Facebook Blogging

Edward Hugh has a lively and enjoyable Facebook community where he publishes frequent breaking news economics links and short updates. If you would like to receive these updates on a regular basis and join the debate please invite Edward as a friend by clicking the Facebook link at the top of the right sidebar.

Friday, June 28, 2002


Following my comments about the investigations into Barclays Bank staff earlier in the week, I can't resist this snippit from the FT: three former employees of NatWest have been charged with wire fraud, for underselling to NatWest their interests in a fund called Campsie which was an early investor in an Enron of-balance sheet partnership called LJM Cayman. Of course, while the activity of these thre, if proven, would seem highly reprehensible, the bigger question is, just what exactly were entities like Natwest doing during the Enron years?

The complaint alleges that the bankers carried out a scheme in late 1999 and early 2000 to defraud NatWest by causing it to sell its interest in Campsie for about $1m when its actual value was several times that amount.At the same time, the three obtained a portion of the NatWest interest for just $250,000 and sold it later for a personal profit of $7.3m, authorities allege.

Part of the evidence gathered by authorities included e-mails sent between the bankers.In an e-mail exchange with Mr Mulgrew, Mr Bermingham discussed splitting the spoils with Mr Fastow. "I will be the first to be delighted if he has found a way to lock it in and steal a large portion himself," the e-mail read. It continued: "We should be able to appeal to his greed."

Authorities said the investigation would continue.
Source: Financial TimesLINK

Thursday, June 27, 2002


Every day the Financial Times gets nearer and nearer to fathoming just how problematic the global position really is. The point about yesterdays WorldCom revelations was not their gravity - they were, after all, the worst accounting fraud in US history - but their timing. The US is facing a total crisis of institutional confidence with everything from the Catholic Church to the CIA under the magnifying glass, passing, on the way of course, through Wall Street and all its works. Euphoria about super profitability is in danger of becoming its opposite. And just as we overshot on the way up, it looks like we're in danger of overshoot on the way down. Of course non of this is helped at all by the chorus of well-meaning (or are they really not so well-meaning?) economic 'experts' who don their best rose-tinged spectacles before venturing into the hot American sun.

The whole problem with the overvalued dollar thesis, as I don't tire of pointing out, is overvalued with regards to what? Gold? The Chinese Yuan (sure but its early to be recognising this)? For the dollar to come down something must go up. The Japanese government hasn't stopped intervening all week to prevent the Yen rising above US$120, and something around US$140 would probably be much better for them (and if you're among those who think that there's a big danger from the backwash if Japan falls, then for everyone else too). So the Euro has started its climb. This reminds me of that old fairground attraction where you take a big hammer to see how far up you can push the ball. Of course you never reach the bell at the top, but the most depressing part is watching the thing come down again. Well here we go with the Euro. The attitude of laissez faire we are exhibiting here really does seem irresponsible to me. Still as the late President Hoover had it 'if you can't stand the heat, then you shouldn't be in the kitchen'. Europe is about to feel the heat, and I just hope it isn't so macho as to not be able to recognise when it can't take any more. Because if it doesn't then it might just fall into such a big hole that its not going to climb out again.

Still, we were talking about America weren't we. The striking thing in todays press is the difference in tone between the UK and the US press on this one. Outside the US it seems the quality of credibility is somewhat strained, whilst back home they seem to feel it would be unpatriotic to engage in negative thinking. Take this from the Financial Times for example:

The equity bull market ended more than two years ago. But now it seems that bull market psychology is unravelling fast.

The WorldCom accounting scandal is an arrow at the heart of one of the standard bull market assumptions: that the US was the paragon of the world's financial markets, with the most dynamic economy, the most innovative companies and the highest accounting standards.

Overseas investors were happy to fund the US's substantial current account deficit because they wanted to have a stake in the great US boom. But they must now feel rather as emerging market investors did in the mid-1990s - that they were suckers in a game rigged in favour of insiders.

In Asia, the blame fell on cronyism and a banking system that allowed overinvestment in unprofitable projects; in the US, the blame is falling on corporate executives, who have taken excessive risks and distorted accounts in pursuit of lucrative share options.The disillusionment with the US has spread to the dollar, which on Wednesday slipped to within an ace of parity with the euro.

