threads but the discussion was then focusing on unions)

all summed up by Bob Johnson's post (Bob Johnson is one of dKos's official clowns, so a fully humorless post from him is really striking...)

It's the Jews

Do you worry? Are you scared? Or are "they" overreaching? Or is it that "It can't happen here"?
But go read the links anyway.

Posted by Jérôme à Paris on April 17, 2005 at 7:48 UTC | Permalink | Comments (30)

April 16, 2005

Mike Moore is Wrong

The title is an obvious wink and a nod to our barkeep, but the topic is probably not the one you'll expect (although, coming from me, you won't really be surprised...)

This is about a story that comes up again every now and then (and of course in the Michael Moore movie) and I try to shoot it down each times in a few lines, usually met with skepticism or mockery: the Trans-Afghanistan Pipeline.

So here is the long version, once in for all, for future reference whenever this topic comes up.

Why it will not be built can be explained by having a detailed look at how pipelines are financed and paid for, and looking at how this applies to this project.

Just to be clear, the TAP (Trans-Afghan-Pipeline or Turmenistan-Afghanistan-Pakistan) is a proposed natural gas pipeline which would go from the gas fields of Turkmenistan to Pakistan through Afghanistan. All that follows below applies to both oil and gas pipelines, but I'll focus on the gas case as it is what concerns us here.

A pipeline is very literally like a chain - all links must be in place for the whole chain to have any value at all. In the case of a pipeline, the links include a gas field to provide the throughput, the construction of the pipeline, the continued operation of the pipe, and a purchase of the gas on the other side.

What is essential to note is that to get any revenue from a pipeline, you need the whole chain to be in place - you cannot have two thirds of a pipeline, and you need the gas production and the gas consumption. That means that all the investments must come upfront and all the revenues will come only after all the spending has been made. As the tag price for a pipeline usually runs in billions of dollars (the typical price can be around 1-3 millions dollars per kilometer, depending on its size and the ground it covers), this means that financing such an investment is a fundamental question:

if you cannot say who is able AND willing to put 2 billion dollars on the table UPFRONT, and explain how they will get paid back, then your project will not fly.

Let me explain how this is usually done.

A pipeline is usually built by a gas producer who wants to gain access to the market or to a specific customer, by a customer needing access to gas reserves (think big customers like a power plant, a chemical factory or an aluminium producer), by a third party (usually, a specialised pipleine operator acting on behalf of the producer or the customer), or by any combination of the 3.

A gas producer wants to bring its gas to a market at the lowest cost possible. It has a good idea of how much gas he can produce and thus ship, and can determine a cost per unit of gas, which it can compare to the price it expects to sell the gas and its own cost of production. If the producer is reasonably confident to be able to sell its gas over the requisite duration (typically 15-20 years or more), it will invest in the pipeline, on a cost basis (i.e. the pipeline will effectively part of the cost of production of the gas from its perspective).

A gas purchaser is in a symetrical situation. It needs to connect to the site where gas is available (whether an individual gas field or a place where the gas grid already exists); it know how much gas it needs over the life of its industrial asset (again, 20-30 year periods are fairly standard) and the cost that this adds to the purchase price of gas over the long term.

A third party will build a pipeline if it can profit from it, as it is not involved in either gas production or consumption and cannot make a profit from the rest of the chain. It is possible to build "merchant" projects, i.e. "build it and they will come" - you build the infrasturcture and charge for its use. This is possible only in places where there is a lot of suply and a lot of demand and not enough transport capacity, which does not happen very often. In most cases, the third party is a pipeline operator acting on behalf of the gas producer or consumer, and the ownership is shared between them in various combinations (everything is possible); the only important thing in that configuration is that the pipeline is an independent entity which must make a profit.

In that situation, there are several ways to remunerate the pipeline company:

  • a simple tariff, proportional to the volume of gas shipped
  • a "capacity" charge: i.e. the user pays for the right to use a given fraction of the pipeline capacity, whether it actually uses this capacity or not
  • or any combination of the two.

