Sunday, April 18, 2010

Are Fraud Allegations by the SEC the Final Nail in the Cross for Goldman?

Sources:
U.S. Securities and Exchange Commission press release: SEC Charges Goldman Sachs with Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages;
New York Times: For Goldman, a Bet’s Stakes Keep Growing;
Reuters: Germany, UK Demand Goldman Sachs Probe;
Reuters: SEC Finally Lights Fire Under Goldman Smoke;
Fox Business: SEC Charges Goldman Sachs with Fraud.

On Friday, April 16, the U.S. Securities and Exchange Commission (SEC) charged Goldman Sachs and Fabrice Tourre, the company’s vice president of mortgage operations, with defrauding its investors. The SEC is the federal agency in charge of regulating the U.S. securities market. Essentially, the SEC complaint, filed in the U.S. District Court for the Southern District of New York, alleges that in 2007 before the housing market collapse, Goldman Sachs, under the direction of Mr. Tourre, marketed and sold collateralized debt obligations (CDOs) to investors knowing that the company that had bundled the mortgages for the sale had a vested interest in seeing those mortgages fail.

A CDO is an investment security that is backed by a pool of assets, in this case, backed by subprime residential mortgage-backed securities (RMBS). This means that instead of being a simple asset, bought and sold in the market, CDOs are essentially an asset made up of promised money. The SEC’s complaint alleges that Goldman Sachs allowed Paulson & Co., a hedge fund, select the compilation of mortgages that comprised the CDO while that hedge fund had simultaneously bet on the failure of that CDO in the market, a process known in market terms as “short-selling.” The SEC claims that Paulson & Co. made $1 billion in the short sale of this particular CDO, and that they paid Goldman $15 million to structure the product. The fraud, according to the SEC, was in Goldman’s misrepresentations to its investor-clients that the RMBS portfolio underlying the CDO had been chosen by a well known expert in assessing RMBS credit risk, rather than Paulson & Co. Paulson has not been charged with regard to this matter.

Goldman made a statement on Friday indicating that the company would fight the “unfounded” charges. The complaint comes at a sticky time for Wall Street, as the Obama Administration has, in recent months, been pushing for broad financial reforms to the banking sector. Some say that a scandal like this will mount significant political pressure on those who are still opposed to reform of the financial sector.

If found guilty, Goldman could be required to forfeit all profits from the fraudulent transaction with Paulson, and could be subject to additional civil penalties. However, repercussions for Goldman could prove to be far more extensive. On Friday after the announcement of the SEC’s allegation, Goldman’s shares dropped 12.8 percent, resulting in a loss of around $12 billion in market value. There is also the possibility that, should Goldman be found guilty, hoards of investors who lost money in the financial crisis could be inspired to bring suit for similar damages. So far, the SECs allegations have encouraged special investigations to begin in both Germany and the UK.

Discussion Questions:
1. Is there any advantage to charging only one mid-level executive in such a large scandal if you are the SEC? Is a possible that this was a strategic move? Consider whether the allegations become easier to prove if the government can cut a deal with Mr. Tourre to testify as to his involvement.

2. According to the New York Times article, Goldman Sachs would usually settle a case such as this, but has chosen to defend itself vigorously at the outset. What are the advantages to settlement in such a case? What are the disadvantages? Consider the transaction costs associated with litigation and the high price of a guilty verdict for Goldman.

3. From the complaint, it sounds as though Paulson & Co.’s actions caused intentional harm to investors. Why do you think the SEC did not charge the hedge fund for its role in the events? Did Paulson have a duty to the investors?

