Jul 21 2010

Too Big to…

Category: Economy,My Web Log,Politics — Admin @ 00:40

The timing is impeccable. Not only is the U.S. Government ready to fully give up on its Goldman Sachs criminal fraud investigation, but it is also preparing to implement the imminent Dodd-Frank Act in order to mitigate systemic risk and prevent another financial crisis. Although there are multiple points that I can pursue for both events, however, I will only focus on two key points, one from each event.

The Securities and Exchange Commission and Goldman Sachs recently agreed on a half a billion dollar fine in order to settle the ongoing fraud investigation against Goldman. Not only did the U.S. Government prove that some firms are too big to fail, but also that some firms are too big to be fully prosecuted. For one, the fraud charge against Goldman Sachs was for about $1 billion dollars, but Goldman Sachs was only fined for about half of that in an attempt to “sweep the case under the rug” as the media switches its attention to the new bill. This action only proves of Goldman Sachs influence on the U.S. Government and the impunity of certain firms and their indifference to Main Street.

The Dodd-Frank Act, named after the two leading proponents of the bill, is the intended moniker for the recently passed financial overhaul bill after it is signed by President Obama. The bill expands the U.S. Government’s oversight on the financial industry but it fails in its attempt to lessen systemic risk. The bill is not clearly defined at times and loopholes are prevalent. For example, the bill states that proprietary trading will be curtailed at large bank holding firms and that banks are able to invest a certain percentage of their tangible common equity in institutions such as hedge funds but it doesn’t clearly define its interpretation of proprietary trading nor does it call for a proportionate increase in capital requirements. The bill also creates several new institutions such as a consumer protection agency to “improve financial literacy” among American consumers and an oversight council that will “monitors systemic risk” and reports to the Federal Reserve. Both of these new institutions are examples of a more bureaucratic and ever expanding government that will continue to be one step behind the Bernie Madoffs of this world. This bill, once signed, will put American financial firms at a slight disadvantage against international competitors and its simply bad for business.

Jun 14 2010

More Resources, More Problems

Category: Economy,Politics — Admin @ 19:07

If you thought the ongoing Afghanistan War was complicated, well the situation is about to be exacerbated after vast deposits of minerals in the country were discovered by U.S. officials in the region. The New York Times reported that the reserves could be valued at close to $1 trillion and the composition included iron, lithium, copper, gold, among others. The good: Afghanistan could potentially become a mining powerhouse giving the Afghan people access to more economic opportunities than the drug trade and/or the Taliban. The bad: New war fronts could be opened up in conflicts over land rights and ownership. The ugly: Imperialist countries such as China or the United States could profit more from mining ventures than the Afghan people, which could potentially taint the already corrupted Afghan government.

 The findings were recently announced and confirmed by the U.S. Geological Survey, which started its exploration over the country in 2006. The discovery forces me to raise the following question about the United States’ presence in the country: If Iraq is to oil, is Afghanistan to minerals? The Afghanistan War has been going on for well over 8 years now and it is currently America’s longest war. Whether or not the United States “wins” the war against the Taliban, the victory will always be viewed as a Pyrrhic one, due to the length and cost of the war amidst America’s growing debt. America has an opportunity to leverage its war costs by gaining some access to Afghanistan’s mineral deposits especially since it has the largest foreign military presence in the country.

Apr 28 2010

“Do you know what a stated income loan is?”

Category: Economy,My Web Log,Politics — Admin @ 02:56

“It’s pretty self-explanatory, sir”–a Goldman executive to Senator Ted Kaufman.

(After spending well over three hours on Tuesday listening to the proceedings of the Senate hearing on Goldman Sach’s role in the financial crisis, I could not help but be overcome by the atmosphere of redundancy that was brought upon by the increasing tension between both parties)–My overall impression

The Securities and Exchange Commission (SEC), once labeled as incompetent, due to its lack of oversight on the financial industry and especially, on Bernie Madoff’s enterprise, is now on an upward climb towards redemption. The agency’s bold agenda to create accountability for the ongoing financial crisis, by implicating Goldman Sachs and one of its executives, is not only positive news to all the affected victims of the mortgage crisis, but also, it is the impetus that Democrats are seeking to progress with a financial reform bill by the end of the year, despite Republican opposition.

I was mostly impressed with the questions posed by Senators Ted Kaufman and Carl Levin, in relation to Goldman’s market making and market manipulating roles. Previous allegations of Goldman’s and other banks’ ability to manipulate spreads and engage in self-interest deals are now resurfacing and after hearing the testimonies of several Goldman executives, it became more apparent to me why Goldman Sachs would want to further distance itself from Fabrice Tourre, the only named executive in the lawsuit. It is a known fact that Goldman Sachs was involved in securitizing stated income loans (borrowers simply stated their unverified income to qualify for loans). It is also a known fact that Goldman engaged in the practice of “bar-belling” (packaging low-rated debt with high-rated debt in a high-rated security package). With these factors and others I did not mention, it can be inferred that Goldman Sachs engaged in the business of advising some of its clients towards vast potential losses for its benefit and that of John Paulson’s hedge fund, specifically with the Abacus CDO.