A typical situation is a capacity charge which is high enough to guarantee a minimum level of revenues (ideally, enough to pay off the initial investment on its own), and a low tariff which reflects operational costs for the use of the pipeline and provide potential profit for the pipeline operator (a minimum level of use will provide a small profit, a full utilisation will yield a nicer, but never extravagant, profit).

Another way to materialise such arrangements are "ship-or-pay" contracts, whereby there is only a tariff proportional to the volume, but with an obligation to pay it anyway, up to a certain value, even if the corresponding volume is not shipped (the shipper then getting "make up" rights - i.e. it can ship more without paying for it again if it exceeds the requisite volumes in future periods.

The essence of all these arrangements is that someone has to commit to provide a minimum level of revenues to the pipeline operations in order to pay off the initial capital investment. Such commitment is what makes a project economic and usually makes it financeable as well.

For someone to commit to paying such tariff - and remember, a pipeline usually requires 15 years of operations for the tariff to make economic sense - it has to have a pretty good certainty that (i) it will need the capacity for such a period, ((ii) it will have use for it and (iii) it will be able to afford it. Such a commitment to pay can be a major financial drain if the corresponding revenues (from selling the gas or from using it) are not there.

So we're back to our initial questions, but with more details:

  • are there enough gas reserves to fill up the pipeline capacity for the requisite 15-20 years?
  • is the gas producer able to produce the requisite volume for 15 years? (has he invested enough to produce the gas?; is the production profile compatible with the transport infrastructure? are all the permits, authorisations, etc... necessary to exploit the gas fields available, and can they be expected to remain in place? do the production costs - including all taxes - make sense in view of the whole chain?)
  • is the gas producer committed to delivering these volumes through ths pipeline?
  • are the proposed construction costs for the pipeline realistic, and will the construction schedule be met?
  • is the pipeline operator experienced and able to keep it functioning for the required duration at the required capacity?
  • has the pipeline obtained all the necessary permits, licences, authorisations from all relevant authorities?
  • will there be a market or a buyer to take all the gas for the requisite 15-20 years?
  • are the purchasers able to pay for the gas for the period?

which can also be identified as follows:

  • reserve and production risk
  • producer commitment risk
  • construction and operation risk
  • market and price risk
  • political risk
  • buyers' counterparty risk

ALL these risks must be acceptable for the project to make sense. Any major issue in any of these categories is sufficient to kill the project. Banks and investors look at it the same way, with the simple difference that, as banks' revenues are imited at most to the interrst income, theyt alos want to limit their risk. As a result, they usually get a first dip in the revenue, after operating costs but before investor revenues.

So, what about our Afghani project? Let's look at all the above points in turn:

- gas reserves and production
That's clearly the strong point of such a project: Turkmenistan has massive gas reserves (the fourth in the world) and it already has significant production capacity (including inutilised capacity since the break up of the Soviet Union). So the requisite gas is there and could be produced and shipped in the required volumes.

- gas delivery commitment
Unfortunately, this is the biggest hurdle for the project: you need to trust the Turkmens to deliver their gas to the pipeline for the next 15 years. The risk is especially important as Turkmenistan is the only possible source of gas for the pipeline and their continued participation in the scheme is therefore essential. The risk is two-fold:

  • the political risk is extremely high, with Turkmenistan ruled by a crazy dictator with absolute powers. He has shown that he was not necessarily rational and could change his mind very easily; if he does that about the project, there is no recourse. Being a dictator, should he fall, it is not clear that his successors would honor a commitment that he made. Over 15 years, these risks are significant.
  • the second item, and more important one, is that Turkmenistan already has an available route to export its gas via the pipelines going North to Russia. These pipelines have been built a while ago (during Soviet times) and do not have to be paid for anymore. They are thus available immediately, and at a very low cost (operating costs, which are usually low for pipelines). That means that it is quite easy for the buyer of gas at the end of these pipelines (currently, the Russian monopoly Gazprom) to offer at any time a higher net price for Turkmen gas than they can get on the other side.
The fact that the Afghan pipeline would not be competitive is thus a major obstacle to its economic rationality, as it threatens the availability of the Turkmen gas volumes.

