Invaluable program at Yale.
A few thoughts on Egypt:
Let’s review the recent events in Egypt against some of the data and principles of Sun Tzu.
Intelligence, and the use of agents were central to Sun Tzu’s strategies and methods. Today, this would constitute having a good and reliable “intelligence estimate” or assessment of the situation leading to predictions of a high probability. Another attribute of intelligence is that it is covert or secret–the elements of surprise and “mis-direction” contribute majorly to probable victory.
SunTzu laid out and codified many principles which would be too numerous to mention in this blog–although it would make a great subject for a written piece to analyze current events: the wars in Iraq and Afghanistan: the Turmoil in the Middle East, etc.–against his strategies.
Simple fact: these are campaigns, well thought out and planned, utilizing the workable principles of war. Yes, social media acted as a light speed facilatator, and yes a students organized the various tactical maneuvers the public sees on television. But make no mistake–these events were well thought out in advance, coordinated, timed, planned using intelligence far superior to the “opponent’s” intelligence. Any other assertion is simply folly.
Who had the accurate intelligence assesment in Egypt? Who has the accurate intelligence assessment in the other countries currently undergoing social unrest in the Middle East? Who’s winning the coordinated campaign? Who ’s using the correct principles of warfare? Who stands to gain from these events?
I guess eventually, we will know.
The breakdown in underwriting standards was definitely a prime contributing factor, which allowed so much credit risk. This became compounded by various leverage factors (actual and derivative), rating’s systems and other elements. Below is an excerpt from a commentary of mine done in August 2008 on BIS Working Papers. It speaks to credit quality and transparency.
Super Anti-efficiency
“Markets can remain irrational longer than you can remain solvent.” J. M. Keynes.
“The current phenomenon occurring in the capital markets is aptly termed a “dislocation”, as the primary ultimate intermediary—as the process proceeds and as a matter of fact—will be the Central Banks, as proxies for the Sovereign Governments and institutions which they represent.
Efficient Market Hypothesis whether one subscribes or not, concludes that financial markets are “informationally efficient”. The current situation finds: these markets have gotten into their current state due to what might be termed a “super anti-efficiency”—in that data believed known or actionable was either not known or if known not acted upon. To be clear, the statement that the general markets in the main, were unaware and thus became stultified seems reasonable. But please note that in these premises, are included by reference the rules of fiduciary prudence as “should have known” or more importantly, “should have acted upon”.
What is manifest tends toward an abject systemic or asymmetric informational anomaly—coupled with lack of positive and clear-cut action. Was the notional value of “innovative” Credit Risk Transfer instruments and derivatives unknown? Were the off balance sheet operations of investment and commercial banks completely latent? Did Credit Rating Agencies have any semblance of true experiential and subjective understanding of the products being rated? Was the rapid vaporization of Enron not enough of a microcosmic event to warrant extrapolation?
From a subjective and visceral view, everyday actors for example, in Originate & Distribute model businesses and at all levels with the exception of certain investors, knew what was occurring at a daily functional level—however, sans any real understanding of the global-macro consequences. To say the least, the full picture was not widely known or if it was, not disseminated to the participants capable of realization and response.
Central Banks and Sovereign Treasuries, to be able to know and analyze macro consequences, must have access to accurate information and then the analyses are only as good as the data collected along with the concomitant ability to analyze, understand and predict distributive results and outcomes.In the final analysis, most did not perceive the true circumstance—save on an idiosyncratic micro level—and of those who did, either the full consequence was not appreciated or as inheritors, were confronted with an overwhelmingly daunting task. Thus, a condition of Super Anti Efficiency was born.”
Federal Reserve Proposed Rulemaking Addresses Dodd-Frank Systemic Risk Provisions
Editor’s Note: Margaret E. Tahyar is a partner and member of the New York Financial Institutions Group at Davis Polk & Wardwell LLP. This post is based on a Davis Polk client memorandum by Arthur S. Long.
