JPMorgan's Dimon Excoriates Hedge Funds Lack of Intelligence

Unnamed Senior Managing Director at Undisclosed Hedge Fund

JPMorgan's Chairman and Chief Executive Officer, known primarily for his "Fortress Balance Sheet", is also known for his suffer no fools, take no prisoners candor.

They say that many a senior officer of JPMC has been reduced to embarrassed impotence with a curt "If I want your opinion, I'll ask for it.  Just give me the facts".  Though to be fair, "they" are reported to say a lot of things.  Some of which others say are not true.

Today in characteristically blunt fashion, Mr. Dimon assailed Hedge Funds and their staff. 

Commenting on the new financial regulations (which his firm approves in principle but apparently not at the pesky level of implementation), Mr. Dimon was quoted by the Financial Times:

“It is highly ill-conceived, doesn’t reduce risk at all. As a matter of fact, it probably complicates it for some [customers]”.

He said hedge funds and other derivatives users would have to deal with two separate legal entities depending on the type of securities they trade.

As usual the most vulnerable members of our society are made to pay the price of poorly thought out rules.

As we have documented right here on this blog before, most employees of financial firms, including the most senior and highly paid, are really bad with maths. 

That seems to be the least of their problems.  Today we learn that they have trouble distinguishing between legal entities.  What might seem to those not familiar with the financial world a rather critical skill when buying bonds or equity.

It's unclear what shameful shortcomings are yet to be revealed.  Memory problems?  How does one remember which firm to call when there are so many?  Morgan Stanley, JPMorgan - is that one firm or two? Goldman Sachs, Sachs Fifth Avenue - one for socks, one for stocks, but which one for which? 

"I want to trade a bond. Do I call Goldman, Morgan or JPMC?  Or Staples?"  And imagine the plight of those poor souls who still have the Bear or Lehman on their speed dials.  Spending hours listening to the ring tone as they patiently wait for the answer that never comes.

To the many heartless critics who ascribed problems in the financial sector to greed. I hope you're ashamed of yourselves.  It turns out after all that these problems are all due to a lack of skills.  Rather basic skills.

1. Excessive bonuses.  A case of greed?  No.  The chap who calculated  them messed up the transformation of the bonus percentage to a decimal.  "Do I move decimal point two spots to the right or the left?   Must be to the right because who but a socialist or worse would go to the left?" "From each according to his ability, to each according to his cupidity" turns out to have been a simple math error.
2. The Great Recession (almost a Depression).  Again it was a question of not understanding the maths.  "You mean a guy with zero income can't pay back a loan?  Who'd have thought?  I figured that 20 years x 12 months x 0 equaled the loan principal plus interest."

Now, while Sarah Palin isn't my President yet, I have written her pleading that her Administration make its first priority doing something for the most vulnerable among us:  those who work in finance.  I call it the "No Banker Left Behind" Act. 

Union of Kuwaiti Investment Companies Studies the Constitutionality of New Capital Markets Law

AlQabas reports that the Union of Kuwaiti Investment Companies has been studying the new Capital Markets Authority Law as part of their self-proclaimed selfless desire to participate in all aspects of the economy and decisions relating thereto.  

As a result of these efforts, they've discovered some shortcomings it seems and have rather patriotically pointed these out to the authorities.   Further careful study has uncovered some articles which are clearly unconstitutional and,  as well, probably run counter to the original intent of the Founders.  By what I suppose might be described as sheer coincidence, the offending articles relate to penalties applicable to Kuwaiti investment companies.

Appropriate action will be no doubt be taken. 

Threat to Capitalism Warning Notice: Expansion of Shareholder Rights

If you weren't scared by my earlier post, you w'll be by this one!

They say that courage is like a potato chip.  Try one and you're likely to be back for more.

After reading my earlier warning on the appearance of yet another manifest danger to the free market system, one of our readers has called my attention to an even greater danger.  And one frankly I had been avoiding mentioning.  But fortified with yesterday's "first chip" of courage, here I am today confronting another manifest imagined danger.

How much fear can one human bear?  I suppose with courage more than one initially thought.  If you're feeling brave, read on.

I know that many of you out there will be saying what could be a greater danger than more disclosure of CEO pay packages?  Socialists on motorcycles?  Disclosure of senior officers' expense reports?  You had how many "massages" in a single night at the Pen in Manila?  Just how many scotches do you have to drink to run up a $750 bar tab in five hours?  By the way what were you doing in a bar for five hours on a business trip?

No this time the danger is an expansion of shareholder rights.  And again we have the FT to thank for making us all aware of the stealth assaults on our way of life, though I would note  more in sadness  than malice that they did also give a forum to those who support the measure.   Fringe individuals and groups like two former SEC Chairmen, Calpers, self-appointed corporate governance experts.  So we may have to mark the FT down as a waverer in the fight to preserve our way of life. 