- construction and operations
This is not an dealkiller, as pipelines have been built in many difficult or harsh places, but it is clearly a challenge. Building a pipeline requires bringing massive quantities of steel (count a few hundred tons per kilometer) - and the workers to put them in place to locations out of reach of roads and other transportation modes. Afghanistan has few roads, a harsh climate, and it would thus be a complex logistical exercise. The risks are thus both high as regards the cost of construction and its time schedule. and any delay has major economic implications as interest costs run on the full amount of the initial investment and are compounded as delays mount.

- market and price risk
The proposed market for the gas to be shipped is the Pakistani market, and possibly (but after additional investments are made), the Indian market (requiring a pipeline between the two countries) or the international market (requiring the construction of a liquefaction plant on the Pakistani coast). The Pakistani market is likely to grow over the coming years, but it is a hard market to assess. In any case, the pipeline company would not want to distribute the gas itself and would thus rely on a local counterparty, in all lielihood the national gas company (Pakistan Petroleum Ltd, PPL). The project thus requires this company to commit to take the requisite volumes for the requisite period, and to pay for it over the duration - in hard currency. This is a risk that the banking market will NOT bear and that international oil & gas companies are unlikely to take themselves except if they have a natural hedge through local production, which is incompatible with a pipeline import project. Multilateral institutions like the Asian Development Bank or the World Bank might be able to do it, as well as export credit agencies (government agencies from the rich countries which subsidise exports from their countries by guaranteeing payment risk), but they usually require commercial banks to share a part of the risk in such big projects.
The recent experiences of Dabhol  (a big power plant in India) and Argentina further show that ven if the demand is there and the price (in dollar terms) is guaranteed by a public body, the commitment to pay these amounts in situations when there is a currency devaluation but no significant increase of domestic prices for gas or electricity is very weak, and investors end up being paid in worthless local currency - starkly insufficient to repay dollar debt.

- political risk
This is also a major obstacle. This is a 3-country project, and these are extremely rare. As far as I know, the BTC pipeline from Azerbaijan to Turkey via Georgia is the only recent example, and it's taken the combined might of BP and a dozen other oil majors with 5 billion barrels of oil on their hands and no other way to bring them to the market, the full support of the US government (fighting against Russia and Iran), the presence of the World Bank, the EBRD and 6 Western government export credit agencies to pull it through - and it's taken 10 years.
In this case, you can argue that you probably have the worst combination imaginable - a crazy dictator, a country with warring local warlords and almost no centralised government, and a highly unstable country - and you need each of them to be happy at all times for a full 15 years, not renege on ANY of their commitments, and not try at any time to get a better deal (with each being absolutely indispensable to the project). Hard to imagine, even with 15,000 US soldiers on the ground...

- counterparty risk
as all counterparties in the 3 countries are public entities, this is fairly similar here to political risk with the price risk added in Pakistan. There are no majors involved in gas production in Turkmenistan, and none in gas consumption in pakistan, so you rely in each case on the local actors. The pipeline would likely be built by a consortium including an oil major, and you could expect that part to be at least manageable, but that's not enough.

So, you're going to tell me, if this project is as impossible as I claim, why do we keep hearing about it? And why do we find these suspicious connections between senior political figures in Afghanistan and oil companies?

Fair questions, but with relatively simple to answer in fact.

