October, 2008 Archives

Pity the fool

Pity the fool

When Alan Greenspan presided over the Federal Reserve for 18 years, he periodically appeared before Congress to mutter some ethereal bromides about the state of the U.S. economy. Greenspan’s pronouncements were greeted as Yoda-like pearls of wisdom. Every mumbled word from this financial deity was reverentially parsed ad nauseum by a herd of financial analysts; every time he raised his eyebrows and creased those shar pei-sized folds on his brow, markets jumped. He even had an official, gushy hagiography penned about him by Washington’s favorite instant historian, Bob Woodward. Woodward called the book ”Maestro.” Yesterday, the Maestro sat amidst the wreckage of the global financial system and was asked by the chairman of the House Committee on Oversight and Government Reform whether his zeal for unregulated markets might have caused the unmitigated disaster we are now living through. The answer was pure Greenspan: ”Yes, I’ve found a flaw,” he mumbled. ”I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.” One might assume this vague reference to a ”flaw” was the former Fed chief’s way of admitting that the housing bubble he was largely responsible for inflating had fueled a wild speculative orgy that resulted in the collapse of the global financial system. Unfortunately, before we could all reach that conclusion, Greenspan wiggled an eyebrow and added some nuance that gave us a clue as to what he was really trying to say. The ”flaw,” he explained, was that the banking giants had failed to regulate themselves, causing the ”intellectual edifice” of the ”modern risk-management paradigm” to collapse. ”Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he said. So Alan Greenspan is shocked, shocked, that unregulated banks might get so greedy that they would act irresponsibly. Pay no attention to the man behind the curtain. Here’s what happened during all those years that guru Greenspan was struggling to reach this conclusion: The largest banks in the world, all wanting to gorge themselves on big gooey chunks of speculative moolah cooked up in the overheated U.S. housing market, created a bunch of exotic financial instruments called derivatives. They used these to bundle ridiculous sub-prime mortgages and spread the unsecured debt throughout the global financial system. Not satisfied with simply owning huge chunks of bad debt they couldn’t even locate on their books, these binge bankers created a market for credit default swaps, insurance instruments that permitted them […]


Live from Germany, It’s Monday Night!

Live from Germany, It’s Monday Night!

This afternoon, I had the privilege of interviewing Volker Hoff, the minister of federal and European affairs for the German state of Hessen. We met in a deluxe, circular conference room adorned with a glittering chandelier and a balcony overlooking the grandeur of Hessen’s capital, Wiesbaden. Hoff and I were joined by Bernd Kistner, head of foreign trade for the Hessian Ministry for Economic Affairs, as well as Oliver Biel and Kristina Garcia, both of Hessen Agentur. As the senior editor of Business Facilities, the opportunity to sit down for a high-profile discussion with some of Germany’s most influential people was a journalistic high point. Speaking with Hoff and company about issues such as the necessary expansion plans of Frankfurt airport to the challenge of finding the funding to invest in education—starting at the kindergarten level—highlighted a significant point for me. Even as the economic crisis grips the world’s banks and strikes fear into the hearts and wallets of billions of people, business still goes on. It, like time, doesn’t seem to stop. There are always decisions to be made, plans to be drawn, and opportunities to be seized. All of this happens like clockwork, regardless of fluctuating stocks, interest rate cuts, and missed mortgage payments. They say time is money, but business is both. I’ve been traveling through Germany for ten days now and, while some companies were hesitant to sit down with me–fearing tough questions about global economic woes—I could not have asked for a better moment in time to meet face-to-face with elite businesses. In Bavaria’s iconic capital, Munich, I met with top-level executives from GE and Ingram Micro, to name a few, before heading to Hessen for talks with The Hartford Financial Group and Citibank, among others. Let me tell you how reassuring it is to have been met with both optimism and candor, open-mindedness and insight, from some of Germany’s newest and biggest economic additions. Keep an eye out for future issues of Business Facilities where I plan to detail what I have learned from conversing with international businesspeople and European lawmakers over the last couple of weeks. For some, the reasons to enter the German market are too numerous to quantify, while the reasons for choosing specific cities, sometimes, have been easier than you could possibly imagine.