The proposed SEC rule on "proxy access" would allow shareholders to nominate up to a quarter of a company's board members. It would allow shareholders to nominate directors if they own 1 per cent to 5 per cent of stock, depending on the company's size, and amend a federal measure that allows management to exclude shareholder proposals that nominate directors.

Sounds simple.  And even good.  Who could argue with an expansion of democracy?  Of shareholders' rights?   

The rule under discussion is "probably the most flawed and unworkable proposal" the SEC has issued on proxy access, the US Chamber of Commerce, the business lobby group, wrote in its letter. Tom Quaadman, its executive director for capital markets, said yesterday that the group was keeping all of its options open, including a lawsuit against the SEC.

Wachtell, Lipton, a big Wall Street law firm, said the proposal would have "negative consequences" for US companies and competitiveness.

When a distinguished firm like Wachtell Lipton or the US Chamber of Commerce weigh in, you know you should listen seriously.  No doubt they're remembering just how well the boards of Citigroup, Lehman, Bear Stearns, Enron, and others - selected, I would remind you, without shareholder interference -  enhanced "competitiveness" to know that the system works just fine as it is.

Threat to Capitalism Warning Notice: Disclosure of Salary Metrics

I was just recovering from the warning that bicycle riding socialists were invading our great land to impose mandatory recycling, when a new danger to the free market system has apparently appeared on the horizon. 

It is the provision in the Dodd Frank financial "reform" legislation that requires financial firms to publish the ratio between their CEO's pay package and that of the average worker. 

It doesn't sound like much of a danger but it must be because I read it in the Financial Times where the article was placed prominently  on the first page.  Clearly a reflection of the seriousness of this mortal threat.  

It is I suppose human nature to avoid confronting the hard truth.  And AA is no exception.  Yesterday I said nothing.   But today in a rare display of personal courage, I've decided to post on this so that those of you out there who may have missed the warning, will be alerted.   I'm not sure what you or I can do to stop this pernicious danger to our very way of life.  How we might "Restore Honor to America".

Two quotes illustrate the danger.

The rules’ complexity means multinationals face a “logistical nightmare” in calculating the ratio, which has to be based on the median annual total compensation for all employees, warned Richard Susko, partner at law firm Cleary Gottlieb. “It’s just not do-able for a large company with tens of thousands of employees worldwide.”

It's hard to disagree, I suppose, with learned counsel Susko.  I mean after all there'd be the initial compliance puzzle of distinguishing among median, mean and mode.  Then the onerous data collection (no doubt by hand) of salary and compensation data which of course companies don't bother to keep as they don't need it to calculate pensions, raises, bonuses, payments to local social security schemes,  etc.  "Fred, would you mind bringing in your paystubs from last year?  You won't believe this but some pointy headed bureaucrat in Washington requires that we figure out what we're paying you!"  And what if it were a foreign employee, a Jacque in Paris, a Sanjay in Mumbai, how on earth can banks be expected to figure out what a Euro or Rupee is worth in good old American money?

But beyond that there would be the number crunching.  And if one thing is crystal clear, it's that banks have a real devil of a time working with numbers.   Imagine the difficulty this calculation poses in contrast to more pedestrian things such as valuing Level III assets, determining VaR, running Monte Carlo simulations to mark to market trading positions in exotic instruments, running credit portfolio risk models, keeping track of all those credit card transactions for  their millions of customers, etc.   

When you reflect on all of the above, you'll understand why financial firms are just not equipped to do this sort of thing.  And why imposing it on them is not only unfair but another step on the road to serfdom!

And

“We’re not debating the concept of disclosure – we think it’s a good thing,” said Larry Burton, executive director of the Business Roundtable, which represents chief executives of the biggest US companies. “But you can do more harm than good if you take a well-intended piece of policy and implement it badly. That’s the risk here.”

Another eminently sensible position.  Of course, we agree with the concept of disclosure.  Where we part company is on actually implementing the principle.  In an earlier time, I suppose the refrain was:  "Of course, we hold that all men are created equal.  But just don't ask us to free our slaves.  It would lead to all sorts of harm." 

As would disclosing this data.  First, there would be dissension within firms.  The old collegial spirit of the group broken down.  Then imagine what might happen if shareholders used a metric like this to  determine the value added by the Chairman or CEO.   One hopes that the more enlightened members of our legislative branch are already working to eliminate not just this foolish idea but any disclosure of senior officer compensation.  Or if not now, maybe in November.

Haven't banks and bank CEOs suffered enough unjustified persecution?