As Poland Mourns, Ice May Be Melting With Russia

CNN: Grieving Poland Eyes June Vote for New President
NY Times: Kaczynski Often a Source of Tension Within E.U.
Newsweek: What’s Next for Poland?
Reuters: Poles Bury Kaczynski, Eye Better Ties with Russia

Lech Kaczynski, 60-year old Polish President, his wife Maria, and 94 others died suddenly this week as their Russian-built plane crashed in the western Russian city of Smolensk in dangerous fog. The travel group, which also included top military commanders, central banking officials, and Catholic clergy, had been traveling to Russia to remember the 70th anniversary of the massacre of Polish officers during a battle in the Katyn Forest in western Russia. The city and story of Katyn is a significant element of Polish history during the Second World War, when Joseph Stalin and his army killed 20,000 Polish officers to eliminate political opposition.

For a long time, Russian leaders attempted mitigate or hide Russia’s true involvement in the event, but with the fall of communism in the late 1980s also came a partial, and some say half-hearted admission of Stalin’s participation in the murders. More recently, in an effort to rebuild Russian-Polish relations, Vladimir Putin and Poland’s Prime Minister Donald Tusk visited Katyn together where Putin more fully admitted, but also justified the crimes, leaving Poles somewhat dissatisfied. The tragedy that followed days after this latest meeting seems to have had a warming effect on the two nations’ war-tattered relations. Vladimir Putin, Russian Prime Minister, and Dmitry Medvedev, Russian President, have extended sympathy and condolences to the Polish nation and victims’ family members as the two countries try to determine the cause of the crash and what comes next.

Closure will not come easy for the Polish nation or surviving relatives, including Kaczynski's idential twin brother Jaroslaw, chairman of the conservative Law and Justice Party. President Kaczynski and his wife were laid to rest this weekend with fewer guests than expected as the result of an Icelandic volcano eruption this week. The eruption sent a cloud of ash into the air over Europe, putting a ground stop on all air travel within the region and preventing heads of state from all over the world from attending the funeral. The date for a Polish election selecting Kaczynski’s successor will be announced this week. Poland’s election was originally scheduled for June, but Poles anticipate the election will be held sometime mid-June because Poland’s constitution calls for an election to be held with 60 days of an acting president’s death.

Discussion Question:

Could EU economic distress caused by PIIGS (Portugal, Italy, Ireland, Greece, and Spain) nations help revive an economic alliance between former Warsaw Pact countries?

How influential are BRIC countries as a group?

Sources:
Economist.com: The trillion-dollar club
FT.com: Brics balance shared interests with rivalries; Bric countries call for greater clout
IIFL.com: Joint Statement of the BRIC Summit

Last week, the leaders of Brazil, Russia, India and China ("BRIC") met in Brazil for the "BRIC Summit". They emphasized that BRIC countries needed to have a greater voice in creating a new international order, calling for voting power reforms at the World Bank and quota reforms at the IMF. This was the second time that BRIC leaders gathered together after their first meeting in Russia last year, and questions arise as to the role of BRICs as a group.

The Economist points out several reasons why the BRICs matter. The annual GDP of each of them exceeds $1 trillion. BRICs together own up to 40 percent of the world's foreign-exchange reserves. Given the importance of BRICs in the world economy, they have been given more opportunities to participate in deciding international economic issues through the G20. Also, BRICs themselves have incentives to act as a group. For example, China wants to increase its influence while keeping a low profile. By acting as a group, China can pursue its national interests "behind a multilateral fa├žade."

However, many view that the role of the BRICs may be limited. BRIC countries lack "coherence" and seem to be more like rivals than partners pursuing common interests. Their political systems vary. The income levels in each country differ widely. China and Russia are permanent members of the UN Security Council while Brazil and India are not. Despite the differences, however, BRIC countries can at least raise their voices on the issues like the reform of IMF governance more effectively by acting together without sacrificing their own interests, according to the Economist. Jim O'Neill of Goldman Sachs who coined the term, "BRIC", says that the BRIC countries are a "good mechanism for pressing rich countries to change their role in managing the global economy more radically."

Questions:
Last month, Organizaiton for Economic Co-operation and Development ("OECD") published a paper, "Economic Policy Reforms: Going for Growth 2010." In the paper, OECD used the term, BIICS (Brazil, China, India, Indonesia, South Africa) rather than BRIC, and said that BIICS have been an important engine for growth. According to the Economist, Russia looks "odd" to be in the group with other three countries. What do you think about replacing Russia with Indonesia or other countries?