Sometime ago, I did some writing on the financial turmoil. In one article, a program was proposed which suggested various factors be looked at in order to logically reform Regulatory policies and regimes regarding the financial system in the U.S.
As time went on, I advised one Senator, a Banking Committee member, through the original TARP legislation.
I’m familiar with Davis, Polk and Wardwell through their excellent contribution to the comprehensive and detailed work entitled Enhancing Financial Stability and Resilience: Macroprudential Policy, Tools and Systems for the Future, produced and published by The Group of Thirty. I commented on and discussed that report with members of the working group who produced it and with the Financial Stability Section at Bank of England.
It’s obvious how imporatnt well ordered Regulation should be crafted. Does Dodd-Frank meet that set of criteria? Can it lead to a well ordered system? How does FSOC function? Who is the final authority? Harry Truman?
In an effort to deal with the concept of “too big to fail”, aren’t we really confronted with the idea of “too big to bail out?” What’s next–”too big to salvage at all?”
The fact is: that implicit in an unweildy system are things like human error, how to connect the dots, definitions of systemically important -non-bank financial companies, systemically important BHC’s, Dynamic Provisoning, Variable Scalars,various types of Capital(Core, Tier 1, Tier 2),etc.
By the way, without reform of the OTC derivatives markets, will we still be herding cats?
This is all in the correct area–but it needs to be simplified.
I hope we can monitor it and keep track of it all–without getting too big of a headache.
http://blogs.law.harvard.edu/corpgov/2011/02/22/federal-reserve-proposed-rulemaking-addresses-dodd-frank-systemic-risk-provisions/
Art of War and Current Events
Originally appeared on Newsvine.com
Sun Tzu said:
“…the skilled in planning and directing the effective use of military operations and forces subdue the enemy’s forces without battle; capture the enemy’s walled cities, fortresses and forts without attacking or besieging them; and destroy the enemy’s nation without protracted campaigns. ”
Sun Tzu also said:
” Those of former times skilled in warfare achieved a condition of first being un-defeatable before engaging in battle by keeping watch or spying out the condition or circumstances under which the enemy can be defeated. Thus, being un-defeatable lies with oneself while the conditions or circumstances under which the enemy can be defeated lies with the enemy”
As a matter of fact, Sun Tzu said many things–many of which would explain several current day successes and failures.
Let’s review the recent events in Egypt against some of these data and principles.
Intelligence, and the use of agents were central to Sun Tzu’s strategies and methods. Today, this would constitute having a good and reliable “intelligence estimate” or assessment of the situation leading to predictions of a high probability. Another attribute of intelligence is that it is covert or secret–the elements of surprise and “mis-direction” contribute majorly to probable victory.
SunTzu laid out and codified many principles which would be too numerous to mention in this blog–although it would make a great subject for a written piece to analyze current events: the wars in Iraq and Afghanistan: the Turmoil in the Middle East, etc.–against his strategies.
Simple fact: these are campaigns, well thought out and planned, utilizing the workable principles of war. Yes, social media acted as a light speed facilatator, and yes students organized the various tactical maneuvers the public sees on television. But make no mistake–these events were well thought out in advance, coordinated, timed, planned using intelligence far superior to the “opponent’s” intelligence. Any other assertion is simply folly.
Who had the accurate intelligence assesment in Egypt? Who has the accurate intelligence assessment in the other countries currently undergoing social unrest in the Middle East? Who’s winning the coordinated campaign? Who ‘s using the correct principles of warfare? Who stands to gain from these events?
I guess eventually, we will know.
Stephen R. Ganns
Abstract:
Exploring the Full Faith and Credit of Sovereign Governments: Solving Productivity, Debt and Fiscal Crises
The current financial crisis was several decades in the making. A series of events, which form a concise timeline, renders a storyline that resulted in turmoil almost too incredible to be believed. The problem of “too big to fail “has in many ways, been supplanted with another notion: viz., “too big to bail out”. Given the orders of magnitude, sovereign governments are confronted with a series of complex and life altering decisions. Other economies not quite as advanced, are plagued by the contagion of “knock-on” effects and thus have become stagnant.
