First, the DOD has announced that it will proceed with sale to Iraq of F-16’s, M1A1 Abrams tanks, cannons, armored personnel carriers, body armor and helmets, and lots more. This to a government led by Nuri al-Maliki who in the past couple of months has had 700 Sunni opposition leaders and local officials arrested; issued a warrant for arrest of his nation’s Vice President (a Sunni) who is being sheltered by the Kurds; refused to honor his pledge to appoint independent ministers of defense and internal security, thus centralizing power in his sole hands; has fired his Kurdish attorney general for looking too intently into corruption; and is openly supporting Assad in Syria!
We are watching an attempt to create a Shiite autocracy, much to the liking of Iran. Who knows whether Maliki has the cojones to pull it off. And Maliki is being openly challenged by a would-be Ayatollah, Muqtada al-Sadr, who believes even more strongly in a Shiite, theocratic autocracy – also much to the liking of Iran.
What the hell are we thinking?!? Arming this instability is like selling hand guns to drunks and mental deficients. (Oh, oh that’s right. We, uh, we do that don’t we -- as American as apple pie and Mom’s Glock.)
Second item: the Egyptian Central Bank, like the ECB, needs funds to lubricate a near-stall speed economy and encourage its commercial banks to start lending again. Solid, American-style economic thinking. So, who has come forward to supply funds to the Egyptian Central Bank? The Army! No, not ours, theirs. The Egyptian military is lending $1 billion to the bank. What the….?
Imagine if the Pentagon had lent the Federal Reserve $100 billion during the financial crisis of 2008. That would be the equivalent, but even if it had been only $1 billion…. Mightn’t that have raised some eyebrows!
What sort of government has this Egypt? Who’s in charge over there? And this is the same military that yesterday raided 17 foreign NGOs suspected of helping establish civilian control, three of which are US funded, and that for three decades has been the second largest recipient of US foreign aid.
Perhaps the proper question is what sort of government have these United States? This all is enough to drive a sane man to Ron Paul….
Friday, December 30, 2011
Friday, December 2, 2011
Fletch's Instability Index
So who will next feel the sting of Arab Springers or Wall Street Occupiers? Turkey? Spain? France? These demonstrations have resonated around the world: dissatisfied, educated young people, mainly men in the vanguard, threatening the status quo. To some, welcome; to others, unwelcome – but to all, disquieting because who knows what might emerge from such instability?
Among my Olympic Club chums there is the full range of reactions and predictions. “Significant” “Meaningless” “World awakening” “Nothing will change” As I reflect on it all, it seems to me that in the yeasty brew of underlying causes, there are four main ingredients: youth, education, unemployment, and mal-distributed income. This is an oversimplification, to be sure, but I wondered if one could quantify these into a single measure of a nation’s predisposition to instability. Hence, Fletch’s rudimentary “Instability Index.”
My numbers are provocative. Using Japan as a base (100) my instability index suggests that the US,with an index of 242, is two and a half times more potentially unstable than Japan. Our neighbor Canada is only at 167 because its median age is a bit higher than ours and its income more evenly distributed. I used Japan as base because it has relatively mild youth unemployment, a relatively balanced society by age, and a reasonably fair distribution of income. Here are some of the highs and lows of the 59 countries for which I calculated my Instability Index.
High rel. to Japan
South Africa: 479 Algeria: 407 Jordan: 361 Spain: 357 Iraq: 340
Puerto Rico: 318 Columbia: 316 India: 304 Ireland: 290
Low rel. to Japan
Thailand: 53 Netherlands: 59 Austria: 70 Switzerland: 72
Norway: 73 Germany: 81 Ukraine: 81 Turkey: 84 Denmark: 87
I mined the CIA Worldbook for my raw data. (An invaluable resource, one of the few admirable and public services the CIA provides; if you don’t know of it, give it a try -- www.cia.gov/library/publications/the-world-factbook/.) I derived a “youthfulness” measure by taking male median age relative to male life expectancy. To that, I applied the literacy rate among men (in mid-east countries, especially, there are distressing differences between men’s and women’s literacy.) Also equally weighted was the unemployment percentage for men 15 to 24. Lastly, I applied with equal weight the Gini index, i.e., the measure of how unequally distributed is family income in the society.
My simplistic theory is that the higher the proportion of young men, educated but without a job, and aware of how income is mal-distributed in their society, the more likely they are to destabilize that society by acting out their frustrations and discontent.
What I find in examining the numbers is that unemployment and mal-distribution of income drive the results. Of course, my numbers are dependent on how one weighs the factors. And that deserves debate – which I hope you, dear reader, will engage in with me by commenting below. I will e-mail the spread sheet to any who wish it. Just give me your e-mail address in the comment section below.
For wonks, like me, the raw data are fascinating. For example, Asian nations, especially the poorer ones like Bangladesh, India or Viet Nam, have very low unemployment rates. Perhaps in such societies one is either working or perishing. (Accordingly, I have tossed them out of the table above; apparently they don’t have the luxury of demonstrating or occupying.) Another item: male life expectancy is pretty even across cultures and between developed and developing societies, running from the low to upper 70s, suggesting that medical advances are well shared. But three shocking exceptions: Ukraine (62), Russia (60), and South Africa (50!) Another item: as we know, the US is an outlier when it comes to the Gini index; no other developed nation among the 59 has a more unequal distribution of family incomes.