Tuesday, April 13, 2010

Implementation of new ownership rules in Zimbabwe leaves economic recovery in question

Sources

All Africa.com: Zimbabwe: Govt Says No to Engen Buying Assets

All Africa.com: Zimbabwe: Mugabe Ignores PM's Directive
Cato Institute: R.I.P. Zimbabwe Dollar
Cato Institute: The Loss of Property Rights and the Collapse of Zimbabwe
Wikipedia: Zimbabwe
All Africa.com: Zimbabwe: The Coast is Not Clear Yet
All Africa.com: Zimbabwe: Future Generations Will 'Inherit Only the Wind'

Zimbabwe has recently taken its first action under a new law that attempts to rein in foreign control over companies and resources. This has already caused concern by foreign investors who already regard the country as hostile to investment. It has also created growing uncertainty over how the law will be implemented in the future. Investment concerns are always worrisome, but they can become a critical issue in a country where poverty and unemployment are extremely high. The economy has the potential to rebound, but laws like this are making some worried that future generations will find the country as destitute as today.

Zimbabwe is no stranger to interfering in private ownership. Starting in 2000, the government started a land reform policy that took farms away from their white owners and attempted to redistribute the land to blacks. No compensation was paid to the legitimate owners, and this was the first time that private property rules were abridged by the government. Experts point to this as one of the major causes of the economic crisis that started in 2000 and is still grinding on today.

Currently the economic situation in Zimbabwe is dire. Unemployment is still at 90% and social services have not been restarted. Even steady electricity is not guaranteed. Previously, Zimbabwe was one of Africa’s stronger economies, but poor management and drought destroyed its strong position. At one point in 2008, the inflation rate skyrocketed to 89.7 sextillion percent, making it the second highest inflation rate in world history. The business world was also hurt by price controls and government programs that printed money. Thankfully, the economy has picked up in 2009, with companies reporting stronger numbers, but at the same time cautioning that the coast is far from clear.

For some time Zimbabwe has been described as unfriendly to business of any type. Some company executives have reported police persecution, while others felt like running a business has become itself a criminal act. This led investors to take their money elsewhere, and investment in the Zimbabwean economy dried up.

The ongoing effects of investment pullout are being seen currently and will be exacerbated by this new law. Oil giants Shell and British Petroleum decided to leave the Zimbabwean market and to sell their assets. Engen Petroleum and Kenyan oil retailer KenolKobil wanted to buy these assets that included filling stations, fuel deposits, and a petroleum blending plant. The Indigenization and Economic Empowerment Act says that Zimbabweans must have 51 percent ownership of strategic businesses. Local Zimbabwean petroleum companies voiced concern over the transaction, and the government announced it would not approve the sale. Business leaders believe this law will only serve to keep investment away.

All countries want a strong economy, but the mind-bending situation in Zimbabwe is uniquely poignant. As a result of the negative business climate leading to unemployment and a lack of social services and poverty the citizens of Zimbabwe have been forced to turn to using firewood, thus destroying their forests. One activist described the situation as “future generations will "inherit the wind." If current policies that prevent economic growth continue, it seems almost certain that Zimbabwe will not move forward.


Discussion:

1) Should countries require a percent of domestic ownership?

2) Do foreign companies have any obligation to make even small investments in Zimbabwe to help alleviate poverty and unemployment?