Of course, it is possible that the current plunge in shares represents the kind of climactic sell-off that often marks the bottom of a bear market. Equity markets have drifted back to the lows last seen after September's terrorist attacks on the US, which were followed by a rapid and substantial recovery. But these are dangerous times, not least because of the way that the global economy and financial system had adapted to the long bull market. There is leverage built into the system, not as extreme as the gearing that brought down Long-Term Capital Management, the US hedge fund, in 1998 but just as dangerous for being so widespread. That leverage shows up most obviously in the US corporate sector, where companies that had geared up their balance sheets during the boom years are now caught in the vice of falling revenues and the constant need to meet interest payments.
Source: Financial Times LINK

or this from this morning's Economist Global Agenda:

The world’s financial markets are in turmoil after the revelation of a massive accounting fraud at WorldCom. Is the collapse in share prices and the dollar a short-term reaction: or might policymakers now find themselves struggling to keep the economic recovery on track? The timing was impeccable. After several days of financial market turbulence, investors and traders had started to calm down on June 25th. Then WorldCom dropped its bombshell. Essentially, an accounting fiddle enabled the giant telecoms company to exaggerate its reported profits by close to $4 billion over the past five quarterly accounting periods. This spells disaster for WorldCom, which could now be forced to declare bankruptcy. But the consequences for the world economy could also be alarming.

While markets remain so volatile, it is futile to make any prediction about when, and where, they will stabilise. It is possible to take an overly pessimistic view of investors’ loss of nerve. Shares and currencies can often bounce back in the most unexpected way, and as the experience of recent years has shown, for the most insubstantial reasons. Even if such corrections are inevitable, there are dangers when adjustments take place in an atmosphere of near-hysteria in the markets. When investors and traders panic, they have a tendency to over-react—shares get dumped indiscriminately, for instance, without investors making judgments about the relative worth of individual shares. This is especially likely to happen when people realise that some firms are willing to pull the wool over their eyes, even to the extent of perpetrating accounting frauds. Investors are hardly inclined to try to decide on the merits of their investments when Rite Aid, Enron, WorldCom and many other companies have tried to disguise the true state of their finances. The typical shareholder is wondering who else is guilty.
Source: The Economist LINK

While the New York Times sullenly noted:

It was not just WorldCom that took a beating today. It was also the United States itself, and the American gospel of how business should be done.

After years of pumping billions of dollars into the United States because it seemed the land of opportunity, foreign investors are pulling back. And people around the world who for decades have looked to the United States as the model for openness and accountability in business have been sorely disillusioned by the mounting waves of scandal. "This is the most pessimistic sentiment against the United States that I have ever experienced in my career," said Wolfram Gerdes, chief investment officer for global equities at Dresdner Investment Trust in Frankfurt. "There is unanimous agreement that the U.S. is not the best place to invest anymore."

The loss of foreign confidence in the United States is important in itself, because of the huge deficit the United States runs in its trade with the world. To cover that deficit, America must attract a net inflow of $1.3 billion in foreign money every day. Even a modest decline in the flow can weaken the dollar and drive up the prices of imported goods. But the fall from grace is broader than just a turn in the monetary tide. The more enduring impact of the accounting and boardroom scandals may be the tarnish they spread on the "American model," a philosophy that emphasizes bare-knuckle competition, aggressive deal making, a high level of public disclosure and fantastic rewards for executives who deliver the goods.

Source: New York Times LINK

The net result of all this. I'm afraid we are going to have to wait and see, but the ending may not be 'Made In Holywood'.


One of the reasons I am a skeptic about the possibility of a sustained rise in the Euro against the dollar is that I just don't see the European companies as sufficiently dynamic or profitable to elbow aside their US counterparts. Here's one example of why I feel like this:

Fiat's long-term debt rating was downgraded on Wednesday to just a notch above junk status after Moody's Investors Services warned that the Italian industrial group's future could hinge on exercising an option to sell its automotive unit by 2004. Moody's downgraded some €15bn ($14.9bn) in Fiat bonds by one notch to Baa3 with a negative outlook. Moody's also recommended that Fiat carry through the restructuring plan's significant asset-sale and debt-reduction plans "in order to avoid pressure on the rating and limit the risk of a further downgrade".People who worked on the restructuring plan said Moody's actions were in line with expectations following numerous discussions with the ratings agency during the plan's elaboration.
Source: Financial Times LINK

In another part of the strong European reform story I don't buy, it's worth pointing out that Italy has the toughest restrictions in Europe on firing workers, according to the Organization for Economic Cooperation and Development.

Article 18 of the Labor Code, passed in 1970, mandates that after a short probationary period, an employee fired from a company with 15 or more employees can bring a lawsuit challenging the dismissal. If the suit is successful, as is often the case, the employer is forced to rehire the worker and pay back wages and social insurance contributions, as well as a large fine.

