2009 | World Finance

Fixing the bankıng system

Posted on February 18, 2009 by

What element of the crisis has most surprised you?
The scale of leverage and underpriced risk on banks’ balance sheets. I was more conscious of household and government debt in thinking about possible problems, and not aware how vulnerable the banks were. Simply put, the world got lazy about balance sheets and more attention was being paid two years ago to hedge funds and private equity. There was an assumption that banks and investment banks must know what they were doing. I don’t think I was aware how their leverage was creeping up. Did I say creeping? – racing up, and I don’t think I was aware how they were juicing their returns through leverage.

What is most likely to happen to the US economy over the next five years?
The most probable scenario is a fairly bleak 2009, with unemployment reaching double digits and a full year of recession. This is likely to be followed by four years of slow growth as deleveraging works itself through the economy. But this scenario assumes the US can continue to finance a substantial part of its expanding deficits with the help of foreign investors.

If Chinese or Middle Eastern investors balk at increasing their purchases of treasury bonds, we could end up with a much more serious trough. This could lead to my worst-case scenario involving the rapid decline of the dollar and rising long-term interest rates necessary to attract foreign capital. Higher rates are likely to choke off recovery.

At the same time, deflationary worries could then be replaced by inflationary fears, as the Fed’s expansionary policies exceed its ability to contract credit.
Unfortunately, in either scenario, there is still the risk of a complete seizure of the banking system, suspension of new credit creation, an increase in corporate failures, rising unemployment and fresh waves of financial panic spreading across global markets.

But on a positive note, a big difference between the 1930s and today lies in policy, especially in the US where monetary and fiscal policies are aggressively expansionary. This wasn’t the case in the 1930s.

Is inflation inevitable given the exploding monetary base?
It’s not likely over the near term because the banking system is essentially absorbing this expansion, not widening the broader money supply, since there isn’t much new credit being created. And there is a strong deflationary pressure coming from the recession.

Can we expect lower employment?
I certainly anticipate unemployment above 10 percent over the year ahead. And if growth starting in 2010 is only about one percent for the next five years, it’s hard to imagine how the US economy can create jobs the way it did in the past.

So we can certainly expect average unemployment over the next five years to be substantially higher than what we’re been used to, something closer to European levels of around eight percent.

Does the potential scale of a stimulus package concern you?
Yes. The current size of the federal deficit is at wartime levels. Without passage of any additional spending packages, Morgan Stanley estimates it to be about 12.5 percent of GDP. Under normal circumstances, such as the years leading up to the crisis, the US shouldn’t have been running much of a deficit. This would’ve provided the fiscal space to better accommodate expansionary policies that wouldn’t have threatened the overall integrity of the federal budget.

But now we must be mindful of how this deficit is perceived by foreign investors buying treasuries. We are running the risk that one day soon these folks may conclude, “hey, wait a second, the US Government is behaving like Argentina or Mexico, and the dollar is looking like some kind of peso”.

If you get to that kind of sentiment, it can begin to eat away at your status as the world’s reserve currency. Then your government bonds lose the perception of risk-free assets, and the cost of funding your deficits is likely to grow much larger.

Where should one be investing in this kind of market?
Broadly speaking, I like Baron Rothschild’s model portfolio weighting: one third securities, one third real estate, and one third art (personally, I’m nowhere near that allocation). But effective asset allocation is getting harder because it’s difficult to find assets that are uncorrelated, which is the key to better portfolio and risk management.

Therefore, especially in today’s challenging market, it’s more essential than ever to be thinking at least a bit outside the box to achieve real diversification.

For a more specific look, it may be easier to start off by saying where I would not invest. It may seem counter-intuitive, but the prudent investor doesn’t want to be too exposed to longer-term US Government bonds. At some point, there’s going to be a shift in sentiment against these securities, and it could be that right now we are very close to the top in demand and price for the 10-year treasuries, which are yielding less than three percent.

I’m also bearish about European government bonds because I believe there is going to be a widening of spreads, especially in the euro area.

Real estate will continue being a minefield, especially commercial property, which is just starting to get hit. This is not going to be a period in which I buy my Manhattan apartment. And I don’t expect US real estate to bottom out much before the middle of the year.

As for commodities, I would be short rather than long. And longer term I believe the dollar is a horror show with a lot of currency volatility next year as US bond prices and currencies are repriced.

This in part makes a case for foreign exposure. The most compelling segments of the global economy at this moment are some of the emerging equity markets where valuations appear to be very cheap.

If there is going to be any meaningful growth at all over the next four or five years, it will be in China, its neighbours, and certain Latin American economies such as Chile and Brazil. I like these markets now. But I would avoid eastern Europe, along with markets that are exposed to above average political risk.

I also like some corporate bonds in fiscally prudent markets.

But whether it’s stocks or debt, investors need to differentiate between various submarkets. Don’t expect broad-based index exposure to work.

Why is interbank lending still troubled?
If the Bank of England estimates global toxic assets at $2.8trn and recognised writedowns are only about $500bn, everybody knows there’s a lot more trouble to come.

And this makes the banks very wary of one another. It’s as if the banks were men nursing very grave wounds, looking at one another wondering, “who’s going to be the first to die”. Not a great basis for long-term relationships or trust.

We will only see a return to healthy interbank lending when there has been a full and credible disclosure of losses. We are a long way from that. And that’s a very difficult conversation to have because such full and frank disclosure of market losses at this point is likely to destroy a very large number of institutions, I suspect. So we are in a twilight world where the full scale of the damage on balance sheets is being repressed.

Do you think extraordinary bailouts will harm our business system over the long run?
In normal circumstances, the US bankruptcy system works effectively to allow insolvent firms to restructure and get back on their feet. But now that would be very hard to do. So temporary extension of credit is understandable. You don’t want major industries to collapse on the cusp of a major recession.

But over the long term I worry about the suppression of the evolutionary process with government assistance preventing failure and consolidations from taking place to clear out the debris and pave the way to healthier markets. Intervention could delay the inevitable, protracting the suffering.

Creative destruction has its place. But if everyone but Lehman Brothers is too big to fail, then we aren’t in a good place.

I’m not happy with the terms of the Citigroup deal. It’s too open and more guarantees may be needed. Someone described it as one of the biggest option trades in history.

The Government is writing blank cheques based on the belief that bank management knows what they are doing. Unfortunately, I’m not certain of that. The conglomerate financial model Sandy Weill conceived hasn’t worked. And I would be amazed and seriously depressed if Citigroup remains in its present form 12 months from now.

We need a serious restructuring in the US financial sector. So one of the most important jobs of the incoming administration is to come up with an approach that’s different from the blank cheque model.

The good news is that there are a number of up and coming banks that are smaller and not so leveraged and which can step up and start filling in the spaces vacated by the larger, more troubled institutions. I still have some faith in the powers of the US to renew itself.

But ultimately, what we can achieve from the money being injected into the system is only the avoidance of massive bank failures and monetary implosion. Broadly speaking, we can’t breathe life back into the dinosaurs. But we are trying to make their death as painless as possible.

Should governments be thinking about a global approach to saving global companies?
That’s an interesting question. Co-ordination would be the key. And towards that end we would need a world finance organisation, something akin to the WTO, which could make independent decisions that its members had to honour.