Saturday, April 10, 2010

China bans Argentina soy-oil imports

Financial Times – Latin American leaders look to China / Financial Times – Argentina soya rift with China grows / BBC – China soya ban angers Argentina / Business Week – Argentina Soy Growers ‘Optimistic’ on End to China Oil Blockade / Merco Press – China allows unloading of Argentine soybean oil / Merco Press – China enthusiastic about reaching agreement over Argentine soybean oil / Merco Press – Argentina protests Chinese sanitary restrictions on soy-oil imports

The trade dispute between China and Argentina entered a new phase on April 1, as China imposed sanitary restrictions on all soy-oil imports. The new restrictions have resulted in an effective ban on Argentina soy-oil imports. Argentina Foreign Minister, Jorge Taiana, summoned Chinese ambassador, Gange Zeng, to Buenos Aires immediately to negotiate a resolution of the dispute. Experts view China’s new restrictions as a retaliatory response to Argentina’s recent allegations of China’s violation of anti-dumping trade laws. As a result of these allegations, Chinese footwear and textile goods became subject to import taxes. Chinese officials have viewed the anti-dumping charges as cover for Argentina attempting to protect domestic producers from competition. Chinese officials have denied that the move was retaliatory, insisting instead that it was purely a matter of safety. China, however, has built significant reserves in the first four months of this year, a move China likely made in anticipation of imposing an import ban on Argentina. China also has expressed a desire to lower imports by increasing domestic production of soya oil.

This recent response from China could prove to have a significant impact on Argentina’s economy. Latin American Countries are increasingly becoming dependant on trade with China. Reports show that Latin American Countries with higher integrated economies with Asia experienced less of a downturn during the financial crisis than their less integrated counterparts. In 2009, China imported 1.84 million tons of soy-oil worth $1.4 billion; the import ban could end up costing Argentinean famers upwards of $2 billion this year.

The ban has increased soy-oil prices in US and China. US producers will likely benefit with increased exports to China. One oilseeds analyst stated, “If it went on long enough, it probably would (benefit US soy oil experts) because Argentina is by far the largest exporter of soybean oil in the world and China is by far the largest importer. But that combination tells me that this situation might not last very long.” Analysts have also noted that the ban will likely be short-lived since China imports 50% of its soy-oil demand from Argentina and finding replacements for this amount of produce would not be easy.

On Thursday April 8, Argentina Agriculture Secretary, Carlos Cheppi, and Carlos of The National Food Health Service reached an agreement with Chinese officials to allow cargo ships already bound for China to unload soy-oil. Analysts see this agreement as a gesture of good faith and an indicator that the countries will likely resolve the dispute in the coming weeks.

Discussion Questions:

Is the ban a signal that China can and will impose its will on Latin American Countries, or merely a proportionate response to Argentina’s ban on certain Chinese goods that Argentina viewed violated anti-dumping trade laws?

What are the biggest risks facing Latin American countries with increasing dependence on trade relations with Asia?

US and Brazil suspend trade dispute

Americas Society Website – US-Brazil Military Pact on the Horizon / The New York Times – US and Brazil Reach Agreement on Cotton Dispute / Latin America Monitor – Good Will to Avert US Trade Dispute / Business Week – Brazil, U.S. Agree to Avoid Tariffs in Cotton Dispute / Latin American Herald Tribune – US Hopeful of Settling Trade Dispute with Brazil over Cotton / Financial Times – Tax move by Brazil risks US trade war / The Economist – Picking a fight Brazil fires another salvo in its dispute with America over Cotton Subsidies

Brazil and the US reached a temporary agreement on Tuesday April 6, over Federal subsidies to US Cotton Farmers. The Brazil-US trade dispute began in 2002 when the Brazilian government filed a case with the WTO alleging that the US was violating trade agreements by providing Cotton subsidies to US farmers. Brazil won the case in 2005 and 2008 with the WTO finding that the US subsidies violated trade agreements. In August 2009, Brazil won WTO approval to impose sanctions on US goods over the Cotton subsidies. The WTO granted Brazil the right to impose annual sanctions of approximately $829 million. Prior to this agreement, Brazil was set to start imposing the sanctions this week.