Not to focus on one firm ex post facto, however, I do believe now is the time for a financial reform bill. The two areas that reform should be focused on are:

1) Ratings agencies
2) Glass-Steagall Act

Firstly, a model in which firms pay ratings agencies to rate their securities is an easy case of moral hazard and a potential conflict of interest, especially when ratings agencies compete with each other to win a firm’s business. Lastly, during the Great Depression, the Glass-Steagall Act of 1933 was established to regulate the financial markets and financial institutions, and it specifically separated the functions of an investment bank from that of a bank, to name a few of its features. After the Act was repealed in 1999, M&A activity increased in the financial sector and financial firms became further intertwined and shared almost the same risks, which is why some large firms are sometimes called “too big to fail”. For the benefit of the financial system and to prevent a near system failure such as that of 2008 from ever occurring again, the Glass-Steagall Act should be reinstated, at least for the large money-center banks.

Mar 24 2010

Try “Googling” Healthcare…

Category: My Web Log,Politics — Admin @ 19:06

Try “Googling” health care and you would have unintentionally, not to mention figuratively, tackled, “with one stone”, two of the most circulated stories in America today: Google’s row with China and the Obama Administration’s newly signed health care legislation. Initially, I intended to write two separate blog articles on each topic but I realized that I do not have much to say about each topic and that my opinion on each was clear cut. Hence, I will attempt to tackle both issues “with one article”.

Google:

China is Google’s loss and not the other way around. Most people are aware of Google’s generous market share in China, but not many people know much about its major competitor and search engine giant, Baidu. Google’s decision to exit mainland China not only surrendered its current market share to Baidu but it was a futile action in the name of a faulted subjective moral reasoning. In my semester in Beijing last year, it was very difficult to find a Chinese individual or student who used the Google search engine. Almost all of the Chinese students that I came across with used Baidu’s search engine for research papers and etc, which is contrary to the claim by some that Google’s exit from China would hurt China’s students and professors the most. Objectivity must be applied to a culture before one can decide on the best course of moral action. Laws exist to suppress freedom and laws must vary across different cultures. Find me a truly free governed body and you will have provided me an example of lawlessness. Google’s exit was not  based on the lack of Internet freedom in China, otherwise, it would have also exited from other countries it still operates in that demand censorship, including monarchies and theocratic states. Google is simply frustrated with its lack of defense against China’s growing hacking community.

Health care:

The issue is not whether universal health care (or the path towards it) belongs to a socialist agenda or is too expensive of  a venture to be pursued, but rather the issue belongs to the old debate of States’ rights. I think universal health care is important for the future growth and prosperity of a nation, especially one as wealthy as America, but should States’ rights be ignored in the pursuit of this? No. Over 14 States are currently preparing to proceed with legal action against both the Federal Government and the Obama Administration. Its easy to make the argument that the bill is too expensive but economists have already argued the long term benefits, including an over a trillion dollar reduction in the U.S. deficit over the next 2 decades as well as the potential decrease in premiums due to a larger pool of the insured. So, back to the States’ rights issue. The health-care bill is unconstitutional, not to mention, a burden on States with already struggling budgets. In my state of Massachusetts, universal health care was already a reality before this current bill, and that’s the best way to solve the issue. Health insurance is not an interstate enterprise so it should remain a “State” issue. Health care reform should come in the form of tort reform and relieving  health care professionals, such as physicians, from their malpractice insurance burdens. The federal government should tackle these first before complicating an already complex health care system.

Feb 11 2010

UNwavering

Category: My Web Log,Politics — Admin @ 01:10

Unwavering is the adjective that best describes Iran’s nuclear ambitions; it also describes the United Nation’s attitude towards nuclear non-proliferation; Lastly, it describes China’s indifference to the entire situation.

After reports of Iran seeking to further enrich its uranium stockpile from about 3% to 20%, allegedly for civilian energy benefits, the United States and other Western powers, along with Russia, called for tighter trade sanctions. The US-led sanction against Iran has halted to a standstill with China putting its economic ties with Iran ahead of its political duties to the UN. However, lest we are quick to blame China for Iran’s continued ambitions, context is key to better understand the “nuclear” situation.

  • Uranium is widely available on the commodity markets for trading “under UN supervision”uranium
  • 90%+ enriched uranium is weapons grade (nuclear bomb)
  • Russia has the world’s largest stockpile of nuclear arsenal, many of which are poorly secured
  • Corporations that trade in uranium contracts hold the physical assets of uranium
  • Politically volatile countries such as India, Israel, and Pakistan refused to sign the Nuclear Non-Proliferation Treaty without imposed sanctions by the UN

There is clearly Western paranoia at play here and I must agree with China that the sanctions are ineffective and unfair to a country like Iran who’s true intentions are not fully known. Nuclear Non-Proliferation is unrealistic, especially with the  known energy benefits from nuclear technology and the fact that political power is closely aligned with military power. The United States and the UN must first focus on fully securing Russia’s nuclear stockpiles, which are more of a threat to global security than Iran’s pursuit of advanced nuclear technology; secondly, uranium can not continue to be a profitably-traded commodity, with which investors and traders have physical access to. For example, after Lehman Brothers became insolvent, a majority of their uranium assets remained unsold as prices continued to decline. If Lehman Brothers were to be a smaller and less regulated company located in a different country with such assets, corruption would be inevitable as profits would easily be accessible to via black markets. As long as uranium continues to remain a for-profit commodity, a country, like Iran, will always have access to it.

The hypocrisy and favoritism that exists within the UN and among allied countries in regards to nuclear non-proliferation is perverted. Unless the US and Russia get serious about completely eliminating (not reducing) their nuclear stockpiles (which is highly unlikely), Iran has the right to further pursue its nuclear ambitions.

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