Fiscal deficits and mounting sovereign debt have become the preoccupation of most developed economies, along with anxiety concerning currency devaluation. Unprecedented maneuvers and operations of various kinds have been performed by central banks and sovereign treasuries. However, this limited view of the current situation continues to deal with symptomatic remnants rather than actual causes. Against this back-drop, we explore the concept of the Full Faith and Credit of Sovereign Governments: leading to a practical definition of what should stand behind fiat currencies.
Sovereign Nations have available within their borders, natural resources coupled with the relative skill and technology to access them. The ability to monetize those resources through coefficients of human innovation and existing technologies, form the basis of a formula with which to view the value potential inherent to sovereign balance sheets—which generally are only representative of current assets. We would argue that it’s not bankruptcy, which existentially confronts developed economies but cash flow problems. New and creative ways of monetizing assets for dealing with long term debt while increasing productivity would sequentially lead to dealing with the problem of short term deficits. The monetizing of assets could increase GDP, spur job creation and if done adroitly, would help control the cycles of deflation and inflation thus protecting the value of the currency.
In this paper, the author discusses a logical program for dealing with the issues of the Full Faith and Credit of Sovereign Nations, GDP and National Debt.
There are some including the IMF, as well as a cadre of preeminent central bankers and economists, who have pegged the true cause of the current financial crisis as trade imbalances which left the world awash in too much currency–the effect of which lowered rates on investments and fueled significant “fat tail distributions” (or bubbles as they are called these days). This is a limited view of significant proportions: however, it contains at least a modicum of truth. But let’s briefly look at the real “imbalance” problem, which if not handled, threatens the entire geo-political landscape.
In the Post on this website entitled, Speculative Economics…, Section IV. , a few countries are represented in terms of their 2009 GDP. The U.S. is first at $14.25 T, followed by Japan at $5T with China a close third at $4.9 T. Lower on the list is Iran, at $330B. To our point, Egypt’s GDP is $217B. Also included in the same Post is the population of each country. This very bluntly, tells an interesting story–quite relevant to the current social unrest occurring in Egypt today.
The U.S. has a population of some 313M with a yearly per capita GDP of about $46,000. Two current examples of social unrest in the Middle East are Egypt and Iran. Both have populations of about 80M. Per capita GDP is approx. $2,770 and $4, 100 respectively. Yemen has a per capita GDP of $1,230 and Jordan’s is $4,400– however, in its Palestinian sector, it fares much worse. We could go on about other parts of the world. But the truth: most of the world lives in poverty and yearns for a livelihood, freedom and government infrastructure stability.
In contrast, Kuwait’s per capita GDP is $54,000–no social unrest. Saudi Arabia’s per capita GDP is around $26,000–some social unrest. The relative correlation of per capita GDP to social unrest would be an interesting study and could conceivably be predictive (a priori) rather than reactive (posteriori) in the universe of geo-politics.
National Security Strategy
Note: This post is included on the website due to the bolded concept below.
Charles Gibson of ABC News, in his interview with Sarah Palin during the 2008 political season, inquired if she agreed with what had been colloquially referenced as the Bush Doctrine. Some believe that this question played a pivotal role in the election.
Mr. Gibson in that interview defined the doctrine as simply “Preemption”; however, this was a somewhat limited view. Due to events in the Middle East over the last two weeks or so, some clarification might be appropriate: in that not much in terms of Foreign Policy or international strategy has really changed–from one administration to the other.
The National Security Strategy (September 2002), the actual document which became known as the Bush doctrine was promulgated by the U.S. National Security Council.