Of course, many unquantifiable factors either moderate or exacerbate the potential for instability. A cultural pattern of acceptance of autocracy or the momentum of improvement might deter acting out. In other societies, demonstrations may be a way of life. Thus, we might not expect to see demonstrations and unrest in Saudi Arabia at a 204 or Morocco at a 213 whereas the UK at 213 has already had its share of disturbances and occupiers.
Crude as it is, this index exercise stimulated interesting speculation: where do we go from here? Jordan? Turkey? Spain? Where is the next tinder likely to be lit by frustrated young men and women who are mad as hell and aren’t going to take it anymore? Stay tuned, for our world isn’t getting any duller.
Among my Olympic Club chums there is the full range of reactions and predictions. “Significant” “Meaningless” “World awakening” “Nothing will change” As I reflect on it all, it seems to me that in the yeasty brew of underlying causes, there are four main ingredients: youth, education, unemployment, and mal-distributed income. This is an oversimplification, to be sure, but I wondered if one could quantify these into a single measure of a nation’s predisposition to instability. Hence, Fletch’s rudimentary “Instability Index.”
My numbers are provocative. Using Japan as a base (100) my instability index suggests that the US,with an index of 242, is two and a half times more potentially unstable than Japan. Our neighbor Canada is only at 167 because its median age is a bit higher than ours and its income more evenly distributed. I used Japan as base because it has relatively mild youth unemployment, a relatively balanced society by age, and a reasonably fair distribution of income. Here are some of the highs and lows of the 59 countries for which I calculated my Instability Index.
High rel. to Japan
South Africa: 479 Algeria: 407 Jordan: 361 Spain: 357 Iraq: 340
Puerto Rico: 318 Columbia: 316 India: 304 Ireland: 290
Low rel. to Japan
Thailand: 53 Netherlands: 59 Austria: 70 Switzerland: 72
Norway: 73 Germany: 81 Ukraine: 81 Turkey: 84 Denmark: 87
I mined the CIA Worldbook for my raw data. (An invaluable resource, one of the few admirable and public services the CIA provides; if you don’t know of it, give it a try -- www.cia.gov/library/publications/the-world-factbook/.) I derived a “youthfulness” measure by taking male median age relative to male life expectancy. To that, I applied the literacy rate among men (in mid-east countries, especially, there are distressing differences between men’s and women’s literacy.) Also equally weighted was the unemployment percentage for men 15 to 24. Lastly, I applied with equal weight the Gini index, i.e., the measure of how unequally distributed is family income in the society.
My simplistic theory is that the higher the proportion of young men, educated but without a job, and aware of how income is mal-distributed in their society, the more likely they are to destabilize that society by acting out their frustrations and discontent.
What I find in examining the numbers is that unemployment and mal-distribution of income drive the results. Of course, my numbers are dependent on how one weighs the factors. And that deserves debate – which I hope you, dear reader, will engage in with me by commenting below. I will e-mail the spread sheet to any who wish it. Just give me your e-mail address in the comment section below.
For wonks, like me, the raw data are fascinating. For example, Asian nations, especially the poorer ones like Bangladesh, India or Viet Nam, have very low unemployment rates. Perhaps in such societies one is either working or perishing. (Accordingly, I have tossed them out of the table above; apparently they don’t have the luxury of demonstrating or occupying.) Another item: male life expectancy is pretty even across cultures and between developed and developing societies, running from the low to upper 70s, suggesting that medical advances are well shared. But three shocking exceptions: Ukraine (62), Russia (60), and South Africa (50!) Another item: as we know, the US is an outlier when it comes to the Gini index; no other developed nation among the 59 has a more unequal distribution of family incomes.
Of course, many unquantifiable factors either moderate or exacerbate the potential for instability. A cultural pattern of acceptance of autocracy or the momentum of improvement might deter acting out. In other societies, demonstrations may be a way of life. Thus, we might not expect to see demonstrations and unrest in Saudi Arabia at a 204 or Morocco at a 213 whereas the UK at 213 has already had its share of disturbances and occupiers.
Crude as it is, this index exercise stimulated interesting speculation: where do we go from here? Jordan? Turkey? Spain? Where is the next tinder likely to be lit by frustrated young men and women who are mad as hell and aren’t going to take it anymore? Stay tuned, for our world isn’t getting any duller.
Friday, November 4, 2011
Embattled Israel -- Our Most Dangerous Foreign Policy Conundrum
A frustrated Palestinian attempting to tend his olive trees ... is he the potential trigger of the next mid-east conflagration? Could he be a Palestinian "Bouazizi" who sets off a new war? The West Bank is poised like a bead unstably perched atop a wire loop; one small push and down it slides, a reaction far stronger than initial push. And in this case, some of the potential reactors are nuclear armed.
One by one, Israel's peace partnerships are coming undone.
~ Egypt: poplar opinion is forcing the junta to moderate both their support of the peace agreement and their constraint of Hamas in the Gaza. After the elections, there will be a lively debate about Egypt's commitment to the peace, no matter who wins.