Crimson tide swamps Birmingham

Crimson tide swamps Birmingham

The fiscal tsunami triggered by the collapse of Wall Street’s investment banking giants is poised to drown an entire county in Alabama. According to a report in Fortune magazine, Jefferson County, AL, which includes the city of Birmingham, is on the verge of filing for Chapter 9 protection in what would be the largest municipal bankruptcy in U.S. history. Fortune says that Jefferson County has fallen ”hopelessly behind” on payments to service $3.2 billion it borrowed on ridiculous terms from the financial geniuses on Wall Street during the past decade to build a new sewer system. Despite desperate pleas from Alabama Gov. Bob Riley to the federal government, the Jefferson County Commission is said to be just days away from an official bankruptcy filing. Riley reportedly has placed several urgent phone calls to Treasury Secretary Hank Paulson’s newly named bailout czar, Neel Kashkari, and told him that the impending fiscal disaster in Jefferson County is ”the single biggest threat to the municipal bond market today and a poster child for how the subprime mortgage crisis is hurting Main Street America.” According to a legal study cited by Fortune, bankruptcy filings by municipalities have been extremely rare in the United States. Since the bankruptcy laws were written in 1934, fewer than 600 localities have filed under Chapter 9. By comparison, roughly the same number of private sector entities file for Chapter 11 bankruptcy protection every two weeks in this country. The Chapter 9 protection provides for the reorganization of the municipality. The folks in Jefferson County may want to start with the officials who thought it was a great idea to finance their new sewer system with exotic financial instruments hawked by the snake-oil peddlers at the big Wall Street investment banks. Two of the county’s biggest counterparties in derivatives trades used to finance the sewer project were the now-defunct Lehman Brothers and Bear Stearns, according to Fortune. To make matters worse, an ongoing federal corruption probe in Jefferson has thus far yielded 21 convictions. The mayor of Birmingham, who previously served as president of the Jefferson County Commission, is said to be a prime target of the probe. The people of Jefferson County thought they were going to get an end to constant overflows of raw sewage when a $250 million project to improve the local sewage system was approved in 1996. What they got was a $3.2 billion piece of the Great Fiscal Flood of 2008, which smells even worse.


You’ve got a new partner, Bjorn

You’ve got a new partner, Bjorn

In the opening scene of one of our all-time favorite TV series, mob boss Tony Soprano is chasing a guy through a Jersey parking lot with a baseball bat. The guy owes Tony some vigorish. Vigorish is local vernacular for the weekly interest payments that loan sharks charge to their borrower community. These payments don’t actually reduce the amount owed, they are kind of an ”insurance policy” — as in, you pay the vig and you can keep your kneecaps for another week. The global financial catastrophe took an interesting turn this week, when Iceland became the first country to officially go belly up. With the country’s banks melting like salt in its famous volcanic hot springs and its currency, the krona, collapsing, Iceland sent out a financial 911 call to Europe’s central bankers. The Europeans, busy arguing over whether the continent’s financial Maginot Line will be located in Britain or Germany, told their insolvent cousins in Iceland to call back later. So the government of Iceland did what anyone desperate for cash might do. No, they didn’t sell grandma’s wedding ring to the local metals trader, now offering almost $900 an ounce for gold. They asked Boris and Natasha to give them Vladimir Putin’s phone number. After some brief consultations with their new friend in Moscow, Iceland’s leaders hastily announced that oil-rich Russia had agreed to loan the country $5.4 billion, roughly the equivalent of a third of Iceland’s GDP. Prime Minister Geir Haarde said he had no choice: Iceland’s banks had run up debts that totaled 12 times the size of the country’s economy. Not so fast, said the Russians. Deputy Finance Minister Dmitry Pankin cleared his throat in Moscow and informed the world that no decision has been taken on the loan to Iceland, though his government ”may consider one in theory.” This requires ”the approval of many agencies [in the Russian government] and is not a decision that can be made quickly,” Pankin added. Here’s a ”theory:” the agencies that must approve this decision are all named Putin, and the decision will be made as fast as the Russian navy can open its new base in Reykjavik. Boris gets the volcanic waste management franchise and Natasha will be the executive director of Iceland’s new Museum of Trucking and Industry.