Earlier in June of 2002 at West Point, President Bush spoke to the cadets, “Our Nation’s cause has always been larger than our Nation’s defense. We fight, as we always fight, for a just peace—a peace that favors liberty. We will defend the peace against the threats from terrorists and tyrants. We will preserve the peace by building good relations among the great powers. And we will extend the peace by encouraging free and open societies on every continent.”
Some of the precepts of the “Bush Doctrine” include: “champion aspirations for human dignity, strengthen alliances to defeat global terrorism and work to prevent attacks against the US and its friends, work with others to defuse regional conflicts, prevent the enemies of the US from threatening it, its allies and friends with weapons of mass destruction, ignite a new era of global economic growth through free markets and free trade, expand the circle of development by opening societies and building the infrastructure of democracy, and develop agendas for cooperative action with the other main centers of global power.”
Have things really changed through the millennia: or is peace through global trade and commerce still the order of the day?
The Group of Thirty
The Group of Thirty, or Consultative Group on International Economic and Monetary Affairs, Inc., is one of the most influential banking and global monetary policy think tanks which exists today.
Their recent publications include: Financial Reform: a framework for financial stability ( working group headed by Paul Volcker), Enhancing Financial Stability and Resilience: macro-prudential policy tools and systems for the future (working group headed by Roger Ferguson, Jr.), Twelve Market and Government Failures Leading to the 2008-09 Financial Crisis (Guillermo de la Dehesa), and other relevant concepts by members such as the Per Jacobsson Lecture Series: Markets and Government before, during and after the 2007-20xx Crisis (Tommaso Padoa-Schioppa-in memoriam). The organization’s papers, work products and reports are generally intellectually breathtaking, relevant and significant to the financial issues of our time.
The members of the the organization comprise “very senior representatives of the public and private sectors” with the mandate of exploring “the international repercussions of decisions taken in the public and private sectors and to examine the choices available to market practitioners and policy makers.” This is an august international body of central bankers, commercial and investment bankers, academics and others who influence monetary and fiscal policy.
Some of the membership includes: Paul Volcker former Federal Reserve Chairman, Jacob Frenkel former Governor of the Bank of Israel, Jaime Caruana General Manager of the Bank for International Settlements, Mario Draghi Governor of the Bank of Italy and Chairman of the Financial Stability Board, Roger Ferguson CEO of TIAA-CREF and former Vice Chairman of the Federal Reserve, Jean-Claude Trichet President European Central Bank, Paul Krugman Professor of Economics at the Woodrow Wilson School at Princeton University, Mervyn King Governor of the Bank of England, Martin Feldstein Professor of Economics at Harvard University, E. Gerald Corrigan Managing Director Goldman Sachs & Company and David Walker former Chairman Morgan Stanley International–to name just a few.
We have provided a link to their website and highly recommend keeping up with their stellar work in the field of international finance. The organization’s Executive Director is Stuart P. M. Mackintosh.
Published 10 August 2010: BNA Real Esatae Law and Industry Report
Economic History
By Stephen Ganns
Houston, TX, 10 August 2010
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“The hope of the twentieth century rests on its recognition that war and depression are man-made, and needless.” Tragedy & Hope, Dr. Carroll Quigley, Georgetown University 1966
I. The Art and Science of Certainty
In October of 2008, I read an article by Krassimir Petrov, Professor of Economics at Prince Sultan University in Saudi Arabia, which stated that the current economic turmoil had no real historical precedent. I commented to him something to the effect that that may be true, save 476 A.D., where we find the last vestiges of Roman civilization; to which he replied: “yes, it’s the end of empire”. read more…
Questions relating to elements of the Financial Turmoil:
Recently, I’ve been asked some similar questions having to do with specific topics related to actions taken and elements which existed or still exist, that are part the macro financial picture. I’ve chosen two of them to mention in this post:
1. The Federal Reserve ended its currency swap lines in February of this year. How do these “swaps” relate to the dollar, and could this affect the value of the currency?