~ Jordan: two prime ministers fired in six months. Much empathy on the street with West Bank Palestinians. A youthful, literate, unemployed tinder box of instability.
~ Turkey: already turned hostile to Israel’s handling of Gaza. Turning its face away from Europe and Eastward toward its Arab neighbors again.
Yet rather than dampen, Israel insists on enflaming Arab populist outrage. My nephew and his fiancé , Ged and Kelleigh, spent a couple of months last summer working on a Palestinian farm in the West Bank, then traveling in Jordan and Turkey. They paint a grim picture.
One Palestinian land owner with whom they worked was attempting to plant an olive grove on his land bisected by the wall. They helped him transport water to nurture the new grove -- expensive water, for the Israeli authorities forbid the drilling of wells or construction of cisterns to catch the rare rains in the West Bank. Forbid, that is, the Palestinians from doing so; no restrictions on settlers' tapping and catching valuable waters. West Bank Israelis annually use 1,450cubic meters per capita vs. 83 per Palestinian -- yes, 83!
Another scene: settlers of an illegal settlement covet an adjacent Palestinian pistachio and olive grove. When the Palestinian owner and his work party, including Kelleigh and Ged, come to tend and water the grove, the armed settlers harass them with taunts and threats. The Israeli Defense Force arrives to separate the adversaries and maintain peace. "Maintain peace" by ordering the Palestinians off their own land, and hurrying them on their way with stun grenades and tear gas, to the delight of the settlers.
Just one small incident in a sea of such mis-matched confrontations.
Netanyahu is intent on flooding occupied land with Israelis, making a mockery of the notion of a free-standing Palestinian state. Regional, indeed, world-wide opposition to and disdain for Israel grows apace.
So what is our policy? To veto Security Council endorsement of statehood recognition? To hang with Israel no matter how isolated they become? To withdraw support from UNESCO – an organization dedicated to defusing world tensions by fostering understanding and exchange? To stand by and watch an embattled Israel, armed with nuclear weapons, turn increasingly defensive, intransigent, feel cornered and desperately deluded that they are always in the right?
Why not abstain when the Security Council votes? Why not begin supplying West Bank Palestinians with supplies, water, agricultural aid -- in effect, countering at least symbolically Israel's real politick investiture of the land? Lecturing Netanyahu hasn't accomplished anything; isn’t it time to demonstrate that our support is conditional and that we can back words with actions that demonstrate even-handedness?
Do we have the political courage to become even-handed? No Republican will do so in this polarized environment, especially given the evangelicals' embrace of Eretz Israel. (Evangelicals believe the second coming will happen only after the Promised Land is fully returned to the Jews. Of course, in the second coming, non-Christians will be wiped out; so much for their empathy with Israelis.) Nor will Democrats support even-handedness, fearful of driving away knee-jerk Israeli supporters. Perhaps a group of "wise men" like those used by Johnson, or Bishop Tutu's “The Elders”, could speak objectively and persuasively. Maybe the specter of nuclear armed instabilities like Pakistan, No. Korea, Iran and Israel will bring some hard thinking and stiffen the spines of our "leaders." Shocked to put Israel in the same company? Ask yourself: are they truly acting more statesmanlike and rational than the others?
Only when we begin to see and listen and think hard about being dragged into another conflagration, one conceivably of mushroom proportions, will we have the courage to change direction and act even-handily and hard-headedly. Israel is our toughest, most dangerous foreign policy conundrum, far harder to deal with than Pakistan, Iran or North Korea where the world sees it our way, because we are alone and stuck in our prior position. But we may be at the two minute warning – little time to find our own, new way in this increasingly dangerous and unstable part of the world.
Saturday, October 22, 2011
My Home Town
I haven’t blogged since mid-August. Too much going on with Horizon House, SRJO, Mt. Baker Rowing; plus an anniversary trip to England; five days in DC for the annual meeting of Leading Age, the trade association for not-for-profit providers of homes for and services to the aged; and getting back into the stone yard at the Pratt Fine Arts Center. Lots of pent-up topics to explore, but first, my trip to DC.
That I hadn’t been in Washington in quite awhile was attested to by an old, out-of-date Metro pass when I tried to use it. Four new monuments have gone up in the interim. I played hooky from the conference one day to walk about and visit the WWII and Korean War monuments, the new memorial to MLK, and the FDR memorial.