Presently, the International Monetary Fund can only help at a country level. The big problem is that the more parties involved, the more challenging are the negotiations.

Any one nation already has to balance many interests, such as investors, bondholders and employees. Just imagine multiplying these concerns across various borders.

Look at the Lehman collapse. There was a wide perception in London that the UK operations were simply “screwed” by the firm’s US executives in the scramble to recoup what was left. Every last dollar ended up in New York, leaving London denuded.

But in early December, we saw General Motors and Ford approach Sweden for aid for their Saab and Volvo divisions, respectively. Perhaps corporations will start this globalised approach on their own.

Big picture: despite what may seem logical as a way to deal with global problems, the quickest action for the time being is likely to evolve from corporate home markets.

What benefits may come from the crisis?
The silver lining may be that we are given the opportunity to rethink the US monetary system – both monetary policy and bank supervision – along with the basis of growth. The theory that the Fed exists purely to control consumer price inflation and to prevent the stock market from cratering, which I would call the Greenspan Doctrine, has shown its limitations. So has the belief that banks are best off if left alone to do what they like.

It’s also time to reconsider if the role of the patriotic American is first and foremost to shop. I remember that was Bush’s message after 9/11, and I thought it was kind of kooky back then.

The ultimate soundness of any economy is rooted in the productivity of its human capital, not a function of citizens leveraging themselves to unsupportable levels of consumption. The age of leverage is over. The race will go to the productive, and investments in education, technology and clean energy will pay more attractive returns than endless Wal-Marts. Hopefully, the crisis will drive home this point to policymakers.

Looking ahead, what concerns you most?
The banks, the Fed and the dollar. When the discussion in the US shifted to the automobile industry, I started laughing because it was such a distraction from the main issue. We’ve got a financial crisis, and everything else that’s happening is a consequence of that. Every company in the country is going to have problems if our banking system collapses. Until we fix the banking industry, anything else we focus on are symptoms.

The balance sheets of the very biggest banks in the US and Europe have been a nightmare for a year and only recently have people woken up to that. There’s still denial about how big the problem is. And here’s what makes things surreal: we are seeing the monetary base explode, but with very little to show for it, as banks seem to be just swallowing up all this capital.

Now about the Fed. As long as global markets continue to treat the dollar as the world’s reserve currency, the Fed will have room to manoeuvre. That room, however, is not limitless.

There will come a point when the credibility of the Fed’s policies will be called into question, along with the dollar itself.

As I mentioned at the beginning of the interview, any significant move away from the dollar before this crisis is resolved could then lead to a very unpleasant scenario where foreign lenders, seeing their investments rapidly diminish in value, sharply curtail their lending.

This would force interest rates up to attract deficit financing, which in turn would choke off recovery.

Until recently, the euro seemed poised to take its place as a reserve currency. What happened, and what is the outlook for the Eurozone?
With respect to common currency, there are two issues here. The first is the euro’s strength over the past five-plus years was largely a mirror image of the dollar’s weakness, more than superior underlying fundamentals of the Eurozone.

The dollar’s recent rally has been based on technical factors. But the second factor driving the dollar is the belief that the US still retains its status as a safe haven during this crisis, hence the flight into treasuries and surging demand for dollars to pay for them.

The euro’s failure to compete with the dollar as a safe haven currency during the crisis doesn’t really surprise me because there’s no European fiscal union or common treasury.

National governments are coming up with their own stimulus packages. So it’s much harder for Europe (compared to the US) to co-ordinate a comprehensive response to problems caused by this crisis.

Regarding the outlook for Europe, I think early on Europeans were exaggerating how the crisis was primarily American. Now they are seeing a wide range of really ugly problems coming their way, and not all are being imported. Moreover, I think the banking crisis is actually worse in Europe than it is in the US. It’s just not as widely recognised yet.

But it will be. Europeans don’t have the policy levers, like those that exist in the US, to respond as rapidly or as effectively. In the long term, Europe may suffer worse than the US during this crisis.

Should we consider returning to the gold standard?
For some folks there is a certain nostalgia in considering this during a major crisis. I have trouble imagining how the world economy with $50trn could be put back into gold given the relatively modest amount of the metal available to central banks.

Gold is just a commodity. It’s good for jewellery and it’s a relatively good hedge against inflation and bank panics. But the notion we can re-engineer a gold standard is based on a naïve reading of history. The gold standard was not a Garden of Eden. Its supposed heyday, between the mid-1870s and mid-1890s, was a time of global deflation. There was an even more deflationary period during the 1929 and 1931 when the standard basically broke down.

The last thing we need during a time of high deleveraging is a deflationary global monetary system. That would be suicidal.

In broad terms, what should President Obama do?
Popular sentiment backs his huge fiscal stimulus. But there’s a danger in this strategy because the Federal Government already took on $8trn in investments, loans and guarantees issued over the past year.

It won’t be long before we are looking at the potential doubling of the federal debt. And I’m concerned that we are underestimating the international ramifications of this trend. National markets are far more open and interrelated than they were just decades ago. Therefore, we need to pursue policies that are globally co-ordinated, especially between Beijing and Washington.

As for a traditional stimulus package that involves issuing cheques to households, that may not work because I’m not sure if people will spend this additional income. They are most likely to save it. We should be mindful that there is stimulus occurring from the sharp decline in commodity prices and nominal wage growth.

Most important, we must forget about trying to restart the formerly high levels of consumer-driven growth, because so much of it over the past seven years was based on credit. If you take away mortgage-equity withdrawal from 2001 to 2006, growth would have averaged only 1 percent. Households must first improve their balance sheets, as it were, before we can expect consumer demand to again contribute substantially to economic growth.

This suggests that President Obama may be more successful if he targets government resources less on trying to stimulate consumer spending and more on infrastructure improvement that would enhance productivity and broader-based economic growth. It may be that he needs to focus more on the medium term rather than the short term.

Niall Ferguson is a professor of history at Harvard University and the William Ziegler Professor at Harvard Business School

Eric Uhlfelder, author of Investing in the New Europe (Bloomberg Press, 2001), covers global capital markets from New York

More failure for the Securities and Exchange Commission

Posted on February 18, 2009 by

When America’s biggest banks began to collapse during the presidential election campaign, the SEC became the butt of criticism from both candidates. Then when giant insurer AIG had to be rescued, the candidates agreed on one thing: SEC Chairman Christopher Cox had to go. But the revelation that Madoff affair triggered a demand for an overhaul of regulatory structures. As President Obama observed in the wake of the Madoff shock, “there’s not a lot of adult supervision out there.”

In these circumstances the President can hardly be expected to praise regulators, but his statement begs questions. First, what exactly does he mean by “adult”? The SEC actually has 3,500 adults in its employ, all of them wired to catching fraudsters. “The SEC is first and foremost a law enforcement agency,” the agency notes unfortunately, given the latest failure.

And it’s pretty good at enforcement, as a perusal of the last ten reports shows. With its enormous resources, expertise and cheerful ruthlessness, the SEC delights in the way it goes after offenders and hauls them before courts to lay bare their deceptions, frauds and plain criminality.