Idiocy Knows No Borders: Terrorist Babies

You may recall, if you're prepared to think some very scary things, how Dan Maes revealed that his opponent in the Republican primary for Governor of Colorado was under the influence of the United Nations and promoting programs (bicycle riding and recycling) which posed a manifest danger to our very way of life. Luckily for our embattled Republic, Mr. Maes will be representing the Republican Party in the general election - the UN's plan in Denver having been dealt a hopefully fatal blow.

But dangers abound.  Stepping forward with the latest warning is Representative Louie Gohmert, Republican, Texas who asserts in the following clip future terrorist babies are being born right here in America by illegal aliens, spirited back home for the necessary training and indoctrination, and then to be later infiltrated back to conduct their nefarious operations.   

While the good Representative did not provide conclusive proof of his warning, I think he did conclusively demonstrate that Idiocy Knows No Borders - a perhaps even more imminent and critical threat to the USA.

You Said What?: Tomalin Reveals Why There Will Always Be Banking Crisis

Taking a leaf from Charlie Prince's notebook, Michael Tomalin, CEO, of NBAD revealed why there will always be bad loans and banking crises in this article from The National:

“The problem if every bank is name lending and you are not is that it puts you in an awkward position,” Mr Tomalin said.

Dance to the music.  And pay the piper later.

Or perhaps, "But, Mom, all the kids were doing it".

Heard at the FT: HP Board Overreacted (?)

My favorite financial newspaper weighed in today on HP's Board's dismissal of Mark Hurd via this comment in the Lex column:

But the safe decision is not always the right one. Mr Hurd was, by most accounts, a superb executive. HP’s shares had outperformed the technology-heavy Nasdaq Composite ninefold since he took over in 2005 and net income grew handsomely. There is no evidence that Mr Hurd cut any ethical or legal corners while presiding over this success. Indeed, his transgressions appear minor enough to have warranted little more than a slap on the wrist at most American companies.

Indeed, one is tempted to say.  Yes, there is a culture of toleration of "mistakes" at most American and most other companies.    Or perhaps a cutting of a corner on a rule.   All as long as the concerned employee is generating the revenue.

After all imposing small minded constraints might limit the creativity and motivation of such corporate high fliers.    Expense rules can be safely ignored.  Dealing limits.  Restrictions on the use of recreational drugs.  How many of out there can recall seeing a "golden" boy or "girl"  on the trading room floor with "talcum powder" on his or her shirt after a trip to the rest room?  Like the athlete on the parallel bars, a little talcum keeps your hands from slipping!

Indeed all minor.  A gentle slap on the wrist and back to revenue generation. 

Of course, for the not so golden or high ranking members of staff,  understanding is a bit more constrained.  And justice more swift.

As it's known out there, checkbook morality:  "If it pays, it plays".

One can always find the small minded (like AA) out there.  Here are couple of more from the FT .

You Said What? Subervsion Alert: The Bicycle Conspiracy

Communist Bicyclists on the Way to Your Town!

In a saying wrongly attributed to Sinclair Lewis we're told that "When Fascism comes to America it will be wrapped in the flag and carrying a cross".

But have you ever wondered how Collectivism and eventually Communism will come to America?  And perhaps to your own country, if they haven't already?

Well, I certainly have!

One brave man (pictured below) Dan Maes has broken the silence and dared to tell the shocking truth.  It will come on bicycles bearing re-cycling bins! 

Dan Maes, Patriot, Profound Thinker and Proud SUV Driver

If you're faint of heart or a sun-shine patriot read no further.   But if you love your country, read on, brave citizen.   From the Denver Post.

"Republican gubernatorial candidate Dan Maes is warning voters that Denver Mayor John Hickenlooper's policies, particularly his efforts to boost bike riding, are "converting Denver into a United Nations community."

"This is all very well-disguised, but it will be exposed," Maes told about 50 supporters who showed up at a campaign rally last week in Centennial.

Maes said in a later interview that he once thought the mayor's efforts to promote cycling and other environmental initiatives were harmless and well-meaning. Now he realizes "that's exactly the attitude they want you to have."

"This is bigger than it looks like on the surface, and it could threaten our personal freedoms," Maes said.

He added, "These aren't just warm, fuzzy ideas from the mayor. These are very specific strategies that are dictated to us by this United Nations program that mayors have signed on to."

Dubai: The Emirati Goldfinger

Fancy expensive car proving honesty and sincerity.

Dubai is known as an important gold trading center.  Apparently the story of Damas is just one of many.

This is another.

An Emirati identified solely as AA, was taking gold from an Iranian woman, FH,  promising her he was selling to Russians at a "higher price".  Presumably because the Russians in the UAE are not sharp traders.  In one example, she gave him gold worth DH850,000 and he gave her a check for DH500,000.  