That I hadn’t been in Washington in quite awhile was attested to by an old, out-of-date Metro pass when I tried to use it. Four new monuments have gone up in the interim. I played hooky from the conference one day to walk about and visit the WWII and Korean War monuments, the new memorial to MLK, and the FDR memorial.The WWII monument would be better suited to London or Rome; it is nothing other than an imperia
l statement of triumph. Cold, massive, impersonal, an overbearing testament to institutional power. The only showings of humanity are in relatively small bronze plaques mounted along the walls of the ent
rance way. These are wonderful bas-reliefs of service men and women in action, and the civilians who worked to provide them the materiel and supports they needed to prevail. Who softens the impact of the whole are the visitors – veterans in wheel chairs, some in old uniforms, being brought in reunion groups or by families to recall and re-live their moments of service. Their eyes told their tales.
l statement of triumph. Cold, massive, impersonal, an overbearing testament to institutional power. The only showings of humanity are in relatively small bronze plaques mounted along the walls of the ent
rance way. These are wonderful bas-reliefs of service men and women in action, and the civilians who worked to provide them the materiel and supports they needed to prevail. Who softens the impact of the whole are the visitors – veterans in wheel chairs, some in old uniforms, being brought in reunion groups or by families to recall and re-live their moments of service. Their eyes told their tales. The monument to the Korean “
police action” could not have presented a greater contrast. Far and away the most moving of the four, this platoon of haunting, life-sized figures moving wearily and warily, wearing ponchos against the cold and rain, a unit yet each in his own solitude. The monument is dedicated to “those who fought for a country they had not heard of and a people they never met.” The crowd was filled with Koreans, probably connected to the visit of President Lee last week. All visitors were sober and silent, especially along the wall engraved with photos of troopers, now vets, in which were reflected these ghostly figures whose expressions seemed only to say “how do I get out of here alive?” or “I want to go home.”
police action” could not have presented a greater contrast. Far and away the most moving of the four, this platoon of haunting, life-sized figures moving wearily and warily, wearing ponchos against the cold and rain, a unit yet each in his own solitude. The monument is dedicated to “those who fought for a country they had not heard of and a people they never met.” The crowd was filled with Koreans, probably connected to the visit of President Lee last week. All visitors were sober and silent, especially along the wall engraved with photos of troopers, now vets, in which were reflected these ghostly figures whose expressions seemed only to say “how do I get out of here alive?” or “I want to go home.” Preparations were underway for the next day’s dedication of MLK’s monum
ent. But a good crowd had found the way, and one could feel the black pride and the respect of we others. The statue is yet raw; it will weather in time. My first reaction was and is that it’s not a good likeness of King, but who am I to judge? Andrew Young has been quoted as saying it is the best likeness he has seen. The figure is strong, almost a bit overbearing. It is heroic and brave, which I know he was, but without the humility that I like to think he also showed. I might have guessed, from my Kuaui Lagoons experience, that it was sculpted in China; it has that massive, muscular quality of their monument style. His quotes along the marble walls are timelessly inspiring. (Black marble walls are apparently de rigueur since Maya Lin’s Viet Nam memorial success.)
ent. But a good crowd had found the way, and one could feel the black pride and the respect of we others. The statue is yet raw; it will weather in time. My first reaction was and is that it’s not a good likeness of King, but who am I to judge? Andrew Young has been quoted as saying it is the best likeness he has seen. The figure is strong, almost a bit overbearing. It is heroic and brave, which I know he was, but without the humility that I like to think he also showed. I might have guessed, from my Kuaui Lagoons experience, that it was sculpted in China; it has that massive, muscular quality of their monument style. His quotes along the marble walls are timelessly inspiring. (Black marble walls are apparently de rigueur since Maya Lin’s Viet Nam memorial success.)It is FDR’s th
at is the most impressive of the four. Massive, rough granite walls delineate chambers open to the sky; lovely landscaping of the four and a half acres creates a peacefulness that not even giddy high-school trippers posing with Fala or smirking 
at the bronze bread line can disrupt. The statues are accessible – just over life-size, emotive, designed to engage rather than inspire awe. Eleanor is there, by herself, away from his side – as she so often was in life –wrapped in her thoughts and concerns which so resonate in this 21st century. And FDR’s quotes, about confidence, foreclosures, unemployment, finding solutions together – unfortunately, they could have been written yesterday.
Also in DC this we
ek were a couple of camps of “occupiers.” Sparse, sad, not much local support. (I gave a brief, impromptu lecture in one, on the unfortunate histories of 'corporations as people' and 'cash as speech.') I suppose the lack of enthusiasm reflects the stake Washingtonians have in their status quo, whether staffers or bureau employees or regulators or lobbyists or contractors. Money out of politics? -- no thank you. That one percent? -- well who else will keep the machine oiled?
at is the most impressive of the four. Massive, rough granite walls delineate chambers open to the sky; lovely landscaping of the four and a half acres creates a peacefulness that not even giddy high-school trippers posing with Fala or smirking 
at the bronze bread line can disrupt. The statues are accessible – just over life-size, emotive, designed to engage rather than inspire awe. Eleanor is there, by herself, away from his side – as she so often was in life –wrapped in her thoughts and concerns which so resonate in this 21st century. And FDR’s quotes, about confidence, foreclosures, unemployment, finding solutions together – unfortunately, they could have been written yesterday.Also in DC this we
ek were a couple of camps of “occupiers.” Sparse, sad, not much local support. (I gave a brief, impromptu lecture in one, on the unfortunate histories of 'corporations as people' and 'cash as speech.') I suppose the lack of enthusiasm reflects the stake Washingtonians have in their status quo, whether staffers or bureau employees or regulators or lobbyists or contractors. Money out of politics? -- no thank you. That one percent? -- well who else will keep the machine oiled?