It wins so many cases few miscreants could sleep at night. Like the eight former executives of AOL Time Warner nailed last year over the “round-trip transactions” trick that enabled the company to overstate advertising revenue by some $1bn.

The SEC has also been busy in the wake of the subprime crisis. Two Wall Street brokers were charged with defrauding customers by making more than $1bn in unauthorised purchases of subprime-related instruments. And two former Bear Stearns executives running the firm’s biggest hedge funds are in the dock for “fraudulently misleading investors”.

The SEC prides itself on exposing the underbelly of financial markets. In 2006, it initiated no less than 914 investigations, 218 civil proceedings, and 356 administrative proceedings covering everything from corporate fraud to compliance failures at self-regulatory organisations such as stock exchanges.

Sometimes it rounds up miscreants by the truck-load, like the 26 people facing the rigour of the law over a $428m securities scam targeting the retirement savings of senior citizens. If the agency wins this one, which it’s likely to do given its record, the ill-gotten gains will be “disgorged”. That is, returned to the victims or, failing that, deposited with the US Treasury. (The SEC doesn’t keep recovered loot.)

In recent years the agency has scored several major coups. Long before AIG’s latest crisis, it got the same firm over the improper accounting of “sham reinsurance transactions”. That resulted in $800m in disgorgement and penalties. It showed up Fannie Mae for “improper smoothing of earnings in violation of accounting rules” ($350m in penalties). Tyco International was nabbed for “utilising unlawful accounting practices in a scheme to overstate its reported financial results by $1bn. And in 2004 Royal Dutch Shell was cited for overstatement of hydrocarbon reserves ($120m in penalties) in an international cause celebre. In fact, 2004 was a bumper year that produced over $3bn in penalties and disgorgement.

And before that, there was the Enron scandal when the SEC nailed scores of firms. It was the first time, as the agency proudly reported, that any regulator had taken on a member of the Big Four and won.

So added together, there’s plenty of adult supervision out there. Every one of the last three SEC chairman has taken this thankless job, vowing to improve accountability, transparency, integrity etc, and has hired extra enforcers to do so.

And yet we still get cataclysmic frauds like that by Mr Madoff. It may be that, in the same way that Wall Street banks were deemed too big to fail, he was too big to investigate. Indeed we know the SEC ignored red lights about Madoff-managed investments, as it did with Enron whose deceptions were revealed by a journalist.

But there may be a deeper explanation why every year the SEC catches so many firms in various forms of fraud from illegal foreign payments to just plain cheating clients. As its filings reveal, a significant percent of the US financial sector is out to game the system. They see it as a set of rules ripe to finesse rather than the embodiment of a code of ethics they are obligated to observe.

In short, a decade of SEC reports suggests the real problem is a systemic failure of integrity that will rebound on the US for years. As President Obama summarised the prevailing climate: “Whatever’s good for me, I’ll do.” If that’s really the way it is, the real challenge for the SEC and other regulators is to find another way because it’s pretty obvious that enforcement doesn’t cut it. n

Coveting the Islamic ﬁnance global position

Posted on February 12, 2009 by

Saadiq, synonymous with “truthful” in Arabic, is the brand name for Standard Chartered’s global Islamic banking services. The sub-brand of the international bank launched in 2007 has to date garnered several accolades for leadership in Islamic finance innovations and deals. Indeed with a global network that covers 50 percent of the Muslim world, it is only natural that Standard Chartered should play a prominent role in the ever-expanding Islamic financial markets. The global Islamic market, comprising more than 1.5 billion Muslims, is currently valued at $900bn and is expected to enjoy sustained growth for the foreseeable future.

An Islamic banking player since 1993 in Malaysia, Standard Chartered Bank expanded to establish a global Islamic banking unit in 2003 with operations in Pakistan, Bangladesh, the UAE and also in Indonesia through its affiliate Permata Bank. The global headquarters of Saadiq, based in Dubai, serves as the product development hub and centre of excellence for the bank’s global Islamic operations. Currently Saadiq provides a comprehensive range of Shariah compliant international banking services and financial products across both the wholesale and consumer banking arms of business. The Saadiq team comprised of qualified professionals who design and structure the products/services and ensure that they are in line with Shariah principles on banking and finance.

Setting the standard
In 2007, Standard Chartered was the first international bank to launch an Islamic credit card in the UAE, Pakistan and Bangladesh and has since expanded product offerings. The Saadiq product suite is purposely different in each market with the goal providing clients with tailored packages to fulfill their needs. On the consumer front, services are offered to SMEs and individuals and include personal finance, auto finance and mortgages as well as third party distribution of Islamic funds. These products and services can be conveniently accessed through specialised Islamic Banking branches as well as the existing network of conventional bank branches.

Similarly, under Wholesale Banking, Shariah principles combined with Standard Chartered’s rich banking heritage of more than 150 years provide customers with a range of products and solutions to cater for the broad spectrum of corporates and institutions. Saadiq covers a complete suite from simple cash and trade finance to complex solutions such as project finance and Islamic hedging solutions.

To ensure that Standard Chartered Saadiq products comply with the principles of Shariah, it consults an independent committee comprising three of the world’s most renowned Shariah scholars – Dr Abdul Sattar Abu Ghuddah, Sheikh Nizam Yaquby and Dr Mohammed Ali Elgari.

Meeting the needs
Currently, Saadiq offers over 100 products across various geographies to meet the needs of customers and corporates and is leading the way in the development of Islamic treasury risk management products to provide end to end solutions.

Saadiq is also at the forefront of risk management products, such as Islamic foreign exchange and hedging solutions. It has one of the broadest range of products in this field, starting from basic FX spot and forward to more structured solutions such as profit rate and currency swaps and FX and profit rate options. Saadiq is also working with leading industry bodies to promote the standardisation of products in the Islamic industry.

Additionally Saadiq is a well respected name in the field of Sukuks, Syndications, Project Finance and Structured Finance and has won a number of awards since inception. It has played a leading role in successfully executing a number of high profile transactions including several industry-firsts and benchmark setting innovative deals. Leveraging its Islamic origination and structuring capabilities with its strong franchise in key Islamic markets and global distribution strength, Standard Chartered Saadiq has positioned itself as the preferred partner for Islamic finance. Some of the notable transactions include:

•First ever Islamic project financing deal in Djibouti for DP World sponsored port project.
•The largest ever Islamic Shipping Finance facility in Southeast Asia for Brunei Gas Carriers.
•Largest Project Finance transaction & Largest private sector Islamic Finance transaction in Pakistan for Engro Chemicals.
•First Shariah compliant local currency Sukuk programme by Government of Pakistan.
•First ever Sukuk issuance by the Tesco PLC group of companies (in Malaysia).
•First Sukuk programme to be established by a GCC sovereign and the 1st rated Dirham denominated sovereign transaction for Government of Ras Al Khaimah.
•The inaugural sukuk issues by a host of entities, including the Department of Civil Aviation (Govt of Dubai), Emirates Airlines, Dubai Islamic Bank and Emirates Islamic Bank. n

For further information tel: +971 4 508 3173; ghazanfar.naqvi@standardchartered.com; www.standardchartered.com

GCC region investment banking

Posted on February 12, 2009 by

Gulf One’s vision is to be a leading knowledge-based infrastructure investment bank. In turn, the bank’s mission statement emphasises the mobilisation of local and global capital to accelerate the execution of infrastructure projects and corporatisation through innovative custom-made financial solutions.