When given a hypothetical choice of a labor market where it is hard to find a job but hard to be laid off or one where it is easy to find a job but easy to be laid off, 71 percent of Italians preferred the former in a poll of 1,000 individuals conducted in April by Tito Boeri, an economist at Bocconi University in Milan, for the Debenedetti Foundation. So Italians value job security — and have lots of it.

Even worse, the uncertainty and expenses associated with dismissals have a chilling effect on hiring. A study led by Stefano Scarpetta of the O.E.C.D. released last week found that the average American company that survives two years increases its employment 160 percent, while the average Italian one that survives as long grows only 20 percent. Although many factors are undoubtedly at work, stiff firing restrictions probably account for some of Italy's lower job growth. Firing protections also affect worker performance. Examining data on 858 newly hired bank employees, Andrea Ichino, an economist at the European University in Florence, found that the absenteeism rate more than doubled after workers had completed the three-month probationary period. "The cost of the job security of the father," Professor Ichino argues, "is the insecurity of the son." Italy's jobless rate hovered around 10 percent in the last decade. Because its safety net has as many holes as Swiss cheese, high unemployment contributes to the remarkable fact that more than half of people in their 20's — and nearly a quarter of men age 30 to 39 — live with their parents. "The family is the main institution that provides unemployment insurance benefits," Professor Ichino said."

Source: New York Times LINK

And bearing in mind that Italy is soon about to enter into serious competition with Japan as to who is going to be the oldest country on the planet, what might also be at risk are papa's pensions, and much, much more.


I'm not actually sure I understand the concept, but the US apparently has one. Her name is Martha Stewart, and she is the head of Martha Stewart Living Omnimedia Inc. A nice name if ever there was one. Martha is in the news recently, not for her impecable lifestyle, but because she is currently under criminal investigation by Federal prosecutors for insider trading in what has become known as the ImClone scandal. Martha is pals with the CEO at the biotech company, and is accused of selling rather a lot of shares the day before the America Food and Drug Administration announced they needed more tests on a key ImClone product.

Shares of Martha Stewart Living Omnimedia Inc. fell more than 20 percent to all-time lows on Wednesday after a report cast new doubts on Chief Executive Martha Stewart's account of her entanglement in the ImClone insider trading scandal. Federal prosecutors have widened their probe of the home decorating diva to include possible obstruction of justice and making false statements related to the sale of ImClone Systems Inc. Stewart is under investigation by federal prosecutors about whether she had inside information when she sold nearly 4,000 shares of ImClone a day before the drugmaker's experimental cancer treatment was rejected.......Stewart is a close friend of Sam Waksal, the former chief executive of ImClone. Waksal was arrested two weeks ago on charges of insider trading.
Source: Yahoo News LINK

So, if the prosecutors are right, veracity is not a necessary ingredient of an attractive lifestyle, not in America at least.

In San Francisco a US Federal Court, the 9th Circuit Court of Appeals, has just ruled it is unconstitutional to ask schoolchildren to recite the Pledge of Allegiance vowing fealty to one nation "under God." The decision overturned a 1954 Act of the U.S Congress that added "under God" to the pledge, saying the words violated the basic Constitutional tenet of separation of church and state. Apparently Congress amended the official version of the pledge in 1954 to add the words "under God" since the then President Dwight Eisenhower said it would demonstrate "the dedication of our Nation and our people to the Almighty." The appeal has been brought by a California athiest who resents that his non-believing daughter is made to feel a second class citizen every morning. But this problem is much bigger. Given the evident diversity of the US today, which God are they under, and in any event why only one, does a true American have to be monotheist, what about Gaia. Or couldn't they insert a clause specifically disavowing that the American god has uniquely masculine characteristics.

No the decision is a good one. Not because it attacks religion, bonobos after all have no recognisable political partisanship nor do they favour one religion over another, but because it asserts the principle that religious belief is a private and not a state matter.

The court, ruling on a challenge lodged by a California atheist, said the pledge "impermissibly takes a position with respect to the purely religious question of the existence and identity of God."

"A profession that we are a nation 'under God' is identical ... to a profession that we are a nation 'under Jesus,' a nation 'under Vishnu,' a nation 'under Zeus,' or a nation 'under no god,"' the court said in its majority opinion by Judge Alfred Goodwin, who was appointed to the appellate court by President Richard Nixon in 1971.

Legal analysts said the decision, the first of its kind in the country, would almost certainly be appealed to the U.S. Supreme Court which begins its sessions with the words "God save the United States and the honorable court." The case turned on interpretations of the "Establishment Clause" of the First Amendment to the Constitution, which requires that Congress "make no law respecting an establishment of religion."