So, a good visit back to my home town, as politely cynical and corrupting as ever. But despite that, when all is said and done, Mr. Lincoln is still my guiding light.
Friday, August 19, 2011
Bond Rating -- One Sweet Racket
Last week, a friend, outraged by S&P’s downgrade of US debt, demanded “who are these guys -- 5 guys sitting around a table somewhere?” I set out to answer his question. Here's what I've learned about how “these guys” make their judgments and their money, and whether I am comfortable with their ratings of US debt.
Who are these guys?
S& P is one of ten NRSROs, Nationally Recognized Statistical Rating Organizations, credit rating agencies which the SEC permits financial firms to use to qualify their net capital reserve requirements, i.e., the amount of readily available cash they have to keep on hand to pay depositors withdrawals. The question is how safe and how liquid the reserves are. Degree of safety is reflected in their credit ratings, as determined by a rating agency that, in turn, must be accredited by the SEC.
As you know, the three majors are S&P, Moody’s and Fitch.
Standard and Poors has been a division of McGraw Hill since 1966. Roughly 5,000 people in offices in 23 countries. They racked up sales last year of $1,695 million, and operating profits were $762 million, or 45%! They make up 27% of McG-H’s sales but 48% of its profits. Their roots go back 150 years to Poor’s review of railroad and canal companies, published in 1860.
Fitch is the smallest of the three. It is a subsidiary of a London rating agency which in turn is owned by a French holding company, so data on Fitch are harder to come by. Though smaller, Fitch frequently positions itself as the "tie-breaker" when the other two agencies have dissimilar ratings.
S&P gets the headlines (and is getting even more for their role in the financial crises of 2008), but the biggest of the three is Moody’s. And it is the only independent; Moody’s Corp. is traded on the NYSE. They generated $2.032 billion in revenues last year and produced an operating margin of 41%. John Moody, 1909, invented the rating scale Aaa to C, and now all three use a variation of that scale. Last year Moody’s Rated debts of 12,000 corporations, 25,000 public issuers, and 106,000 structured financial obligations.
This is a profitable business. S&P: 45% operating profit; Moody’s: 41%. By comparison, Boeing’s operating profit margin was 22% last year. And these agencies have relatively little capital invested – office leases and computers -- compared to the capital assets Boeing needs to generate that 22%. Little wonder that Warren Buffet owns 12% of Moody’s and Hedge funds own another 36%.
Where does the money come from and what do they do to earn it?
The bulk of their revenues come from the issuers of the bonds being rated. (But the US Treasury does not pay for ratings.) In the case of corporations and municipalities, this raises conflict of interest potential since the bond issuer has an incentive to hire the agency most likely to give it a good rating. The agencies argue that in this age of easy sharing data via emails and texting, a subscription-based model would not be profitable. Further, a rating agency often learns non-public information and, under an SEC rule, such information may only be used if ratings are made available to the public for free. So issuers pay, like it or not.
What do the ratings mean? What is the difference between a Triple A and a Double AA?
AAA: Obligations judged to be of the highest quality, with minimal credit risk.
AA: Obligations judged to be of high quality and subject to very low credit risk. And so on down the line.
Then, to further slice the cake, Moody’s adds numerical modifiers 1, 2, and 3 to each rating classification. AA 1 indicates that the obligation ranks in the higher end of its group of AAs; a 2 indicates a mid-range ranking; and a 3 indicates a ranking in the lower end of the AAs. S&P uses a plus, as in AA+; a neutral, AA; and a minus, AA-, rather than numbers.
In all, there are 21 rating categories, with angel-on-head-of-pin distinctions between them.
Note how indefinite are the words: indicates, very low, higher end, minimal, highest – all quotes from Moody’s materials.
How do they determine a rating?
They have armies of analysts, industry and country experts who basically follow a three step process. Here's Moody’s description of how they rate sovereign debt:
“Step 1: Country economic resiliency
The first step consists in determining the shock-absorption capacity of the country, based on the combination of two key factors:
Factor 1: the country’s economic strength, in particular the GDP per capita -- the single best indicator of economic robustness ....
Factor 2: the institutional strength of the country, the key question being whether or not the quality of a country’s framework and governance – such as respect of property rights, transparency, the efficiency and predictability of government action, the degree of consensus on the key goals of political action – is conducive to respect for contractual obligations.
“Combining these two indicators helps determine the degree of resiliency, and positions the country in the rating scale: very high, high, moderate, low or very low.
“Step 2: Government financial robustness The second step focuses directly on debt itself, a combination of
Factor 3: the financial strength of the government. The question is to determine what must be repaid ... and the ability of the government to mobilize resources: raise taxes, cut spending, sell assets, ...
And factor 4: the susceptibility to adverse economic, financial or political events....
“Step 3: Determining the rating
The third stage consists in adjusting the degree of resiliency to the degree of financial robustness. This results in the identification of a rating range.
“The determination of the exact rating is done on the basis of a peer comparison, in other words, relative to whom, and weighting additional factors that may not have been adequately captured earlier.”
(Does this not begin to sound rather fuzzy?)
The findings and recommendations then go to a rating committee. In Fitch’s case, it is 13 senior executives chaired by Stephen Joynt, Chief Executive Officer. So, not five guys sitting around the table, but 13.