The 3 countries would like this project to exist. Turkmenistan would like to have an alternative to Russia to sell its gas to, Afghanistan would like the transit revenues it would bring, and Pakistan does need gas and this is one of the options. A lot of people are going to tell the authorities of these countries the things they want to hear, i;e. that this project can be built in a painless way. Some institutions may have other interests (the ADB would like to show that it can do a major oil&gas project, some of the oil producers have operations in Pakistan that they may want to protect or expand, and various countries in and out of the region have various interests involved and want to support their allies and their pet projects). The question, as stated above is - who will put 2 billion dollars upfront in this project? Putting a few million to conduct feasibility studies, naming a roving ambassador that makes speeches, etc... costs nothing to an oil major or a big country, and brings various diplomatic or relationship advantages, but it does not finance or build a project.

So, please, please, do not use the Afghan pipeline as an axample of nasty oilmen conspiracies. There are enough of these going on not to focus on those that have no serious basis in reality. It just makes you lose credibility with those that know anything about the sector.

Remember, oil is a mutli-hundred-billion dollar business. Spending a few million here or there to make or keep friends and make them believe you are their friend is a small investment in the larger scheme of things. Making big announcements is a way of life for politicians and it costs oil companies to flatter them by letting them having their ways and the positive PR even if there is nothing behind the announcements.

It's not because Halliburton does evil stuff (mostly scamming the US government by the way) that everything that any oil company does is evil or suspicious...

please bring up your questions or suspicious quotes and I will try to answer them as best as I can.

Posted by Jérôme à Paris on April 16, 2005 at 18:06 UTC | Permalink | Comments (12)

Tough Love

I am worried that this weeks downleg in the financial markets will go on longer and deeper than most people expect. The dark clouds have been hanging around for month, last week saw some rain and higher winds. The financial storm is rising.

From Doug Nolands weekly Credit Bubble Bulletin:

The developing financial crisis took a major leap forward this week, with equity and risk markets in sharp retreat across the globe. Here at home, the Dow was hit for 3.5% and the S&P500 for 3%.  Economically sensitive issues were in liquidation. The Transports were clobbered for 6% and the Morgan Stanley Cyclical index for 7%. Even the Utilities were down 1%, about the same as the Morgan Stanley Consumer index. The broader market was under heavy selling pressure. The small cap Russell 2000 dropped 5%, and the S&P400 Mid-cap index was down 4%. The NASDAQ100 sank 4% and the Morgan Stanley High Tech index fell 6%. The Semiconductors were hit for 8%. The Internet index fell 5%, and the NASDAQ Telecommunications index declined 4%. Led higher by Genentech, the Biotechs gained 1%. The Broker/Dealers dropped 4%, and the Banks declined 2%. While bullion declined only $2.20, the HUI gold index sank 9%.

Sounds quite bad, but well - the week was profitable for me. I am short the NASDAQ100 index and some semiconductor stocks for some time now and the week gave me a chance to add some cheap silver options.

The U.S. consumption binge is coming to an end and the hangover will be, like usual, of a proportional size to the binge. In this case this means, it will be gigantic. But it is healthy this way. It will keep at least some folks from drinking too much the next time cheap liquid(ity) is offered.

As Stephen Roach sums up in his Friday piece:

For a US economy that is living dangerously beyond its means, the tough love of fiscal and monetary discipline is the only way America will ever make lasting progress on the road to rebalancing.

Posted by b on April 16, 2005 at 16:41 UTC | Permalink | Comments (11)

April 15, 2005

Billmon: 04/15 (2)

V: The One True Frist


IV: Man of the Hour

But now they're going after the Progressive Era -- first the inheritance tax (1916), then the income tax (1913) to be followed, no doubt in the fullness of time, the Food and Drug Act, the Interstate Commerce Act and the Sherman Act ... .

So many laws, so much repealing to do before the Lord returns. And at this point it isn't too hard to imagine what the Republican Jesus will look like.

Posted by b on April 15, 2005 at 18:14 UTC | Permalink | Comments (56)

Open Thread 05-38

Your news, views and visions  -  and a link to the forerunner

Posted by b on April 15, 2005 at 7:00 UTC | Permalink | Comments (84)