The Establishment Clause has already led to a series of debates over the separation of church and state in the United States, with cases ranging from publicly-funded Christmas displays to school prayer. But in addressing the Pledge of Allegiance, the current case takes on one of the country's strongest patriotic traditions.
Source: Yahoo NewsLINK

This case has added importance raising as it does the common value core of our modern social identities at a time when similar oaths of allegiance are being proposed for new immigrants in, for example, the UK and Germany. The fundamental privacy of religious belief, and the right to non discrimination and tolerance in the area of religion seems basic to what should be important to us.

Wednesday, June 26, 2002


Lynn and Tom MIlam just wanted to build a quiet log cabin retreat up in the mountains near Hernando Missisippi, they couldn't possibly have imagined what was coming next.

It took six hospitalizations and a number of misdiagnoses before Lynn Milam learned what was causing the vomiting and diarrhea that almost killed her in 1999. The arsenic levels in her body, her doctor said, were about 100 times what they should have been.

Ms. Milam was relieved to have a diagnosis, however terrifying. That relief vanished when the police arrived. "They said someone was trying to kill me, and they were almost 100 percent sure it was Tom," her husband, Ms. Milam said.

But she refused to believe it. "I know the man," she said. "If he were going to kill me, he'd just shoot me."

As it turns out what was really causing the problem was the mixture of arsenic based compounds contained in the chemicals used to treat the wood for the cabin. So now the legal problem is one for the products manufacturers. But this didn't stop thelocal police from accusing Lynn's husband of trying to kill her, from advising Lynn that she leave her husband, and the district attorney from trying to persuade a grand jury that it was a case of attempted murder. But perhaps the most striking thing of all is the wife's suggestion that she really does know her husband best, after all.

The Enron investigators extend their search into the banking business:

Criminal investigators examining the Enron debacle have expanded their inquiry to focus on activities at the commercial banks that provided billions of dollars in loans and other financial services to the company, according to current and former Enron executives and others involved in the investigation.

Federal prosecutors are investigating whether individual bankers illegally benefited from deals involving Enron-related entities, potentially at the expense of their employers, people involved in the case said. A number of bankers have been questioned about such self-dealing, lawyers said, and the government is said to be weighing whether to bring charges in one such matter.

The government has also stepped up its examination of an Enron-related partnership called Chewco. The financing for the partnership included loans from Barclays Bank structured in ways that hid them from Enron's auditors, according to Congressional testimony. The discovery of the hidden loans ultimately played a central role in the financial crisis last fall that led to Enron's collapse.

The Manhattan district attorney's office, meanwhile, working independently of the federal Enron task force, has opened its own inquiry into an array of transactions and financial institutions tied to Enron. According to current and former Enron executives who have been questioned by the Manhattan investigators, these include a series of deals between Enron and J. P. Morgan Chase that have been described in private lawsuits as disguised loans to the energy company.Banks had complex financial relationships with Enron, and the full details of those only began to emerge amid the debris of the collapsed company. Like most companies, Enron borrowed money to finance its operations. But banks also provided cash for the company's off-the-books partnerships and for outside investors in those entities. Some financial institutions and bankers were themselves investors in the partnerships.

Major New York banks, meanwhile, engaged in circular trades with Enron that allowed the company to obtain billions of dollars in loans without disclosing them to shareholders, according to trading records and court documents.
Source: New York TImes LINK

Of course, the insinuation here concerns individual employees, not the banks themselves. But it still raises the question as to how all this could have been going on, while at the same time individual American investors were being sold a story about a major revolution in productivity based on new techniques previously unknown to humankind, or was this what the late great Adan Smith really had in mind when he spoke of the operation of the hidden hand?


The latest crisis at WorlCom - one of the world's largest telecom operators - highlights just how prcarious the US corporate situation actually is. Apart from the now customary tinge of scandal in high places, rapid managerial exists, and flawed 'creative accounting', there is also another detail which increasingly appears to be par for the course: the accountants were Arthur Andersen.

WorldComthe nation's second-largest long-distance carrier, said last night that it had overstated its cash flow by more than $3.8 billion during the last five quarters in what appears to be one of the largest cases of false corporate bookkeeping yet.