Under this agreement, the US has agreed to create a $147.3 million fund that would provide assistance to the Brazilian Cotton industry. The US would keep the fund in place as long as Cotton subsidies exist for US farmers. The US opted to provide assistance to Brazilian Cotton farmers rather than eliminate the Cotton subsidies that it provides US farmers. Reports also indicate that the US will lift import bans on Brazil Beef that stem from foot and mouth disease and other livestock infections. The US Agriculture Department will also modify a program that will allow foreign banks access to loan guarantees for purchase of American agricultural products by foreign buyers.

Both countries hope that they can reach a permanent solution in the coming weeks. Many fear that the dispute could erupt in to an all out trade war between the two countries. Brazil planned to impose a 100% tariff for cotton prices, duties on cars, and suspend intellectual property rights. The dispute also threatened Barack Obama’s goal of doubling US exports over the next five years. US Agricultural Secretary Tom Vilsack stated, “I look forward to working with Congress and Brazil to crafting a long-term, mutually agreeable solution to this dispute that meets the needs of American farmers, workers and consumers.” Analysts indicate that this agreement will push any changes to US Cotton subsidies to the 2012 farm bill.

Reports also indicate that Brazilian Defense Minister Nelson Jobim will travel to the US to meet with US Defense Secretary Robert Gates during the upcoming week to finalize a military agreement between the two countries. This will be the first military agreement between the two nations since 1977. Experts have speculated that the agreement would create a joint military base in Rio de Janeiro. The agreement would also likely provide for joint training, collaboration and exchanges between military experts, defense related commercial visits, and naval visits. The US will likely utilize the new agreement to combat narco-trafficking from Rio de Janeiro. Analysts have asserted that the agreement stems from ongoing negotiations about proposed United Nations Nuclear Sanctions against Iran, as Brazil has been a key holdout in opposition to strong sanctions against Iran.

Discussion Questions:

Was this agreement a response to the growing presence of Russia in Latin America?

Will Brazil and US be able to work out a permanent agreement before the 2012 US Farm Bill?

Monday, April 05, 2010

Denial of new ivory sales a victory for elephants

Sources

Ottawa Citizen: Agony and Ivory

Business Daily: Tanzania plans to appeal failed ivory auction proposal

VOA News: Kenya Welcomes Tanzania Ivory Ban

New York Times: Addressing the Ivory Surplus


Environmentalists and conservationists are praising a recent decision by the Convention on International Trade in Endangered Species (CITES) to deny Tanzania and Zambia the opportunity to sell their ivory stockpiles. This has shined a new light on ivory poaching in Africa, and has lead some to question China’s role in the ivory trade.

Ivory has long been a prized commodity. Experts believe that demand in Asia is behind much of the current poaching. China has been named as one country particularly responsible, where the ivory is made into jewelry, carvings, chess sets, chopsticks and personal seals. In 2009, China opened 37 new ivory stores, leaving little doubt about the destination of much of the world’s ivory. Poachers make big money in their illegal trade. A small pair of tusks can bring a Kenyan poacher as much as the average laborer earns in a year. Tanzania’s proposal involved selling 200,000 pounds of ivory, worth $20 million. Zambia’s proposal would sell 48,000 pounds, which would bring $4 million.

Animal protection activists in the United States estimate that 36,000 elephants were victims of poachers last year. Ian Redmond, a biologist and elephant expert from the United Kingdom says that elephants are being killed for their ivory across Africa. For example, Zimbabwe lost 3,000 elephants last year. Chad has lost 80% of its elephants since 2006. Even more drastically, Sierra Leone’s elephants disappeared in November of 2009. This brings the number of countries in Africa with elephants from 37 to 36. Tanzania claims its elephant population was increasing from 55,000 in 1989 to nearly 137,000 in the most recent survey. Zambia estimates its elephant population is 27,000 and increasing.

The international community was alarmed at the free falling elephant populations as a result of drastic poaching in the 1980’s. It responded in 1989 with a total ban on ivory sales using the Convention on International Trade in Endangered Species (CITES). However, this impenetrable wall soon had cracks. In 2007 CITES allowed a so-called “one-off” sale of excess ivory stockpiles in four countries. These stockpiles came from ivory taken by the government from poachers and from elephants that died naturally. Proponents believed that this would sate the demand, but experts believe that it has in fact driven up demand by allowing “legal” cover for illicit ivory.