Buoyed by the enormous investment opportunities in the Gulf region, there is a step-change in the size of financing requirements, a result of the region’s booming economies, benefiting from the soaring liquidity created by more than two years of sustained high oil prices. Affluent and reformist governments pursuing industrial diversification and world-scale infrastructure developments are stimulating the private sector and simultaneously improving the operating environment. This slow-burn revolution is transforming the landscape of the region’s investment and project finance industry from both the demand and supply sides. The sizable growing demand for investment banking services has been accelerated by over $1trn projected investments in regional infrastructure and mega-initiatives.

The comparatively young Gulf Cooperation Council (GCC) countries’ markets have not been conducive to the development of a regional investment banking industry. While recent equity market activity has attracted a growing number of players, none has yet established a clear leadership position. The drive strategy of Gulf One is to support the GCC region to evolve as a strategic vital part of an increasingly competitive global economy. By embracing knowledge-based banking, Gulf One aims to be a catalyst to unleash GCC potential. With a highly experienced team, extensive network of relationships across the region, and strong links to international partners, Gulf One is dedicated to providing exceptional and advanced financial solutions, based on Islamic principles, for its clients.

Mega-initiatives
While Gulf One serves a number of selective sectors, its strategic focus of specialising in infrastructure mega-initiatives gives it an advantage over competitors with a broader investment focus. Gulf One’s activities comprise:

Specialised and infrastructure funds
Private equity
Corporate finance advisory services, and
Asset management services

Gulf One was founded by Dr Nahed Taher, a leading economist and executive banker and the first female CEO of a bank in the GCC, and CIO Mr Ziyad Omar, with over 20 years of senior banking and finance experience in Saudi Arabia and the US, both of whom serve as Executive Directors on Gulf One’s Board. Gulf One’s unique vision has attracted significant regional and international shareholders that understand the need for this initiative. It is headquartered in Bahrain and has an authorised capital of $1bn and paid up capital of $100m.

Gulf One has a distinctive high calibre investment banking team, comprising experienced dynamic individuals with established track records in industry and investment from all corners of the globe. The collective and individual strength of the Gulf One people paints a unique canvas of strength and unity and sets the bank apart from other regional players.

Gulf One CEO and Executive Director Dr Nahed Taher, is justifiably proud of the fact that her “Gulf One is the first truly independent investment bank in the region, and the region’s first institution to focus its core products and services exclusively on large scale energy-related and infrastructure development projects. The aim of the bank is to facilitate sustainable economic development and create wealth and prosperity.

She points out: “We believe that a fundamentally different approach is necessary to maximise the inherent opportunities that are currently emerging as the Gulf region uses the benefits derived from its natural resources to transform its infrastructure and establish economic stability for future generations. We are, however, more than just GCC based; we are an organisation committed to delivering knowledge and expertise to assist economic development around the globe”. The bank released its $2bn infrastructure fund, Tharawat (Arabic for all forms of wealth including knowledge). The bank started a journey of creating an exclusive pipeline of select infrastructure transactions for the Tharawat Fund.

While focused on building regional capacity, Mr Omar stresses that “Gulf One is committed to full alignment of interests with its investors.” The bank has stepped out of the prevalent regional investment approach. Creating value is a function of vision and time. The performance of investment banking has to mirror the dynamics of the underlying investments. The alignment of risk and rewards is essential to the success of all stakeholders and the longevity of the business.

Over its relatively short two years of existence, Gulf One has already executed a number of successful groundbreaking transactions. The bank received international recognition for its role as leading financial advisor to the pilgrimage airport terminal in Jeddah, Saudi Arabia. In that project, Gulf One pioneered the departure from the long established regional tradition of awarding advisory to institutions that bring along their balance sheet. The bank structured the first known Islamic BTO (Build Transfer Operate) transaction as a pure project finance with international, local, and development bank participation.

Importance of collaboration
Collaboration is another fundamental theme at Gulf One. From the outset, the founders trotted the globe searching for partners and alliances that can participate in creating a platform, a spring board, for launching concepts like Public Private Partnerships (PPP) in the region. Gulf One alliances spawn significant international and regional investment, professional services, and industrial knowledge hubs. Gulf One has a deep commitment to knowledge-based advancement. Recently, the bank teamed up with leading University of Lancaster, Dr Taher’s alma mater, to form a joint research centre focusing on economic and financial research relevant to the region and acting as a gateway for the exchange of knowledge between the MENA and the rest of the world.

Dr Taher also stresses that the bank is built and continues to function with commitment to Islamic principles and a deeply-rooted understanding of local culture and traditions, combined with our multinational intellectual capital and global experience. Gulf One is uniquely equipped to meet the region’s demand for investment banking as the engine that drives its economic growth. Noteworthy, the current global financial crisis brought to the attention that Islamic Finance presents a credible and viable antidote to the recurrence of the current global financial crisis. Mr Omar states that Islamic finance relies on three basic principles: risk and profit sharing amongst investors and financiers, the presence of real assets (asset backed finance), social participation through the distribution of the annual Zakat (2.5 percent of equity) preferably for the benefit of the immediate location of the asset. Gulf One is committed to innovation in translating these principles into effective globally beneficial financial solutions.

The boom in MENA infrastructure represents a global opportunity for growth and a chance for the MENA region to further integrate into the global economy. Gulf One, with its unrivalled credentials, constitutes a competitive advantage that positions it as a leading participant in the region’s economic progress. With exceptional leadership, and dedication, great achievements and rewarding returns will follow for shareholders and stakeholders alike.

For further information tel: +973 1710 2555;
m.cruz@gulf1bank.com; www.gulf1bank.com

Public-private partnerships

Posted on February 12, 2009 by

Public-private partnerships is the institutional and practical expression of the central idea: the involvement of the private sector in the provision of infrastructure and services which were previously the exclusive domain of public authorities, such as health, education, penal and other social services, and so on.

PPPs are not a form of privatisation. The state keeps all its power and authority it wants over the deliverables under a PPP. Goals of public interest and social services remain still under the public authority, but why not a private finance solution for such public goals and social services? PPPs are a means to achieve social goals set by the public authority and are organised by the same mobilisation of market forces.

Politically still debatable, although not as fanatically as some time ago, the idea behind the PPPs (and the PPPs legislation and practice) seems to be generally accepted. The differentiations among various EU countries may be differences in emphasis or in the methodology, but not a real questioning of the PPPs. Almost every single country of the EU, either governed by the socialists or the conservatives, has introduced (or reshaped previously existing) relevant legislation some time in the last five or six years. So we can find PPP Acts, Decrees, Task forces etc in Spain, in Portugal, in France, in the Netherlands, in Czech Republic, in Germany, in Ireland, relatively recently (2005) in Greece and elsewhere. So the PPPs are a stable institution; market forces can count on them. In some cases, several important private players have even reoriented their business structures to meet the needs of PPPs.