The Fed “Swap Line” is essentially using a different definition of “swap”–which is also used to denote certain classes of “Over the Counter” ( or unregulated and non exchange traded) options style contracts such as Credit Default, Foreign Exchange/Currency or Interest Rate Swaps –which make up the vast majority of these unregulated or OTC derivatives.
This definition (Fed Line) is literally swapping or trading dollars with other central banks. These are mainly used to settle contracts that are denominated in U.S. dollars when there is a shortage of dollars held by foreign commercial banks–primarily to facilitate international trade or various cross border transactions. It relates generally to a country’s “current accounts”–which appears in the public press as trade deficits or surpluses, etc. When the Fed set the swap line up, there was a shortage of dollars available to settle foreign exchange contracts and this line allowed stability in the price of dollars for other countries to be able to settle trade contracts. The effect of its “ending” could be volatility in the price of dollars if a shortage is perceived. I’m including a title from the WSJ A Primer on the Fed’ Swap Lines with Europe* about this swap line for your convenience.
2. There are some 1.4 quadrillion dollars of derivatives floating around. Interest rate swaps and currency/exchange rate swaps are most worrisome. I haven’t seen a breakdown of these anywhere but I assume a lot of them are valued in dollars. If they were to cascade into a default what effect could this have on the dollar?
The back story of this question is really tantamount to asking “What happened anyway?”
It’s really a longer study but briefly:
The “notional” aggregate amount of Quadrillions, is just that–notional or imaginary–probably better defined as the face amount of the outer limit of all liabilities real and contingent contained within this economic class of instruments. As assets or rates decline or increase, it forces settlement of these contracts–which could be a small portion of the notional amount or all of it, a moving target which is impossible to accurately quantify. That is a real problem.
These “derivatives” are pretty evenly divided between Exchange Traded (regulated with rules, settlement protocols, reserves against future liabilities, margin calls, etc.) by various regulatory bodies such as CFTC, Chicago Mercantile Exchange, etc. and non-exchange traded or Over the Counter (OTC). There is a lot of regulatory and legislative history related to all this. The OTC market literally has no “real” rules or regulation (except made up on a sort of ad hoc basis by the dealers in these contracts) which unfortunately are primarily the large money center banks and investment banks. You’ll recall that the original plan by the U.S. in ‘08 was to purchase the “toxic assets” from banks through the TARP program. The idea was: this plan would un-freeze the capital markets and let the economy re-set and move forward–sort of back to normal. Why did they suddenly change the plan to “recapitalizing” the banks rather than just purchasing the bad assets–as was done many times in past anomalies–such as the savings and loan crisis in the 1980’s?
This brings us back to the derivatives. The banks losses or liabilities were magnified by the OTC derivatives (CDS, Interest Rate and Foreign Exchange) in a parabolic fashion– like a particle accelerator in a nuclear reactor. The correct action at the time would have been to suspend all trading in these OTC contracts (as the Chinese allowed their private corporations to do) as a matter of National Security and then to create a bad bank to liquidate the assets–have treasury or the fed pay the difference which at the time was only around a trillion dollars, and just move on down the road. This bad bank had been the usual “workable” solution used in past anomalies–not ideal but at least a better solution.
So instead, we get a “suspended animation” of real economies–hoping that banking capital will increase sufficiently to be able to then take the “losses” into account and then re-set. Problem is that this is a slow painful process–the fragility of which cannot handle another major anomaly.
So, simple answer to the question is that: it’s the erosion of banking capital that is at risk–which would have tangential effects on the value of the dollar, such as continued freezing of credit, more bailout, more fiscal deficits, more loss of confidence, geo-political implications, etc.
As a note, there could be currency manipulation as well, but at this point, the Fed and Treasury would step in to handle that–so I don’t see it as very deleterious to the overall situation.
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Stephen R. Ganns has more than 30 years of real estate experience in acquisition, management, restructure/workout and financing.