There is growing concern linking China’s expansive growth in Africa to this increased poaching. Africa is happy to have the infrastructure that China is building. But this development also has a dark side, bringing Chinese workers to Africa. This has in turn provided an easier way for the black market in China to hire poachers and bring ivory back.

CITES’ denial of new ivory sales is a victory for conservationists and elephants. However, it is only a small battle in a much larger war. Until a solution to the bigger problem of demand can be found, elephants will still be killed for their valuable ivory.


Discussion:

1) Should international law be used to protect specific species? Or should protection efforts rely on economic development programs to make poaching less enticing?

2) International law can prevent supply, but how can it be used to reduce the demand in ivory sales?

Sunday, April 04, 2010

U.S. Inflation Perceptions Differ Based on Perspective

Sources: WSJ: Inflation Fears Cut Two Ways at the Fed; Investopedia: Inflation; New Haven Register: Experts, Public Differ on Inflation Fears.

In an effort to encourage consumerism to combat the aftermath of the financial crisis, the Federal Reserve Bank (“Fed”) has been keeping interest rates at as near to zero percent as is possible. The decision to do so has been a topic of mounting concern for some financial analysts who worry that as a result, economic inflation could occur. Analysts who are in charge of the Fed’s actions worry; however, that the rate of inflation is currently too slow.

In economic terms, the term inflation describes a rise in the general price of goods and services in an economy over a specified time period and the resulting decline of the value of currency in that economy. Most financial analysts agree that high inflation rates are harmful to the economy if the rates occur at a time when the economy is unstable. The present is just such an unstable time as the U.S., as well as the rest of the world, is still recovering from the recent recession.

The divide among financial experts on whether or not the U.S. will experience significant inflation is quite split. A 2009 survey of such experts undertaken by the National Association for Business Economics found that 50 percent were confident that the Fed could limit inflation for the next few years and that 41 percent shared the belief that inflation would most likely rise to high levels within the next few years. While expert opinion was somewhat contended, American consumers were also surveyed and were in agreement that the U.S. inflation rate for 2010 would raise 5.1 percent. If increased at this level, the result could be a devastating halt on U.S. economic recovery.

Why would an inflation rate of 5.1 percent freeze progress in the U.S. economy? Surveys and bond price changes have revealed to economists that on average, the American consumer believes that inflations will increase at about 2 percent a year. A 5 percent increase would noticeably alter the an American consumer’s buying power. Put into context, the Consumer Price Index (“CPI”) has not gone over 5 percent in a single year since 1990 when Iraq invaded Kuwait. The CPI measures the price change for a standard group of goods, which, when calculated, reflects the typical market purchases of an ordinary urban consumer.

The Fed has stated that it will continue to keep short-term rates low for an “extended period” which could mean a few months as long as inflation remains low. Some traders anticipate that the Fed will begin raising federal-fund rates to 0.5 percent by November of 2010. Currently they are at or near zero percent.

Discussion Questions:
1. Have you found evidence in your daily life that inflation is occurring?
2. One of the side effects of inflation is that consumers will hoard their assets until they are worth more in the market. Although this is a logical reaction, what are the ills of a spending freeze?
3. How can a high inflation rate affect the U.S.’s presence in the world economy?

Germany's New Stability Levy Proposal

NY Times: Germany Readies Bank Tax for Future Bailouts
CCTV: Germany Approves Plan for Bank Stability Fund
BBC News: German Banks to Pay into Financial Protection Fund
WSJ: Germany, France Both Plan Bank Tax


German Finance Minister Wolfgang Schaeuble has announced a plan that would require all German banks to pay a “stability levy” into a financial stability fund intended to serve as a bailout fund for future systemic failures in the German banking system. The proposed levies will be weighted according to each bank’s risk profile. Schaeuble and the rest of the German government predict the levy will generate approximately 1.2 billion Euros each year. While this amount is just a small percentage of the bad loans German banks presently carry as a result of the recent financial crisis, the Finance Minister expects the fund to grow large enough over time to adequately cover the costs of a future financial crisis. The German government expects to draft and pass legislation on this levy as soon as this summer.