Cooperating across borders
Not defined at community level, yet under European community law, the term refers to the forms of cooperation between public authorities and the world of business which aim to ensure the funding, construction, renovation management or maintenance of an infrastructure or the provision of a service. The PPPs are not a form to escape from European law; it is a method to exploit European law in a way better for both the public and the private sector, and more expedient for the satisfaction of the social needs.The Greek legal and institutional regime on PPPs, basically law 3389/2005 on Public Private Partnerships and Directives 2004/17/EC and 2004/18/EC, goes along the general governing matter at European level.

The public authority, in the Greek case an interministerial committee deciding on the basis of proposals by ministries and other entities of public law – such as local administration bodies, universities, public hospitals etc – sets a task of public interest, such as to build and operate a hospital or a port facility, or to build and make available to the public an educational institution, or to install and operate a waste management facility and so on, expected to be fulfilled by a PPP and opens the competitive procedure for the award of the PPP.

It is true that the initiative for a PPP comes from the public sector, but ideas for such initiatives may come from private operators as well. So if private operators are ready to finance and accomplish a task under conditions of a PPP, why shouldn’t they indicate it to the relevant public authority.

The private operator has to secure the financing of the public task, to produce the technical skills necessary for the accomplishment of the task, to proceed to the project management of the whole operation leading to the completion of the task. The idea is that there will be only one operator to adopt, combine and fulfill all these roles. It would not suffice to have, say, a bank for the money, and then a constructor for the construction, and then a consultant to consult, and also a manager to manage the project etc.An SPV – a Special Purpose Vehicle – is the form required by the Greek legislation for a private operator to enter into a PPP. It is called Special Purpose Company. Its constitution, as outlined in law 3389/2005, is designed to secure that the company will have the powers to undertake all the necessary for a PPP functions and combination of functions.

Both parties, private and public, are expected to set in their contract their mutual obligations, including the modalities of payment of the private operator (which may include the transfer of the cost to the – essentially private – users or the direct payment by the public authority to the private operator for the availability of the project). In essence the public operator sets or guarantees the institutional prerequisites for the task (such as licenses, regulations, tax regime), while private operator guarantees – undertaking the risk – the completion of the task.

Active mobility
Greek authorities seem to put a lot of emphasis on PPPs. Ministers and other high ranking officials, do not lose any occasion to underline that they take PPPs very seriously. Almost twice a year several dozens of PPP projects are opened by decision of the interministerial committee. The Special Secretariat for PPPs, an institution devoted to the implementation of PPPs projects, has been established and proves an active mobility. Greek PPP projects have started to rise international interest.

For us, PPPs are not only a Greek matter. In a working day on PPPs organised by our Sofia office early this year by Minister Granchareva have clearly highlighted the institution in relation to Education and Health as major governmental priorities, while Minister Vassiliev has expressly mentioned 66 local administration buildings and the construction or modernisation and operation of border crossing points at external borders of the EU in Bulgaria. Our office in Bucharest is actually discussing a proposal to participate in the implementation of a PPP project regarding to a major construction work.

The lesson learned? In the European environment and legal space, legal services for PPPs form a harmonised market, where flexibility, ability to cooperate and professional excellence will make the difference.

Banking in Oman

Posted on February 12, 2009 by

Listed on the Muscat Securities Market, NBO has a market capitalisation of $1.81bn as of July 2008.  The diversified shareholder base includes the Commercial bank of Qatar, Suhail Bahwan Group, and government pension funds as core shareholders along with individuals and local institutional investors.

Being a leader of the private sector and second largest commercial bank in Oman in terms of total assets, shareholder equity and market capitalisation, NBO projects itself as a full-service commercial bank that offers cutting-edge solutions, designed to keep pace with businesses and tailor-made to meet every individual needs. The bank’s products and services include among many other facilities, retail banking, card services, wealth management, corporate banking, investment banking, trade finance, and corporate internet banking. Its corporate finance services include IPO management, loan syndications and business advisory services for trade and investments in Oman. Whether these requirements are within the Sultanate of Oman or beyond, the bank has the people, expertise and technology to help its clients achieve their goals in the most convenient manner.

Meanwhile, the bank maintains a network of 58 branches, including five branches in Egypt and one in the UAE, fully backed by both internet and telebanking services supported by 122 ATMs countrywide.

The bank’s strategy, which has generated a compounded annual growth rate of over 50 percent in all net profit over the last four years, is today a blend of both organic and inorganic business diversification. All core businesses have recorded consistently strong growth, along with improving asset quality and efficiency ratios, and a well diversified risk profile. Proactive investments in technology and human capital, together with a strong capital base and underwriting capabilities, provide a solid foundation for maintaining accelerated quality based growth.

Highly recommended
NBO has prime D+ (Ba1) and BBB credit ratings from Moody’s and Capital intelligence rating agencies successively. Both agencies are globally recognised in their relative fields. These ratings reflect the bank’s consistently strong financial performance and solid earnings power, good risk profile, healthy asset quality, strong capitalisation and stable efficiency indicators.

The strengths of NBO, as assessed by the above rating agencies, include a well-established and growing banking franchise in Oman, and a strong retail banking presence, coupled with an experienced management team.

A strategic alliance concluded between National Bank of Oman (NBO) and Commercialbank of Qatar (Cb) in 2005 has allowed both banks to take advantage of the dynamic changes facing the banking industry in the GCC, diversify risks and achieve economies of scale.

With a deep sense of social responsibility as the nation’s bank, NBO is committed to community support through its corporate citizenship programs.
In addition to donations and financial support to various local charities and social, health, sport, and educational organisations, the bank also regularly participates in fundraising programs and lends generous support to a range of other worthy and deserving causes in Oman.

The bank’s sustained efforts to incorporate corporate social responsibility in every aspect of business were rewarded by the Bank being selected as the ‘Best Bank in Corporate Social Responsibility in Oman for 2007’ by World Finance magazine.

The bank believes that every business decision taken has an impact on society and the environment and so it is imperative for it to consciously address the issues facing it with solutions that facilitate a process of sustainable development that envisages the pursuit of economic prosperity without harming the environment or at the expense of the members of society, including staff and communities.

Making sure of development
The bank’s Corporate Social Responsibility (CSR) involves not only responding innovatively, but proactively, by offering solutions to societal and environmental challenges. It is a process of collaboration with both internal and external stakeholders to ensure sustainable development.
NBO always strives to incorporate CSR in every aspect of its business and to have in place systems that measure, report and continuously improve its social, environmental and economic performance.

Emanating from its strong belief that any business has to give something back to the community in which it operates and from which it derives its revenues, National Bank of Oman takes its role as a corporate citizen seriously in all the three jurisdictions in which it has presence.

NBO’s contribution to the community takes different forms. It continuously supports any activity that adds to the development of young people and the nation as a whole. The list of the institutions that receive support from National Bank of Oman includes among many others Oman Charitable Organisation, Oman Association for the Disabled and Association for the Welfare of Handicapped Children. NBO also gives numerous donations to schools across the Sultanate of Oman around the year as part of the initiative.

NBO also actively participates in the various developmental projects including privatisation projects initiated by the government. A Summer Internship for Omani students graduating from various colleges in the Sultanate of Oman is another of NBO’s CSR contributions.

