Friday, 19 February 2010

“We do God’s work”....hmmm….but do the Greek Gods agree?

If I asked you to think of someone who did God’s work, I would imagine, you are probably thinking of a high priest, Mother Teresa, Pope or someone of that esteem. You could not have been more off the mark!! Well, that is according to one Wall Street Banker!

In an interview with the Times of London in November 2009, Lloyd Blankfein, Chairman & Chief Executive of Goldman Sachs, is quoted to have said “We do God’s Work”, with much hubris and smile!

As per him, modern banking performed a vital function and he described himself as a just banker 'doing God's work'. We're very important. We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. We have a social purpose.”

All very noble, indeed. But even as the dust has barely settled on their role in the sub-prime crisis, they now find themselves under fire following the escalation of Greece’s fiscal woes. Greece’s entry to Euro zone is said to have been facilitated by the complex currency swap undertaken with Goldman Sachs in 2001.

The transaction consisted of cross-currency swaps of about $10 billion of debt issued by Greece in dollars and yen. That was swapped into Euros using a historical exchange rate (read off-market rates), a mechanism that implied a reduction in debt and generated about $1 billion of funding up front.

The swaps allowed Greece to delay payments and shrink its reported budget deficit and are now fueling questions about whether Greece used the contracts to mask the fact it was struggling to comply with the currency’s membership criteria from the early days of its entry into the Euro zone.

Legal ‘At the Time’

It is claimed that EU regulators had blessed the use of derivatives to let some countries curb their deficits. Italy had swapped fixed payments on a three-year, yen-denominated bond in 1996, for a floating rate, enabling it to cut the amount of interest paid on the debt.

The use of derivatives helped Greece manage fiscal deficit by pushing the interest obligations into the future. While this may have been blessed by the EU, the fact remains that Goldman’s helped Greece to disguise its deficit. Probably at Goldman’s when one’s engaged in a "social cause", small things like ethics are not allowed to come in the way.

Apparently, it was all ‘Greek’ to the EU officials when they allowed it! They have since changed the rules on deficit accounting for off-balance sheet items. Eurostat (the EU’s statistics office) has now ordered Greece to hand over information on the swaps transactions in an investigation that may extend to other EU countries.

Bond sales

If you thought that was all to it, well it does not stop there! Goldman Sachs further managed several bond sales amounting to US$15 billion for Greece. No mention of the swap was made in prospectus for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the by Bloomberg.

Goldman Sachs earned about €735 million (US$1 billion) for its “God’s work” of underwriting the Greek government bonds since 2002 (data compiled by Bloomberg). Small fee for God’s work!!…but large enough to get the Greek Gods seething…

Fall from grace?

The firm has a long established reputation and was seen as the “Gold Standard” for Investment Banking. It now finds itself suddenly equated to the ‘toxic’ financial instruments it sold to its clients.

Politicians and commentators are now competing to denounce Goldman in ever more robust terms — "robber barons", "economic vandals", "vulture capitalists". Rolling Stone magazine ran a story that described Goldman as "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money".

Direct line to the “Gods”!

A firm that claims to do God’s work, of course, are close to the Gods in seat of Power!! The list of Goldmanites who have held key posts in the US administration and vital global institutions in New York and Washington alone is mind-boggling. Here’s a sample list:

§ Robert Rubin (the treasury secretary under Bill Clinton);
§ Hank Paulson (the treasury secretary under George Bush);
§ William Dudley and Stephen Friedman (the current president and former chairman of the New York Federal Reserve);
§ Mark Patterson (the chief of staff to the treasury secretary Timothy Geithner);
§ Joshua Bolten (the chief of staff under President Bush);
§ Robert Hormats (the economic adviser to the secretary of state, Hillary Clinton);
§ Gary Gensler (the chairman of the US Commodity Futures Trading Commission);
§ John Thain and Duncan Niederauer (the past and current heads of the New York Stock Exchange)
§ Adam Storch (the chief operating officer of the Securities and Exchange Commission’s enforcement division).
§ Michael Paese, lobbyist for Goldman used to work for Barney Frank, the congressman who chairs the House Financial Services Committee.

As in the US, the bank is closely linked to the government in the U.K. too. Goldman has been s a key banking adviser to the government on the sale of Northern Rock.

It’s no small wonder that another of Goldman’s nicknames is "Government Sachs". The Apostles of God serving the financial world are certainly well entrenched with the God’s in the Government!