One could make a small fortune in such exchanges - though starting with a large fortune would be a prerequisite.

In any case the woman was sure this chap was on the "up and up". 

FH said that each time the accused, who addressed her as 'mother' visited her he used a different car. And, therefore, she believed whatever he said and never suspected him.

As Ken over at Wall St WTF can testify, justice has both a long arm and is swift in the Emirate of Dubai.  Interpol arrested the chap in Thailand and he's been arraigned in Dubai.

The accused has denied the accusation and the Dubai Misdemeanor Court has adjourned the case until August 9.

A couple of further notes.

Despite the similarity of names (AA), like a certain prominent Kuwaiti-Saudi businessman, I continue to deny any wrongdoing.  Mother, why won't you believe me?

And for Ken at Wall St WTF:

1. You've expressed some concern at your blog as to the  vigor (or lack thereof) in the legal pursuit of the Flying Abdullah Brothers.  Perhaps the judicial venue for this case  - the Misdemeanor Court - is an indication of the seriousness with which such crimes are viewed in the Emirate?
2. Also as one who has worked with the DIFX/DFSA, perhaps you can  advise whether Iranians are working there in senior management.  That potentially could explain a lot of things.  He called me "mother" when he signed his Enforceable Undertaking.

Belt Buckles: The New Paradigm of Patriotism

For many years now, we Americans have been able to measure one another's patriotism by the presence or absence of an American flag pin on a lapel.  And the bigger a pin, the more patriotic.  

But perhaps we'd become complacent and so lost sight of the original intent of the Founders.

One man, David H Brooks, has shown that we can not only renew our patriotism but take it to a higher level:  the US$100,000 American flag themed belt buckle shown in the above picture.

Even though this idea was his, David didn't shrink from giving average citizens - at least those who pay taxes - the opportunity to join in making his vision a reality by defraying the cost along with $6 million in other expenditures.

As the NY Times reports:

DHB, which specialized in making body armor used by the military in Iraq and Afghanistan, paid for more than $6 million in personal expenses on behalf of Mr. Brooks, covering items as expensive as luxury cars and as prosaic as party invitations, Ms. Schlegel testified.

Also included were university textbooks for his daughter, pornographic videos for his son, plastic surgery for his wife, a burial plot for his mother, prostitutes for his employees, and, for him, a $100,000 American-flag belt buckle encrusted with rubies, sapphires and diamonds.

The expense-account abuse, the prosecution has said, represented a pittance compared with the $190 million that Mr. Brooks and another top employee are accused of making through a stock fraud scheme in which he falsified information about his company’s performance — including significantly overstating the inventory of bulletproof vests — to inflate the price of the stock before selling his shares in 2004.

Patriotism and family values!

Mr. Brooks appears to be using the Abdullah Brothers' defense.  And I suspect this may all turn out to be a tempest in a teapot.  A failure - if one were to be so uncharitable to use the term "failure" - to properly document some transactions. 

I'm also guessing - but don't know for sure - that the buckle is from Damas' Bur Dubai store.

You Said What?: Apparently Time is Running Out

Sorry to be the bearer of bad tidings. But here at Suq Al Mal we don't shrink from telling it like it is.

Bahrain Police Crack Down on Dangerous Street Crime

Copyright Gulf Daily News Bahrain

In an wise move local authorities - both police and government officials - have launched a decisive campaign to increase public safety in the Kingdom of Bahrain.

While I consider this a family blog and don't post what I consider to be offensive pictures or refer to offensive acts, I've made an exception this time - simply because of the enormity of the act and the need to speak out to condemn it.

Pictured above is the manifestly dangerous Ms. Kauthar Abdulameer,  Bahrain's Public Enemy #1.  

As you can see, caught by the camera in flagrante delicto.  That's right standing in the balmy Bahrain summer  (40 degrees or more centigrade with a bracing hint of humidity in the air) breathing toxic car fumes selling water.  To support her family and newly born daughter, Fatima.  

The heavens call out, I suppose, for an appropriate punishment for so great a crime.  And, if not the heavens, at least the local authorities who apparently have no more urgent criminal matters to deal with.

In any case I'll be holding my next trip to the Kingdom until I have assurances the authorities have  restored safety and order.   I'd suggest you consider the same.

Damas Extends Standstill To September - Business Model Apparently Validated Yet Again

From Nasdaq Dubai 22 July:

Damas International Limited (the Company) announces today that the Company has signed an extension to the standstill agreement signed with a majority of its bank lenders. 

 

The standstill agreement has been extended until 30 September 2010 in accordance with its terms in order to allow the Company to finalize its restructuring plan and having regard to the Ramadan period. The Company has agreed a term sheet with the steering committee of its bank lenders and which has now been sent to the entire lender group for approval.  