Well, what do I conclude?
About ratings: They are imprecise judgments. In the words of Stephen Joynt CEO of Fitch,”Simply put, ratings are a credit opinion.”
And note that ratings are relative, not absolute. While they don’t say it in so many words, their “peer review” logic leads to this conclusion: if all nations were shaky and at risk, the least shaky bond of the bunch, no matter how risky, would still be rated AAA.
About their ratings of US debt: As you know, Fitch and Moody’s have reaffirmed their AAA rating on US Debt, S&P has downgraded to AA+. I’d bore the hell out of you, if I haven’t already, to go into all the detail of their judgments. Just let me say that if you’re a long-range optimist, Fitch and Moody are right. But if you’re a pessimist about the medium term, S&P also is right. And I agree, both mid-term and long-term. In the mid-term, until January of 2013, we will have a Washington mess on our hands and that does increase the risk of a stupid – read tea party highjacking of the GOP – default because of Congress’ inability to reach a balanced compromise.
About the rating industry: If you intend to issue debt and want to have insurance companies, pension funds, and banks buy your notes and bonds, you have to use, i.e., to pay, a rating service; the few services available to you are a government-sanctioned and protected oligopoly; like all oligopolies, they have pricing power to set rates without having to break any laws about price-fixing.
So, they make huge profits on minimal investment.
In other words, the rating agency business is one sweet racket.
Who are these guys?
S& P is one of ten NRSROs, Nationally Recognized Statistical Rating Organizations, credit rating agencies which the SEC permits financial firms to use to qualify their net capital reserve requirements, i.e., the amount of readily available cash they have to keep on hand to pay depositors withdrawals. The question is how safe and how liquid the reserves are. Degree of safety is reflected in their credit ratings, as determined by a rating agency that, in turn, must be accredited by the SEC.
As you know, the three majors are S&P, Moody’s and Fitch.
Standard and Poors has been a division of McGraw Hill since 1966. Roughly 5,000 people in offices in 23 countries. They racked up sales last year of $1,695 million, and operating profits were $762 million, or 45%! They make up 27% of McG-H’s sales but 48% of its profits. Their roots go back 150 years to Poor’s review of railroad and canal companies, published in 1860.
Fitch is the smallest of the three. It is a subsidiary of a London rating agency which in turn is owned by a French holding company, so data on Fitch are harder to come by. Though smaller, Fitch frequently positions itself as the "tie-breaker" when the other two agencies have dissimilar ratings.
S&P gets the headlines (and is getting even more for their role in the financial crises of 2008), but the biggest of the three is Moody’s. And it is the only independent; Moody’s Corp. is traded on the NYSE. They generated $2.032 billion in revenues last year and produced an operating margin of 41%. John Moody, 1909, invented the rating scale Aaa to C, and now all three use a variation of that scale. Last year Moody’s Rated debts of 12,000 corporations, 25,000 public issuers, and 106,000 structured financial obligations.
This is a profitable business. S&P: 45% operating profit; Moody’s: 41%. By comparison, Boeing’s operating profit margin was 22% last year. And these agencies have relatively little capital invested – office leases and computers -- compared to the capital assets Boeing needs to generate that 22%. Little wonder that Warren Buffet owns 12% of Moody’s and Hedge funds own another 36%.
Where does the money come from and what do they do to earn it?
The bulk of their revenues come from the issuers of the bonds being rated. (But the US Treasury does not pay for ratings.) In the case of corporations and municipalities, this raises conflict of interest potential since the bond issuer has an incentive to hire the agency most likely to give it a good rating. The agencies argue that in this age of easy sharing data via emails and texting, a subscription-based model would not be profitable. Further, a rating agency often learns non-public information and, under an SEC rule, such information may only be used if ratings are made available to the public for free. So issuers pay, like it or not.
What do the ratings mean? What is the difference between a Triple A and a Double AA?
AAA: Obligations judged to be of the highest quality, with minimal credit risk.
AA: Obligations judged to be of high quality and subject to very low credit risk. And so on down the line.
Then, to further slice the cake, Moody’s adds numerical modifiers 1, 2, and 3 to each rating classification. AA 1 indicates that the obligation ranks in the higher end of its group of AAs; a 2 indicates a mid-range ranking; and a 3 indicates a ranking in the lower end of the AAs. S&P uses a plus, as in AA+; a neutral, AA; and a minus, AA-, rather than numbers.
In all, there are 21 rating categories, with angel-on-head-of-pin distinctions between them.
Note how indefinite are the words: indicates, very low, higher end, minimal, highest – all quotes from Moody’s materials.
How do they determine a rating?
They have armies of analysts, industry and country experts who basically follow a three step process. Here's Moody’s description of how they rate sovereign debt:
“Step 1: Country economic resiliency
The first step consists in determining the shock-absorption capacity of the country, based on the combination of two key factors:
Factor 1: the country’s economic strength, in particular the GDP per capita -- the single best indicator of economic robustness ....
Factor 2: the institutional strength of the country, the key question being whether or not the quality of a country’s framework and governance – such as respect of property rights, transparency, the efficiency and predictability of government action, the degree of consensus on the key goals of political action – is conducive to respect for contractual obligations.