President Obama, just last week said in defense of Goldman CEO Lloyd Blankfein and Jamie Dimon, his old Chicago buddy who heads JPMorgan Chase, "I know both those guys; they are very savvy businessmen." The Greeks, of course, have a different view! Incidentally, both were big campaign donors for Obama.

With such a glowing endorsement from the President, the fall from grace, I reckon, will only be temporary......What the heck do I know about God’s work?

Monday, 1 February 2010

Its the Jobs, Stupid!!

In plain Clinton Speak - "It's the Jobs, stupid!" One in five families in the US is struggling to make ends meet and mood is increasingly getting despondent as the job market continues to show weakness.

The crying need of the hour is "Confidence" and that is fragile at the moment. The last thing we need is knee jerk actions from politicians that can threaten the fragile confidence that is so essential for the business to resume hiring.

The combination fiscal stimulus, quantitative easing and low interest rates have managed to hold the economy from sliding deeply into a pit but it has had its run and has even helped in recording a strong growth of 5.7% in Q4. The United States economy grew at its fastest pace in more than six years at the end of 2009, even as businesses resisted hiring and continued to do more with less.

However, the growth is a lot more feeble than the headline number suggests if we strip the effect of inventory build up. The biggest factor in the strong growth rate during the last quarter was not driven by consumers spending, but by businesses building up inventories. The change in inventories added 3.4 percentage points to the growth rate.

Obviously inventory changes alone cannot sustain growth over an extended period of time, unless of course these are consumed. Interestingly the economy has been able to grow even without adding workers because of productivity gains.

There isn't much more ammunition left to pursue this steroid infused growth any further without threatening to fall into a debt trap, risking ratings downgrades and fuelling future asset bubbles.

The biggest challenge in the near term is the job market. On a net basis, the economy lost 208,000 nonfarm payroll jobs last quarter, and the unemployment rate rose to 10 percent, from 9.7 percent. As long as the labor market remains weak, consumers — whose purchases make up the bulk of economic output each quarter — will be reluctant to spend money. That means businesses will need to look for other sources of demand, like exports (read weak US Dollar policy).

Larry Summers commented at Davos that US "appears to be out of statistical recession, but remains in a human recession". Across the world, unemployment looks set to remain high despite GDP growth. This will have a huge impact on politics, and thus on policy. The risk is that concerns about "protecting jobs" lead to protectionism. That may well endanger trade and retaliatory actions all around.

The West has been profligate for far too long and it is time now to tighten the belt. And tighten the belt it must by several slots! President Obama unveiled a budget that projects a deficit of US$ 1.6 trillion for Fiscal year 2011 and the cumulative deficit to reach US$ 5 trillion over the next 5 years. US is postponing the problem in the hope that they can rein in deficits in the future. It is a ticking time bomb!

Alternatives are tough and its time for some radical action. Actions to eliminate waste, productivity gains in administration to fund investments, innovation through research (tax breaks for research spend), creating business climate that encourages capital investment (stable tax policies), investment in green energy and private sector job creation (reduce corporate tax and support self employment programmes).

I think the administration is turning its focus on the critical issue i.e. job creation. The Obama administration seized on news of the latest upturn as an opportunity to push its proposal to encourage hiring. Companies would receive a tax credit of up to $5,000 for each new hire, and an additional credit on Social Security payroll taxes for raising wages — by increasing hourly pay or work hours, for example — in excess of inflation. Some of the new initiatives are being funded by taxing earners with income > US$250,000.

A lot more needs to be done and some additional measures such as the following would help:

- lowering corporate taxes thereby encourage foreign capital investment

- supporting investment in new technologies through tax breaks;

- investment in education to improve skills linked to business needs

- support research for innovation mainly in green energy,

- focus on improving productivity, eliminating waste in public sector and stricter conditions for doles and

- lastly, sensible regulation that does not limit credit growth from banks; bashing bankers, however, appealing it is must stop and focus should be on developing a framework that makes the system safer;

There is a great need for public-private partnership with focus on equipping the youth with appropriate skills through sustained training and development
programmes. If only part of the fiscal stimulus or the QE was spent to set up a Venture Capital fund to support entrepreneurship and self employment programmes, it might have had potentially much more lasting and positive impact.

Time for some concerted, coordinated and well thought out measures. Can we expect it from our Leaders ?