The Company is pleased to announce that a majority of its bank lenders have approved the extension which proves once again the confidence of the Company's bank lenders in the strength of the underlying business model of Damas, a Company spokesman stated.

With respect to latter comment, I was surprised that Damas neglected to mention their lenders' confidence in Damas proven corporate governance model.  So I will mention it here.

Some commentators might remark that the lenders are making the best of a bad situation in the hopes of securing their recovery.  But those with Vision (like AA) know this can't possibly be right.  Can it?

What Were They Thinking?: Central Bank of Kuwait Approves Burgan Bank Share Buyback

When I read announcements like the one below (that the CBK has given permission to Burgan Bank to buy back or sell up to 10% of its shares) or the periodic announcements on the UAE exchanges reporting this or that bank's share buyback activity, I've got to wonder "what were they thinking"?  Or maybe "were they thinking at all?"  To be clear, here I'm not just questioning what the bank itself is thinking so much as what its apparently overly friendly or somnolent regulator is.

Those not suffering from banker's ADD will recall that Burgan Bank had a massive rights issue earlier this year -  April to be specific.  360 million shares.  Equivalent to a 34.57% increase in capital.  A Rights Offering that needed two stages because in the first Burgan managed to only place 85% of the amount.   If you have a banker's memory and don't remember, here's the link.

While one can never be certain, presumably Burgan raised this massive amount of capital because it needed it.   Perhaps, it was even encouraged by the Central Bank to do so.  To now partially decapitalize the bank seems not to make much sense though I suppose I could have missed the miraculous turnaround in the Kuwaiti economy in the last three months.  The boom in the KSE. The restoration of imagined ruddy health to the investment firm sector.  The disappearance of problem loans.

Looking southward,  one might also expect that the Central Bank of the UAE would stop or reduce sharebuybacks by local banks on the theory that in these difficult times banks need all the capital they can muster to provide a buffer against  problems. Though again I suppose difficult times may have ended. A dramatic recovery in the UAE.  The start of a new real estate boom.  The concomitant collapse of problem loans.  A new improved "Vision".  At least 20/5 this time!

It really does pay to pay attention as they say.

In cases like this where the decision seems contrary to good sense, it makes sense to look for additional motives.  As we all know, regulators are charged with looking out for the health of the banking sector and the economy as a whole - and not just that of this or that bank.

That suggests the Central Bank of Kuwait's decision is motivated by a higher  and more pressing need: raising Burgan's share price to a more appropriate level -- defined as one that makes its shares worth more in a collateral pledge and which increases the equity and perhaps income of its owners (FVTPL).  And goal so compelling and universal that a regulator "down South" might share a similar view, though of course for different banks.

As all good bankers know it is a cardinal rule of commercial banking to "have a second way out".  Even given the apparently generous pricing mooted on United Gulf Bank's purchase of 13% of Burgan is it really wise to rely solely on this "auction" to achieve this nationally important economic goal?  Apparently not!

And finally, yes, Burgan does hold Treasury Shares (some 29.6 million of them if I'm not mistaken) though I rather doubt they sought the CBK's approval because they want to sell them.  And of course, in such a case, the CBK could have limited its approval to a sale only.

[13:28:52]  ِ.موافقة بنك الكويت المركزي لبنك برقان بشراء ما لا يتجاوز 10% من اسهمها
يعلن سوق الكويت للاوراق المالية ان بنك الكويت المركزي وافق بتاريخ ‏
ِ21-7-2010 علي طلب بنك برقان بشراء او بيع مالا يتجاوز 10%‏
من اسهمه المصدرة لمدة سته اشهر اعتبارا من تاريخ انتهاء الموافقة ‏
الحالية في 5-8-2010 وذلك مع ضرورة الالتزام بما وضعه البنك المركزي
من ضوابط وشروط في شأن تملك البنوك لاسهمها اضافة الي ضرورة الالتزام
باحكام المداة ( 115 ) مكرر من قانون الشركات التجارية واحكام القرار ‏
الوزاري رقم (10) لسنة 1987 وتعديلاته بموجب القرارين الوزاريين رقم (11) ‏
لسنة 1988 ورقم ( 273) لسنة 1999

Financial Times: The Great (Economic) Debate

Today's Financial Times resounded with more than its usual "plop" when it hit my doorstep this morning.  When this happens, AA knows that the issue is freighted with more than the usual amount of weighty insight and ponderous thoughts.

The FT has opened its opinion page to a one week debate between the advocates of austerity and of stimulus which promises at least five more such issues.  And at least that number of resounding thuds.  Luckily, the doorstep at Chez AA is sturdy.