NBO has been actively sponsoring ministries, organisations, events and programmes such as Muscat Securities Market’s Gatherings; Blood Donations; Salalah Khareef Festival, Muscat Festival etc to mention a few. The bank maintains and promotes a very high level of ethical standards within and outside its premises.

As part of its efforts to mainstream CSR into its business strategy, the bank participates regularly in Career Fairs to identify talented Omani students for potential recruitment within the bank as well as supporting government efforts towards developing Human Resources within Oman. An example of this is the bank’s sponsorship of candidates for the ‘Intilaaqah’ program conducted by Shell Marketing to groom talented youths to undertake self-employment.
In fact, the bank was also the first bank in Oman to organise an exclusive Career Fair for young Omanis. In addition, the “NBO Management Trainee Program”, launched by the bank last year, is regarded as a unique program in the banking sector – NBO is first bank to have initiated such a programme.

The Program includes training of the participants in the different divisions of the Bank; assigning them to various projects aimed at developing and enhancing different banking services in the organisation. Trainees are able to get hands-on experience in the various areas of banking, develop their communication skills; inter-personal skills, leadership skills as well as develop overall capabilities. At the end of the Program, trainees undergo an evaluation prepared by an external body and the bank’s management.

The Management Trainee Program forms a critical part of the bank’s strategy to support Omanisation efforts and produce future leaders.

The bank is also engaged in a number of local projects handled by Omani entrepreneurs, thus acting as a catalyst for national development.

The bank is also involved in a number of sports initiatives to develop sports in Oman by sponsoring many athletes, particularly in football.

NBO is now in the process of enhancing its program of funding Small and Medium Enterprises (SME’s) so as to broaden the areas of business within the country.

Investing in Austria

Posted on February 12, 2009 by

The high levels of investments into Austria but also from Austria into the CEE region, for which Vienna is often seen as an ideal home base, were resulting in a steady stream of work in particular in the field of Banking and Finance and M&A. However, not only the Austrian economy but also the Austrian law market has done well which is demonstrated by law firms still expanding and having significant growth. Not for nothing Austrian firms are among the top players in the CEE region. Still, it is not only about size that counts which is why beside the large Austrian firms with own offices spread over the CEE region smaller boutique firms becoming tremendous success stories, one of which is Vienna based award winner Herbst Vavrovsky Kinsky Rechtsanwälte GmbH (HVK).

Since its establishment just over three years ago in 2005, HVK has managed to place itself among the top players in the market and to become one of Austrians leading commercial law firms. With more than 20 highly specialised lawyers and offices in Vienna and Linz, accompanied by an office in Salzburg aiming at Austria’s western regions as well as southern Germany, the firm operates in and covers all of the domestic economic hot spots. For its outbound business HVK has close contacts to major international law firms enabling it to assist its clients also in multi-national transactions.

From the very beginning HVK has put particular emphasis on its banking and finance practice to meet increasing market demands. Scope of services includes besides regulatory aspects the full spectrum of financial products including syndicated lending and leveraged and acquisition finance, asset finance, derivative products, project finance, public offerings, financial regulatory, insolvency and restructuring and structured finance. HVK’s clients cut across all types of participants in financing transactions across a wide range of industry sectors and countries.

Even flow
HVK has seen a constant deal flow in the past years and has gained a more than solid track record. Within the last two years HVK’s lawyers advised on various Debt as well as Equity Capital markets transactions with a total transaction volume of approximately two billion, including Austria’s largest IPO ever launched, Strabag SE, and Austria’s most recent corporate hybrid financing of an international packaging solution manufacturer. “We are proud of our track record which displays our strong commitment exemplified by our partners’ deep involvement in the execution process and greater attention than is the norm, thus resulting in a client service that according to Chambers’ market survey is reputed to be amongst the best,” says Philipp Kinsky, one of HVK’s founder partners.

The lawyers of HVK are also active in fund structuring where they were recently involved, inter alia, in setting up a Ä140m CEE hotel investment fund or a Ä100m private equity fund. Besides its Banking and Capital Markets work, HVK has gained strong presence in the field of Private Equity and Venture Capital where it advises industry heavy weights such as CVC Capital Partners.

Taking the lead
The crunch, however, also had an impact on HVK deals and has caused several clients to postpone or cancel investments, leading to decreased deal flow in acquisition finance and private equity transactions while increasing the clients’ demand for refinancing, rescue offerings or convertibles. Since the beginning of the crunch HVK already advised on various high level refinancing transactions.

In October 2008, HVK advised one of the lenders on the Ä460m refinancing of Oleg Deripaska’s Rasperia Limited by a consortium led by Raiffeisen Zentralbank Österreich AG to refinance Rasperia’s acquisition financing in relation to its stake in Strabag SE. Moreover, during September and October 2008, HVK advised HYPO Investmentbank AG as transaction counsel on a multi-million euro refinancing facility granted by HYPO Investmentbank AG as lead arranger to a holding company for major Austrian blue chips. This transaction turned out to be particularly challenging as numerous international syndicated lenders were involved and it was closed at the peak of the crash of the European stock markets. HVK’s work was not only focused on the re-financing facility as such, but also involved a number of transactions for the refinancing of the lead arranger itself.

One of the aspects of HVK’s success in the past is that its lawyers are known to be very solution-focused, reliable and pragmatic which is essential in handling complex transactions. They devote themselves to the highest standards and level of expertise. As Philipp Kinsky puts it: “We see our role as providing a blend of specialist knowledge and practical advice designed to achieve our clients’ objectives in a cost-effective, bankable, solution-focused and pragmatic manner. Our breadth of experience has enabled us to establish a comprehensive approach to financing transactions.”

The firm’s high-level quality is recognised among its clients and international top tier law firms alike. For partner Christoph Wildmoser this is a result also from the firm’s policy to cooperate with local tier 1 firms where needed: “We have decided not to open own offices abroad but to choose such firm among local tier 1 players which in each specific matter we deem best for our client’s needs. Over the last years we were able to tie close relations not only in the CEE region but also to leading US and UK firms which we could also convince of the quality of our work. Today we experience significantly increasing inbound business from those major players and enjoy working together with them on a regular basis.”

Another factor is seen in the combination of the in-depth know-how of the markets with the understanding of the clients businesses and needs, Philipp Kinsky is convinced: “Our goal is to create added-value for our clients which I believe may only be achieved by knowing what clients in specific situations need and what the markets offer. This requires not only market know-how, which we feel able to offer due to long-standing experience in the present markets, but also – may be even more – entrepreneurial skills.”

One of the challenges for the future which all key players in the Austrian market will have to face is getting the right staff required to further enhance their position and increase market share. For sure this means that HVK will have to recruit only the best staff available and thereby competing with the large firms. If the firm’s upturn continues, however, HVK will not have difficulties attracting qualified and dedicated lawyers joining the team.

For further information tel: +43.1.904 21 80 – 0; email: office@hvk.at

The green enterprise

Posted on February 12, 2009 by

Communicating a company’s social responsibility and commitment to the common good is a role not just for communications executives like myself. It is one that most appropriately must start at the boardroom level and be shared across the entire executive team. Today’s message? The Green Enterprise – a story that plays well to the public, the markets and all stakeholders, including employees and shareholders alike.