French Finance Minister Christine Legarde, who was visiting Germany for a cabinet meeting in Berlin when the levy was proposed, has said France is also considering a similar levy, but that it must be coordinated internationally. The UK’s conservative party has also suggested that it will adopt a similar levy if it wins the upcoming election. Last year the UK imposed additional taxes on bonuses in the financial sector, but stopped short of mandating a levy of this magnitude. President Obama, in his efforts to alleviate taxpayer concerns over the U.S. Government’s bank bailout program, also recommended a “financial crisis responsibility fee” that would require the biggest banks in the United States to pay fees in an effort to recoup the cost of the bailouts.

Germany’s stability levy proposal comes at the same time that the G20 and the IMF have been developing their own plan for a G20-wide bank tax. British Chancellor of the Exchequer Alistair Darling has suggested that any levy imposed on G20 banks should go into their respective countries’ budgets, not a global bailout fund.

Supporters of the German levy say that it will generate ample funds to mitigate any future bailout risk, while not placing an overly burdensome obligation on the banks’ ability to recover from the current crisis. They say it achieves the purpose of placing the responsibility of preventing future systemic risks on big banks. Opponents, on the other hand, say that the proposed levy will not yield enough money to prevent future crises, and is just a political move ahead of an upcoming election season.

Discussion Questions:
1. Does the no-bailout provision of the EU’s treaty prohibit a collaborative stability levy creating an EU-wide bailout fund?
2. Would Darling's country-specific tax proposal circumvent the prohibition?

Does India need a super-regulator for financial stability?

Sources:
The Hindu: A super regulator for financial stability
Business Standard: RBI ideally placed to address financial stability issues; FSDC not a super regulator: Pranab; Paper on FSDC soon: Pranab
RBI: Financial Stability Report
Livemint.com: Regulating financial stability

In an effort to enhance the stability of the financial sector, the Indian government plans to establish an "apex-level" Financial Stability and Development Council ("FSDC") which will "monitor macro prudential supervision of the economy." In the Budget speech last month, the Finance Minister Pranab Mukherjee explained that the FSDC would monitor large financial conglomerates and coordinate inter-regulatory issues. In addition, the FSDC will deal with the matters relating to financial literacy and financial inclusion.

Currently, there are four major regulators in India - the Reserve Bank of India ("RBI"), the Securities and Exchange Board of India ("SEBI"), the Insurance Regulatory and Development Authority ("IRDA") and the Pension Fund Regulatory and Development Authority ("PFRDA"). Since 1992, the High Level Coordination Committee on Financial Markets ("HLCC") has attempted to coordinate inter-regulatory issues among them. The Governor of the RBI is the chair for the committee. The RBI, in its first issue of the Financial Stability Report said that the FSDC answered "a felt need for an institutional mechanism in the post-crisis scenario to pre-empt build-up of systemic risks with potentially huge costs." It also said that it would be important to define the relationship between the FSDC and the existing HLCC.

Those who oppose the establishment of the FSDC argue that the RBI has been already implementing similar roles of the proposed FSDC. The RBI has been quite successful in protecting the Indian economy from the impact of the global financial crisis. Although the Finance Minister emphasizes that the FSDC is not a super regulator, they worry that it may eventually act like one. Also, they point out that the super regulator approach under the Financial Services Authority in the U.K. has not been effective during the global financial crisis.

Last week, the Finance Minister emphasized that the FSDC would not impair the autonomy and independence of existing regulators and only focus on what the existing regulators have not done so far. He also said that the government would publish a paper which would provide information about how the FSDC would work.