Wrapped comfortably in their blankets of blind dogmatism (perhaps a bit too tightly wrapped), several learned thinkers have already weighed forth.  There have been the usual appeals to authority, though as of yet we have not heard what Master Aristotle's position is.  Prophets of various economic sects have been quoted along with the lesser works of apostles and disciples.   Holy books have been referred to.    Heretical scriptures and false prophets denounced. 

Today the abject failure of one particular sect to learn from history was noted, perhaps more in sadness than bitterness.  They are, it appears, sadly doomed (and perhaps damned) to repeat it.  One bearded chap was called out for holding a particularly laughable view - at least in the opinion of one economic "scientist".

As of yet there have been no remarks on opponents' paternity nor the virtue of their womenfolk, though like the 2006 World Cup there is still plenty of time.

While many important matters have no doubt been settled in this way, such as the number of wills and natures of Christ,  I expect this debate will prove a vain attempt to enlighten those who are manifestly in error.   

And so AA is preparing for the eventual regrettable recourse to force to secure recantations (or perhaps more precisely "refudiations") from the evil,  the ignorant and those of mixed disposition between the two.  And, if necessary to eliminate the various Great and Small Satans from the "science" of economics before they mislead others from the path of righteousness.

At present, AA is busily sharpening a rather sturdy stave for the intellectual battles to come.  What better way to make a point forcefully?

But which side to choose?  As a young undergraduate, I had fancied one day enlisting in Minsky's legions to do battle with the unbelievers.  Recently though I have considered joining the forces of Arthur Laffer.  A man whose profound insight was with Occam-like economy inscribed on the back of a cocktail napkin.  When I consider the venue, a potent motive for enlisting in his research corps.

Bahrain: Saudi Driver Crashes - Lost or Never Had Control of His Car?

The Gulf Daily News carried one of the typical GCC traffic accident stories.  As is common, we're told that at some point the driver "lost control" of his car.

Whenever I read one of these accounts, my natural reaction is to wonder if he ever had control.

If you know this road, you've got to have a pretty powerful faculty to imagine an innocent loss of control resulting in a dip in the drink.   (Yes, that last word was deliberately chosen as I'm sure some drink of one kind or another was involved).  This chap was probably practicing for the F-1.  And as everyone in Bahrain knows, the nearest venue for that is the King Faysal Highway.

You Said What?: Sue Myrick "The Iranians are Coming"

Well the thing that concerns me, and you mentioned this briefly, Iran is working with Venezuela. And they're transiting through Venezuela, taking Spanish for maybe six months. They're getting the false documents that they need, coming up through Mexico and if they're stopped, they just say well I'm Spanish. And it, oh I mean Mexican, and it only takes a smart border agent who knows the difference in the accents. He can tell, but if he doesn't have that, there's no way to know.

And the other thing that we're seeing, and we're seeing it in your state in particular in the prisons is Farsi tattoos. Farsi is basically a Persian language, which Iran is, and we know we've seen Arabic tattoos in our prisons for a long time, but we haven't seen Farsi tattoos in a long time. That's a pretty good indication that these people coming across our border are not just coming from Mexico and other countries that are looking for work. And that's what scares me. Being on Intelligence, we know there are people who are are here who do want to do us harm who are already in the country and it's not a matter of will they get in anymore, it's a matter of they're already here because of our lax border laws.

Well, as I'm sure you'll agree, this is mighty disturbing.  Rather sophisticated Iranians - capable of learning Spanish in six months - are infiltrating our country.  The only thing that stands between "them" and "us" are the language skills of our border patrol.  If they can't tell a Mexican or Spanish accent from  a Farsi  one, we're in for big trouble.

Of course, if they have those "Farsi tatoos", I suppose that would be another way to catch them.  Though I have to admit it's unclear why they would have these tattoos.  Wouldn't that undermine their clever disguises?

And if they're in jail, haven't we already caught them? Or is this a diabolical plan to take over our prisons?  And what greater threat to our nation?  For what more symbolizes a nation than its prisons? 

Perhaps, convenience stores?  And there's another threat lurking there.  And it isn't Apu.

After all this AA is pretty scared but not more than by two chilling facts:

1. Representative Myrick has represented the 9th Congressional District in North Carolina since 1995 .
2. She has a seat on the House Intelligence Committee.

I'm hoping the name signifies the Committee works to raise the intelligence level of its members.  No Representative left behind, no matter how far back he or she starts out.

The Investment Dar - Restructuring Plan Does Not Incorporate New Central Bank Regulations - So What?

You've probably seen the articles (Gulf Daily News, AlWatan, and AlQabas) saying that TID, its creditors, Morgan Stanley and Credit Suisse met 6 July to discuss the draft restructuring plan and to discuss the fact that the plan does not incorporate the new Central Bank guidelines for investment companies.