“Combining these two indicators helps determine the degree of resiliency, and positions the country in the rating scale: very high, high, moderate, low or very low.
“Step 2: Government financial robustness The second step focuses directly on debt itself, a combination of
Factor 3: the financial strength of the government. The question is to determine what must be repaid ... and the ability of the government to mobilize resources: raise taxes, cut spending, sell assets, ...
And factor 4: the susceptibility to adverse economic, financial or political events....
“Step 3: Determining the rating
The third stage consists in adjusting the degree of resiliency to the degree of financial robustness. This results in the identification of a rating range.
“The determination of the exact rating is done on the basis of a peer comparison, in other words, relative to whom, and weighting additional factors that may not have been adequately captured earlier.”
(Does this not begin to sound rather fuzzy?)
The findings and recommendations then go to a rating committee. In Fitch’s case, it is 13 senior executives chaired by Stephen Joynt, Chief Executive Officer. So, not five guys sitting around the table, but 13.
Well, what do I conclude?
About ratings: They are imprecise judgments. In the words of Stephen Joynt CEO of Fitch,”Simply put, ratings are a credit opinion.”
And note that ratings are relative, not absolute. While they don’t say it in so many words, their “peer review” logic leads to this conclusion: if all nations were shaky and at risk, the least shaky bond of the bunch, no matter how risky, would still be rated AAA.
About their ratings of US debt: As you know, Fitch and Moody’s have reaffirmed their AAA rating on US Debt, S&P has downgraded to AA+. I’d bore the hell out of you, if I haven’t already, to go into all the detail of their judgments. Just let me say that if you’re a long-range optimist, Fitch and Moody are right. But if you’re a pessimist about the medium term, S&P also is right. And I agree, both mid-term and long-term. In the mid-term, until January of 2013, we will have a Washington mess on our hands and that does increase the risk of a stupid – read tea party highjacking of the GOP – default because of Congress’ inability to reach a balanced compromise.
About the rating industry: If you intend to issue debt and want to have insurance companies, pension funds, and banks buy your notes and bonds, you have to use, i.e., to pay, a rating service; the few services available to you are a government-sanctioned and protected oligopoly; like all oligopolies, they have pricing power to set rates without having to break any laws about price-fixing.
So, they make huge profits on minimal investment.
In other words, the rating agency business is one sweet racket.
Tuesday, August 9, 2011
Oh, Hillary, How I Wish...
…you were President.
That thought’s been haunting me all night and today – after the deal which isn’t a deal; the downgrade (deserved despite its irresponsible source); Drew Westen’s must-read article in the Sunday NYT, “What Happened to Obama?”*; the market gyrations and gold bugs’ delight; and, last night at the Seattle Chamber Festival, sitting through the agonized anger and sweet grief of Elgar’s Quintet for Piano and Strings in A Minor.
At the 2008 Democratic caucuses, Ann was the Obama delegate; I was for Clinton, but later came round to Obama. Would Hillary have proved tougher, more directive, more capable of striking a true deal, more willing to face down Petraeus, and more able to sell the public? I don’t know of course -- but just think, with Bill whispering in her ear and if she channeled the Hillary of the 1995 Beijing Woman’s Conference or the 1998 Davos Conference, wouldn’t that be better? With Biden at State? Gates at Defense. Obama learning how the Senate really works under his mentor (soon to be?) Majority Leader Dick Durbin? Would we have surged Afghanistan? Or be flirting with staying in Iraq?
Sure, the Obama haters hate her, too. But if she could win over no-nonsense New Yorkers as the carpetbagger, wouldn’t she likely win over the rest of us reasonable skeptics? Surely.
Oh, how I wish….
(Here’s a link to that must-read Westen article: http://www.nytimes.com/2011/08/07/opinion/sunday/what-happened-to-obamas-passion.html?scp=1&sq=what%20Happened%20to%20Obama?&st=cse.)
Sunday, July 24, 2011
Public Policy Becomes Personal
I haven't blogged since late May because, as many of you know, I suffered sudden, life-threatening diverticular bleeding in Moab, Utah, at the start of what was to be two-plus weeks of visits to and hikes in the national parks and monuments of southern Utah, Death Valley, Yosemite, and the Northern California/Oregon coast. I was lucky -- doubly lucky. First, it happened in town as we finished a nice, late dinner. Had it been 15 hours later, I would have been out on the back-country trails of Arches or Canyonlands, and who knows how quickly I might have gotten aid. As it was, we were 5 minutes from the Moab Hosp
ital ER. Second lucky? They airlifted me out to Grand Junction, CO. Grand Junction?!? What the hell is there? Just St. Mary's Regional Medical Center, top ranked in the Dartmouth Health Atlas study of 2008, a simply superb center of caring, exacting professionals supported by terrific staff. We all should be so lucky as to fall into the hands of such people when in need.
What did they do? Medivac'd, stabilized, transfused (10 times!), tested and probed, found the leak, removed 3/4ths of my colon, put me back together, watched over me and finally allowed me to fly home. What did that cost, to restore me to health? $145,000. And I seem to be restored, save for the oddities of my new plumbing; I finally got back into the boats last Friday and felt great after 1hr, 40mins of sculling.