Discussion Questions:
1. How could the FSDC effectively achieve its objective of coordinating inter-regulatory issues among regulators without undermining the autonomy of existing regulators?
2. Does India need a super regulator?
3. What should be the relationship between the FSDC and the HLCC?

Saturday, April 03, 2010

Putin’s visit to Venezuela strengthens Russian Venezuelan relationship

Sources: Financial Times – Russia and Venezuela eye strengthened ties / Business Week – Putin Signs Accords with Chavez in Venezuela Trip / Business Week – Putin Visits Chavez in Russian Bid to Grow in Obama’s Backyard / CBS World News – Putin, Chavez Deepen Ties with Space Deal / Reuters – Putin bolsters oil, defense ties with Venezuela / BBC – Putin signs energy deals with Chavez on Venezuela visit

Russian Prime Minister Vladimir Putin made his first visit to Venezuela on April 2 to meet with Venezuelan President Hugo Chavez. Mr. Putin also met with Bolivian President Evo Morales during the trip. These meetings provided Mr. Chavez with a much-needed political boost. Mr. Chavez’s popularity has suffered recently as a series of water and energy shortages have forced Mr. Chavez to declare a number of “public holidays” over the past few weeks that effectively shut down the country. During the meeting, Mr. Putin and Mr. Chavez strengthened their countries commitments on a number of policies and projects. At the conclusion of the trip, Mr. Chavez stated, “Russia and Venezuela will be closer each day."

The countries cemented their commitment to energy development in both crude oil and nuclear energy. Earlier in the week, the countries announced an agreement to drill and process heavy crude oil in the eastern Venezuela Orinoco belt through a joint venture. The countries anticipate that the venture will eventually produce 450,000 barrels a day. In a move that is sure to rattle the nerves of some of Venezuela’s neighbors, Mr. Putin also agreed to provide Venezuela assistance in setting up a nuclear power plant. Mr. Chavez stated, “We aren’t going to make an atomic bomb, but we are going to develop atomic energy with peaceful aims."

Mr. Chavez reaffirmed his commitment to continued arms purchases from Russia. Over the past five years, Venezuela has purchased more than $4 billion in military equipment from Russia. Last year Russia agreed to provide Venezuela with up to $2.2 billion in credit so that the country could purchase additional arms from Russia. Mr. Chavez has asserted that the arms purchases are necessary to protect Venezuela from a US invasion and has frequently criticized America as being an imperialistic force in Latin America. US Secretary of State Hillary Clinton has expressed concerns that Venezuelan arm purchases from Russia could trigger a Latin American arms race.

While Mr. Putin and Mr. Chavez have agreed to joint oil production and arms sales, some experts openly question whether this will actually occur. Pavel Baev stated, “It’s much more a political project.” “Chavez has already signed up for more weapons than he can buy, and Russian energy companies aren’t really interested in exploration and production in Venezuela.” Fyodor Lukyanov, a Russian editor in the magazine, Global Affairs, stated, “In the present economic situation, Gazprom won’t be ready to invest serious money in Venezuela.” He went on to add, “It’s more symbolic, a reminder that Russia is still the biggest player in the hydrocarbon market.”

Mr. Chavez also announced that Prime Minister Putin offered Venezuela assistance with creating a space industry. Mr. Chavez boasted about plans of potentially creating a satellite launcher. Following Venezuela’s announcement of its space aspirations, the United States Assistant Secretary of State of Public Affairs, P.J. Crowley mocked Venezuela. In a response to a question about Venezuela’s space aspiration, he replied, “We would note that the government of Venezuela was largely closed this week due to energy shortages.” “To the extent that Venezuela is going to expend resources on behalf of its people, perhaps the focus should be more terrestrial than extraterrestrial.”

Questions:

Are Venezuela’s nuclear ambitions solely for power or is President Chavez pursuing a nuclear bomb?

How will a stronger Russian presence affect regional stability?