Much is made of the fact that the Central Bank guidelines must be completely implemented by June 2012.

As you'll recall (and if you do not, look here and here), these impose certain rather strictly drafted ratios:

1. Leverage of 2:1 (Total Liabilities to Equity)
2. 10% Liquid Assets Ratio
3. A cap on foreign borrowing - 50% of total equity.

Frankly, this seems much ado about nothing.

Barring a miraculous recovery of asset values, there are two ways that TID can get in compliance with the ratios.

1. Its shareholders agree to fund a massive increase in capital.
2. Its creditors, particularly the foreign ones, forgive debt.  Other options would be defeasance.  Or equity conversions.

Hard to imagine rational investors throwing good money after bad (subscribing for new equity) for the sake of complying with some regulation.

Impossible to imagine creditors forgiving debt - especially the "Islamic" ones even in light of the clear guidance in 2:280.  

Defeasance would require sufficient assets in the "trust" to provide a comfort margin.  Given the quality of TID's "core assets", one would expect a very large margin.   That would leave other creditors high and dry.  As well, the hook into the Company by not defeasing provides at least additional theoretical source of repayment. 

Converting secured debt into equity doesn't seem like a particularly appealing prospect unless the conversion could be into an instrument that was called "equity" but was actually the equivalent of secured debt.

There's no real motive for a shareholder or creditor to take any of these actions.  Both realize that the Central Bank's options are limited.  It's not going to place TID into Administration (at least not beyond what the restructuring is already doing) for the sake of  enforcing a regulation.

More likely than not the Central Bank of Kuwait will have to give TID a special exemption from the new rules - an extension beyond the 30 June 2012 "deadline".   Just as it is likely to have to give Global such a pass.

The Elixir of Privatization for Infrastructure

 Blueridge Parkway Tunnel Construction 1935 (In the Public Domain)

Along with the nostrum of austerity in the midst of severe recession, the pedlars of financial patent medicines are offering the magical elixir of privatization as the cure for infrastructure needs around the globe. Today's Financial Times carried a lengthy article focused on America's needs, including advice from one famed investment banker who as noted saved New York City some years ago. And just now happens to be working for a firm "which has a big infrastructure business" and, perhaps, stands to make a shipload of money from successfully closing such deals. A bit of signaling from the FT in those six words?

Not only are the sums required great -- an estimated US$2 trillion. But there is a deeper problem.

"We are almost broke wherever you turn," Mr. Rohatyn said.

 How can we solve this conundrum?

Private investors, including kindly foreigners, stand ready to step up to bail out beleaguered and bankrupt local US governments if only small minded impediments can be removed. If achieved, local governments will be able to sell existing assets and get cash now. To apply the teaching of the famous commercial "It is my money" and "I want it now". And as well turn over costly new projects for private development.  An apparently free lunch, economically speaking.

Imagine the economies and efficiencies of having private industry in charge, not wasteful, spendthrift governments. Or the enhanced sharply focused management of assets and resources. One only has to look at the track record of the private sector in the financial sector, the oil and gas sector (perhaps with a focus on offshore drilling), mineral extraction (coal mining springs to mind) to see how well the profit motive can sometimes be married with careful stewardship.

The price for all this is rather modest. All that's required is the agreement to pay a fair return on the capital provided, a rate set by the "market". What could be fairer than that? Well, maybe just a few extra "bits" to top off things: some tax breaks and perhaps rights to develop adjacent or adjoining real estate. A small price indeed when one considers all the benefits promised to accrue.

Like the chimera of the efficacy of self-regulation, however, the reality is a bit less rosy than promised. Private capital generally is looking for returns in excess of 12%. On top of that one will have to compensate the diligent managers of that capital with management fees and carried interest for their time, hard work, and value creation. Anything less would be unfair. Anyways it will be a "market" rate. Then, of course, some one will have to bear the cost of the services of famed and not so famed investment bankers who help put the deals together. But no doubt (well at least among its advocates) still cheaper than wasteful government spending on a purely public project which is done as we all know on "non market" terms.

Suddenly, that "free lunch" appears a bit more costly than that in the public service diner. With privatization citizens will pay the price in terms of higher usage fees and/or less service. Or will give up value through the sale of "their" existing assets at prices low enough to give private capital its required market based rate of return. "Their assets"? Well, ultimately what are local governments except those citizens? Much as the shareholders of a private company are essentially the company itself.   I am for the sake of economy in my argument ignoring the many and repeated "agency problems" in the public sector.  A sad event which happily does not occur in the private sector.