In recent years, science has started to unmask one the biggest illusions in business – that knowledge-intensive work is much “cleaner” and more “eco-friendly” than polluting smokestack industries. Fact is, the environmental impacts of office buildings as well as the energy use by employees and information technologies serving them are considerable. And so are the costs.

For example, in the US alone, the US Environmental Protection Agency (EPA) reported that in 2006 the nation’s data centers used 1.5 percent of all US energy consumption – 61bn kWh – at a cost of $4.4bon. By 2011, the EPA estimates those figures could rise to 100bn kWh and $7.4bn. Given that the US consumes about a quarter of the world’s energy each year, the global figure for powering the world’s data centres by 2011 could be as much as 400bn KWh, spewing up to 172 million metric tonnes of carbon dioxide a year into the atmosphere, according to calculations from the UK-based National Energy Foundation.

Rise of the green enterprise
This kind of research provides just one of many cost-based insights that are giving executives worldwide good business reasons to embrace so-called green enterprise initiatives. Other drivers toward the green enterprise are: regulatory pressures; customer expectations; investor influences; and market image.

In short, green enterprises can build their bottomlines in three measurable ways:

Increase business productivity and overall performance, helping to build market share and profitability
Reduce operating expenses in the face of relentless competition, helping to keep and build margins
Raise corporate brand image, helping to attract a fast-growing segment of environmentally aware – and demanding – consumers

Green enterprise initiatives leverage the long-standing environmental precepts of Reduce, Reuse and Recycle. These were often ignored in the days before the commodisation of just about everything – even knowledge-based outputs – back when proprietary pricing power ensured profit margins, energy was cheap, and waste disposal costs were few or non-existent, because the earth’s carrying capacity was considered infinite.

Fast-forward to today, with global competition and deregulated markets squeezing margins tight, with energy costs soaring, and with the world consensus about global warming almost unanimous. In this context, the environmental precepts of Reduce, Reuse and Recycle have become prescriptions for enterprise profitability. Corporate objectives of revenue growth, lower costs, asset efficiency, and performance excellence can now align with environment sustainability.

More effective communications and knowledge access
Over the years, companies have increased the efficient use of their monetary capital tremendously. But their big opportunity today is to improve the efficiency of their human and knowledge capital. The best way to do this? Through more effective communications, collaboration and knowledge access across their organisations.

Of course, this is much easier said than done. While the rise of ubiquitous global networks, the proliferation of end-devices and the increase in worker mobility have had productive enterprise results, they also have contributed greatly to the fragmentation of the enterprise intellectual fabric.

Classic “phone tag,” for example, has gotten worse as more and more workers must manage inter-device communications and contact management among their desktop/laptop computing environments, their personal digital assistants (PDAs), their mobile phones and their fixed-line phones. To flag an important email for attention may require a phone call or two (or a voicemail or two, if the intended recipient is not available). Another example is not having the knowledge readily available, either in some form of documentation or in a subject matter expert, to help solve a customer problem or advance a sale.

Fortunately, the advent of network-based, presence-aware communications software with a unified communications architecture based on open standards can enhance collaboration and knowledge access. It does this by giving users fixed-mobile convergence with one-number access across all their devices. It also enables them to know the availability of others who are on-network, so they can quickly convene tele- and videoconferences and share documents seamlessly.

How much can this help an enterprise? An Accenture study of a corporate pilot of this kind of presence-aware software showed that distributed, on-the-go workforces such as field technicians, sales people and logistics personnel could realise productivity gains of up to 40 percent. For a $4m annual payroll covering 1,000 people, that is equivalent to about $1.6m in productivity gains.

Further, a study conducted by the Canadian consulting firm Insignia Research concluded that companies with 1,000 employees could lose more than $12.5m a year to productivity losses and avoidable expenses without this kind of communications application.

Where “green” comes in
Unified, presence-aware communications like the above can provide a wide range of cost-savings, including environmental ones. If employees are working longer hours, they are consuming more resources, such as the energy to power and light the office infrastructure as well as the extra burden on IT infrastructure. If employees are traveling more – commuting when they could work from home, unneeded truck rolls for service, and meetings to “sync-up” – they are consuming more energy in their transportation, while losing productivity in producing results.

Consider the scenario in which XYZ Enterprise’s 250 most frequent travelers each travel six times per year. After deploying a video-conferencing software application, these travelers can instead conduct part of their remote meetings through videoconferencing, cutting their annual trips by one (or 17 percent). Prior to deploying this application, the typical XYZ employee spent an average of $1,797 x 6 = $10,782 per year on travel as a direct expense. That does not count the indirect costs of time spent on the road and travel administration.

Under a conservative assumption that traveling employees cost $50 an hour and spend 10 hours on the road on average for each trip, it means lost productivity of 10 x 50 x 6 = $3,000 per employee a year. For 250 employees, annual enterprise travel costs – both direct and indirect – were $3.45m. By replacing 17 percent of the travel with videoconferences, XYZ Enterprise is able to reduce direct travel cost to 1,797 x 5 = $8,985 per employee, and lost productivity of only $2500 per employee. Overall travel costs are now $2.87m, with annual savings of $574,250 – roughly enough to pay for a software-based communications system for 1,000 users. Carbon savings? About 73 metric tonnes a year.

Green IT savings, too
Already mentioned is the enormous power consumption of data centres worldwide. To cite a specific example, some analysts estimate that one of the world’s largest ISPs’ 2006 power requirements for an estimated 450,000 servers worldwide were 135 megawatts per day – enough to power about 33,000 homes, according to some sources. That level of consumption generates an equivalent of about 72 metric tonnes of carbon dioxide a day.
Clearly then, IT can have a substantial carbon footprint of its own, not to mention direct energy costs. These latter costs break down into 53 percent for cooling and infrastructure; 37 percent for components such as servers; 13 percent for storage; 10 percent for power supply units; and six percent for
network equipment.

In 1993, Siemens was among the first companies in the telecommunications industry to consider the environment in the design, manufacturing, deployment and recycling of its enterprise equipment. We took this approach as a matter of corporate responsibility.

Since then, the company has made great strides in lowering the capital and operating costs of its equipment. It has done so by carefully evaluating the holistic product life cycle, the total energy consumption of its solutions and components, and the business process efficiencies that its communications solutions provide. In addition, it has embraced open standards over the years to enable enterprise customers not only to mix interoperable, best-of-class components but also to interoperate with their legacy infrastructure. This latter capability helps customers get the most out of their legacy investments that, in effect, means reusing and recycling the older equipment.

To illustrate, here are just three ways that green engineering of your company’s communications infrastructure can help save energy and overhead costs, while reducing your carbon footprint:
Power consumption of IP phones can be reduced as much as 50 percent by using advanced circuitry and features like power “standby.” Software-based IP phones that operate via PDAs, laptops and desktop PCs can reduce power consumption even more. Projected across the full base of Siemens end devices, this efficiency can cut power consumption by 32 gigawatt hours, about the same amount of electricity it takes to power some 8,000 households a year. It also equals about a 20,000-tonne reduction in annual CO2 output.