How does one rack up $145,000? (And the bills are still trickling in.)
ER Moab - $ 1,353
Medivac flight to Grand Junction - $18,801
ER Grand Junction - $3,870
Medical, Surgical, ICU Rooms and Board - $24,537
Pharmacy - $3,501
Supplies - $2,014
Lab and pathology - $4,030
Radiology - $19,513
Nuclear Medicine - $2,202
Surgical - $43,611
Blood Bank - $7,155
Attending physicians - $1,951
Gastroenterologists - $3,225
Radiologists - $1,006
Anesthesiologist - $4,485
Surgeons - $4,382
Through Ann's employer, we are among the 85% of Americans that are insured -- first tier, United Health Care; second tier, Medicare. But what if I had been only on Medicare? Would the hospital, the physicians and the specialists have lavished such care on me? And what if I were in that benighted, uninsured 15%? I don't know the answers; I'd like to think the Sisters of Charity would treat all equally -- the privately insured, those on medicare or medicaid, the uninsured. But would a for-profit hospital?
I'm fairly fit for an old fart. In part, again, because we are insured. We take full advantage of check-ups and preventative medicine; we don't let little ills grow into crises. What are the odds that my uninsured 76 year old doppelganger has taken such care of himself?
What is a fit 76 year-old worth? $145,000? $250,000? $750,000? Others in the ICU were two obese patients, 300-plus pounds , one a smoker to boot, and a very audibly ill 90 year old woman more fit for hospice it sounded like than hospital. Did those three receive the same batteries of tests, transfusions, probes? Or did I get special attention? (I overheard one staffer saying to another, "...oh, he's an executive of some sort.") Again, I don't know.
What should society ask of its health care givers? Is the Hippocratic Oath absolute or relative to physical condition, financial condition, age, odds or role in society? How do "they" -- the ER staff, physicians, specialists, administrators, those on the front line -- how do they make those calls?
In retrospect, I was three times lucky -- the right time, the right place and insured. But now those public policy abstractions of health care reform -- single payer, universal coverage, medicare cuts, advisory councils, all that stuff -- have suddenly become quite personal since that balmy spring evening in Moab.
ital ER. Second lucky? They airlifted me out to Grand Junction, CO. Grand Junction?!? What the hell is there? Just St. Mary's Regional Medical Center, top ranked in the Dartmouth Health Atlas study of 2008, a simply superb center of caring, exacting professionals supported by terrific staff. We all should be so lucky as to fall into the hands of such people when in need.What did they do? Medivac'd, stabilized, transfused (10 times!), tested and probed, found the leak, removed 3/4ths of my colon, put me back together, watched over me and finally allowed me to fly home. What did that cost, to restore me to health? $145,000. And I seem to be restored, save for the oddities of my new plumbing; I finally got back into the boats last Friday and felt great after 1hr, 40mins of sculling.
How does one rack up $145,000? (And the bills are still trickling in.)
ER Moab - $ 1,353
Medivac flight to Grand Junction - $18,801
ER Grand Junction - $3,870
Medical, Surgical, ICU Rooms and Board - $24,537
Pharmacy - $3,501
Supplies - $2,014
Lab and pathology - $4,030
Radiology - $19,513
Nuclear Medicine - $2,202
Surgical - $43,611
Blood Bank - $7,155
Attending physicians - $1,951
Gastroenterologists - $3,225
Radiologists - $1,006
Anesthesiologist - $4,485
Surgeons - $4,382
Through Ann's employer, we are among the 85% of Americans that are insured -- first tier, United Health Care; second tier, Medicare. But what if I had been only on Medicare? Would the hospital, the physicians and the specialists have lavished such care on me? And what if I were in that benighted, uninsured 15%? I don't know the answers; I'd like to think the Sisters of Charity would treat all equally -- the privately insured, those on medicare or medicaid, the uninsured. But would a for-profit hospital?
I'm fairly fit for an old fart. In part, again, because we are insured. We take full advantage of check-ups and preventative medicine; we don't let little ills grow into crises. What are the odds that my uninsured 76 year old doppelganger has taken such care of himself?
What is a fit 76 year-old worth? $145,000? $250,000? $750,000? Others in the ICU were two obese patients, 300-plus pounds , one a smoker to boot, and a very audibly ill 90 year old woman more fit for hospice it sounded like than hospital. Did those three receive the same batteries of tests, transfusions, probes? Or did I get special attention? (I overheard one staffer saying to another, "...oh, he's an executive of some sort.") Again, I don't know.
What should society ask of its health care givers? Is the Hippocratic Oath absolute or relative to physical condition, financial condition, age, odds or role in society? How do "they" -- the ER staff, physicians, specialists, administrators, those on the front line -- how do they make those calls?
In retrospect, I was three times lucky -- the right time, the right place and insured. But now those public policy abstractions of health care reform -- single payer, universal coverage, medicare cuts, advisory councils, all that stuff -- have suddenly become quite personal since that balmy spring evening in Moab.
Subscribe to:
Posts (Atom)