So the choice is between paying taxes to the Government (an inherently bad thing as any good American can tell you) or paying fees to the private sector (an inherently patriotic and soundly economic thing to do). A remarkably easy choice it seems.

That the fees to the private sector may in the final analysis be higher (because of all the worthy mouths that need be to be properly compensated) is a rather small detail. The provenance of the small minded.  Another real benefit is that these schemes allow politicians to engage in the time honored and election savvy practice of inter temporal shifting. Provide a benefit today and shift the cost burden to the future when it will be someone else's election and problem. A fact which largely explains why investments in infrastructure have been deferred causing the current problem. 50 years or more of neglect. Until the water mains start popping like champagne corks, their condition is out of sight and out of mind. Instead money can be spent on more pressing universally recognized public goods like tax cuts.

Many will no doubt protest that such analysis smacks of dangerously leftist ideas. Indeed!

For such an analysis let's turn to the radicals at Blackstone Infrastructure Partners.

In a guest editorial for Infrastructure Investor magazine, Blackstone's Michael Dorrell, David Tolley and Trent Vichie point out that the Dow Jones Utilities Index could be used as a benchmark of performance for long-term, US-listed infrastructure returns. That index has delivered 9.5 percent compounded returns per year since 1970, and private infrastructure funds should take stock of this return:

"By simply levering the Index to customary infrastructure fund leverage levels, one would increase the return to 12 percent. That is, on a leverage-equivalent basis, private market funds must provide net returns of 12 percent simply to match the historical performance of the Dow Jones Utilities Index," Dorrell, Vichie and Tolley write in their editorial.

To provide a 12 percent net return, Dorrell, Vichie and Tolley point out that funds will likely need to provide internal rates of return in the range of mid-teens, taking into account several different fee structures.

	Carried Interest
Management Fee	10%	20%
1%	14.1%	15.2%
2%	15.2%	16.3%

 

"The analysis demonstrates clearly that a low double-digit return hurdle, which is somewhat common among private infrastructure funds, is too low to generate any meaningful outperformance against publicly-listed infrastructure, and provides investors no compensation for illiquidity," they conclude.

The simple answer is to raise the required return to attract the capital. Those with a belief in traditional economic theories of demand/supply equilibrium might be forgiven for assuming that raising a non trivial US$ 2 trillion might perhaps exert some "slight" upward pressure on the required rate of return.

Now AA is not advocating that private capital has no role in helping fund public infrastructure. It has but in the context of the proper understanding of what a public good is. And the value – both direct and indirect – of service franchises. Plus critically their importance in the wider context. One only has to think of the myriad of benefits and the knock-on effects that accrue to a locality from improved transport. So-called positive externalities. Sadly often overlooked by those selling public assets and public franchises. With the result that no examination is made of how higher private market pricing might in itself adversely impact those externalities to the detriment of aggregate wealth.  If I'm not mistaken, a famous Austrian political and economic thinker attributed such rent seeking behavior to "girly men" capitalists.  But then I suppose I could have the citation wrong.

Anthony Shorris, former head of The Port Authority of New York and New Jersey, discusses some of these issues along with others in this rather useful article. As above, this is a good juncture to note that as a former public employee, his agenda might reflect some personal interest just as that of famed and not so famous investment bankers might.

Finally, to complete the discussion, it might be worthwhile to muse on relative rankings of government expenditure. Some expenditures it seems are by common agreement and definition more worthy than others. More worthy of spending. More worthy of incurring debt to be paid by one's grandchildren.   And perhaps in some cases one's grandchildren's grandchildren's grandchildren.

Perhaps the simplest solution to the infrastructure crisis in the USA is to redefine the need as an integral part of national defense. From potentially futile attempts at nation building in inhospitable foreign climes to a bit of nation building "at home".  A new twist on "Homeland Security" if you will – a phrase that just might catch on.

Dubai: Self Made Challenge

HH Shaykh Mohammed Bin Rashid AlMaktoum set the record straight in an interview with CNN.  Or more precisely will do so next week when the interview airs.

Like Global Investment House in Kuwait, Gulf Finance House in Bahrain and several other careful students of the market, he's identified the sole cause of current problems - the global financial crisis.  As we always note here at Suq Al Mal out of an abundance of caution to prevent anyone from drawing the wrong conclusion, that's global with a lower case "g".

"The recession is a global phenomenon and I do not think that we in Dubai fear it, but instead we consider it a challenge."

It's often said that true progress and development comes by challenging oneself.  Sadly, other members of the GCC, like Qatar, apparently don't feel up to challenging themselves in quite the way that Dubai is challenging itself.

While in reference to Dubai World, he adds: "I'm not worried about the company, the company has got the wealth. So they have something, and they will come back very very quickly."