The problem, discovered during an internal audit, throws into doubt the survival of WorldCom and MCI, the long-distance company it acquired in 1998. The company, which was already the subject of a federal investigation into its accounting practices, has been struggling to refinance $30 billion in debt. Its credit was relegated to junk-bond status last month, and even before last night's announcement, the stock price was down more than 94 percent so far this year..........Instead of the profit of $1.4 billion the company reported in 2001 and $130 million in this year's first quarter, WorldCom now says it lost money during those periods, although it did not say how much.In disclosing the bookkeeping problem, WorldCom said it had fired its chief financial officer, Scott D. Sullivan, the executive widely credited with helping orchestrate the financial strategy during the mid-to-late 1990's that enabled WorldCom to rise from a second-tier telecommunications company to a world giant through a series of acquisitions that included the $30 billion purchase of MCI in 1998...........WorldCom's board said it had fired Mr. Sullivan after discovering a strategy in which operating costs like basic network maintenance had been booked as capital investments, an accounting gimmick that enabled WorldCom to hide expenses, inflate its cash flow and report profits instead of losses. Until last month, WorldCom's auditor had been Arthur Andersen, the accounting firm that also audited the books of Enron and Global Crossing.
Source: New York Times LINK

Obviously with this environment it's very difficult to see a strong economic recovery as a credible possibility in the US in the near future.
The more pertinent question would appear to be, just how near to the edge are we right now? Not as near as we might be I hope.

Tuesday, June 25, 2002

How Flexible is Flexible

The news drom Seville is that everyone went away happy. But should this have been the case? Clearly a move in EU policy away from a monorail obsession with inflation, at a time when the most preoccupying tendencies appear to be deflationary, should be a good thing. At the same time the preoccupying fiscal unsustainability of some of the European economies in the mid-term, and Italy immediately comes to mind here, means that cyclical automatic stabilisers should not be used as an excuse for avoiding the issue.

EU leaders, meeting in Seville, gave France, Italy and Portugal more time to eliminate their budget deficits, while Edmund Stoiber - the frontrunner to become German chancellor in September - warned that his country may need until 2006.

Slower than expected economic growth and a diminishing political will to tackle deficits is putting the EU's growth and stability pact to its greatest test since the euro was launched.
The European Commission, which polices the stability pact, insists it is vital for governments stick to their promises to bear down on budget deficits in order to maintain confidence in the currency. The underlying fear is that if countries such as France and Germany retreat on commitments they have given, then a free-for-all could develop, with smaller countries following suit.

The EU summit in Seville endorsed a compromise deal, hammered out by finance ministers in Madrid in the early hours of Friday morning, for a watering down of the guidelines to France, Portugal and Italy over their budget deficits.France and Portugal have now been told to get their deficits "close to balance" in 2004 instead of to zero, giving them extra room for manoeuvre. Italy had a similar wording inserted, and was told to have a close to balance budget in 2003.
The Italian government over the weekend jumped on the opportunity to cut taxes and spend more on unemployment benefits following the EU's decision to ease its deficit target. Prime minister Silvio Berlusconi's cabinet in coming days is expected to announce tax cuts next year for low income households and for corporations - two promises Mr Berlusconi failed to keep this year following his election in 2001.

Italian officials also hailed the EU decision as a shift to "a political approach to the stability pact", highlighting a view that finance ministers at the Ecofin council are taking a more flexible approach to the stability pact than the Commission.
Source: Financial Times LINK

Of course it's precisely the "political approach to the stability pact" which makes Italian politicians so euphoric that is in fact most worrysome. If Europe's problems are merely centred on the need to adapt flexibly to a cyclical downturn, well then, where's the harm. But if, and it's a big if, the EU economies problems are much more deep seated, and at the same time poorly understood, then could this fudging really only serve to produce bigger problems in the future?
Little to Show for It?

This description is not mine, but comes from the Economist. In an article rhetorically titled 'Call This a Success?', the magazine points to two particular areas of mirky progress: immigration and the stabilisation pact.

The summit of European Union leaders in Seville in Spain ended with only limited progress on the main agenda item—immigration policies—and setbacks over the establishment of a European military force and the management of the euro. But all of these issues pale into insignificance compared with the main challenge facing the EU in the coming months: enlargement.

THE leaders of the European Union (EU) came to their summit in Seville vowing to “do something” about immigration. They left claiming success. They always do. But the reality is that the results at Seville were less than impressive, not just over immigration but also over other important issues such as defence and the management of the euro.

There were other setbacks for the EU at Seville. The “stability and growth” pact which attempts to ensure fiscal discipline among members of the euro zone was watered down further, as France was, in essence, allowed to wriggle free from an earlier commitment to balance its budget by 2004. And efforts to introduce majority voting at future gatherings of European leaders were also blocked, again by France, which suspects that it would eventually be forced into unpalatable concessions over agricultural reform.
Source: The EconomistLINK

As is becoming customary these days the economist goes to the heart of some of the EU's most pressing problems only to end on a note of cautious optimism that seems curiously out of keeping with the tenor of the rest of the article. Or am I alone in thinking that a lot of this movement around the stability pact marks the begining of the slippery slope for the non-political ECB?