Wireless technologies can help reduce both energy and cabling costs, while offering much greater mobility for employees that can help improve their productivity. The new Power-over-Ethernet (PoE) standards can eliminate the use and cost of copper metal needed in separate electrical wiring to power wireless access points. The industry’s most energy-efficient wireless access points, for example, require just 13 watts of power – less than half the energy demands of other wireless access points – and well within the PoE standards, so no external power supplies are required.

Power demands of large IP switching system may be reduced dramatically by using software-based VoIP solutions. For example, a carrier-grade, enterprise-class IP communications platform can run centrally on off-the-shelf, energy-saving servers in an IT data centre. Just two servers can provide richly featured communications services to as many as 100,000 subscribers. Classic distributed VoIP systems can require as many as 70 servers for the same number of users. In fact, a recent study showed that centralizing and running communications as a pure software application can cut power consumption by 25 percent compared to first-generation distributed Voice-over-IP (VoIP) systems. And compared to a 15-year-old Private Branch Exchange (PBXs) telephone system? Power can be cut up to 90 percent.

Why now and not before? For reasons mentioned earlier, the demand for green technologies did not exist as long as regulated markets and customer lock-in by proprietary vendor solutions guaranteed fat profit margins. At the same time, cheap energy and little or no waste disposal costs meant accounting could pay little heed to the cost of those inputs. Of course, few if any of these conditions exist today. Fortunately, technologies have progressed considerably to help offset tighter margins and higher energy and carbon costs.

While eco-friendly, IP-based communications can help “green-up” a company’s IT and corporate-responsibility profile, it also may help an enterprise to attract and retain customers and employees in the longer run. Meanwhile, it is important to carefully consider the underlying architecture, power consumption and environmental regulatory compliance of any prospective platform. A lot of vendors say their solutions are green but many are merely “green-washing” existing technology without making the considerable investment in engineering that truly green technology requires.

Ultimately, green enterprises stand to reap tremendous benefits of greater efficiencies, more productivity and a better corporate image going forward. Why commit to doing it now? Not only are green approaches to business the right thing to do, but – similar to the quality control movements of the 1980s and 90s – being a green enterprise today can be an effective competitive advantage. And tomorrow, it will be a competitive imperative, so companies should get started now.

Fredy Osterberger has more than 20 years of international marketing experience from arious industries, companies and agencies. He spent 10 years with Apple in Europe, following two years with Intel. In 2006 he joined Siemens Enterprise Communications to lead all of its corporate and marketing communication activities globally

Key points
1. “Green Enterprises” can build market share and profitability through greater energy efficiency and a lower carbon footprint.
2. New IT technologies can improve business performance via better communications, collaboration and knowledge access, while helping improve energy efficiencies and lowering the company’s carbon footprint.
3. Companies have improved their financial capital efficiencies tremendously in recent years… but today’s big opportunity is to improve the efficiency of their enterprise human and knowledge capital, which the green enterprise can help do.

For further information tel: +49 (0)89 722 24849;
email: jeremyw@connectpr.com; www.siemens.com/open

Balancing risk and credit in Spain

Posted on February 12, 2009 by

Mr Longarte, what does it mean for your firm to  have been selected as the best and most innovative transfer pricing team in Spain?
It means everything, considering that the prize is granted by analysing the feedback of the clients and also that the selection panel is composed of people with high technical knowledge and wide experience, and who really understand what the clients answers are.

The selection criteria are normally very closely related to depth of practice, size of firm, international links, reputation, size of projects but in this case, attending to the information we received, in this case the clients also valued excellence in the service, and moreover, our capacity to innovate. That is the most important part for me. Being first or second in something is always hard to differentiate, but having received feedback from the clients that shows appreciation to our innovation capacity and efforts is something that made me feel proud of the team because of the principles and spirit we want to transmit on a daily basis, not only to our clients, but to the team internally.

It is not enough to do our work very well, we always have to be one step ahead in new approaches and innovation.

The tax and transfer pricing business has been here for a long time, and we tend to see the same things all the time. What other examples of innovation can you provide customers? What is your strategy here?
Habitually, when people think about innovation in the tax arena, they think about aggressive tax planning schemes. But that is not how we work. We use innovative means to develop different ways to support the arm’s length nature of our client’s transactions, in a way that can provide further reliability using all the information that is out there nowadays, thanks to globalisation and technology. We canalise that information in ways we never thought was possible before. I think that part of our role as advisors is being up front in this R&D effort so we can add value to our clients and in some cases trace the way for the tax administrations that do not always have all the required resources at a glance.

Building on this, we always want to understand the key economic value drives of our clients, and identify more efficient alternatives to organise their functions, assets and risks in order to enhance the after tax treatment of their value chain. We are very much a “business consultant” in this area of work. Tax nowadays is one more critical component of business costs and the fundamental philosopher’s stone that affects the company world tax position is transfer pricing, at least in the early twenty-first century because in the international and cross border arena it is placing infinite challenges for the companies when becoming global.

The interesting point of our role as transfer pricing advisors is providing a balance between risk control and value.

Risk equals transfer pricing and double taxation contingencies with tax exposures, including potential penalties and impact to the company in its trade name.

Risk can be material in intercompany transactions, as nowadays between 63 percent and 67 percent of the total international cash flows are between parties of the same group and can add up to many millions every year, with sometimes very repetitive transactions and high figures at play.

Considering value, we are at perfect capacity to get to know the multinational company business model, sometimes even much better than the client’s own management if they work in vertical organisations through different business lines. This provides a huge capacity to propose better ways of reorganising the value chain of the group in the way that being more appended to the business model provides the best global after tax return.

I think part of the function of the key financial and tax executives in every multinational organisation in 2008 was to make sure that the balance between “transfer pricing risk control” and “transfer pricing value” is at the very least inclined toward the “value” side. That is part of our roles as “experts”, in the same way that the global logistics manager will be measured not only by making sure the products arrive safely but at the most efficient economic conditions and in the most business aligned way (ie, if the value proposition that the client receives the online order in 48 hours, that can’t fail). Our vision is to help our clients achieve that result.

Part of the “time capacity” of the team is devoted to investigate the future directions of transfer pricing approaches, and to link with our Deloitte Consulting folks, about which business model and management trends are envisaged to be here in some years from now. Having transfer pricing and tax people working with other practice areas like consulting is not an easy deal, because we tend to speak very different technical languages, but is the one that will return the most for our clients and the firm and sometimes we are looking for the same, but from different angles.

Let me finish this part with another example. We have just developed software in Deloitte Spain that helps global multinationals in approaching their transfer pricing efforts in a very flexible and adaptable way, being a tool that can be used and understood by many parts of the client’s organisation. We are not technology developers, but we recognise that in our specific way of delivering value to our clients, even in the tax consulting arena, technology plays an important role, sometimes auxiliary, and some others much more important.

This software is called D-TEMPLAR, which is an acronym of Transfer Pricing Electronic Masterfile Planner, but which also recognises the fact that the templars were the first organisation that was some centuries ago recognised to have multinational management and organisation capacity, and which some have pointed out as the first version of the multinational company. Curiosities aside, this software is state of the art in our view, with the sole aim to deliver high quality and different value to our clients.

We have also presented work to the client in a multimedia format, or in digital forms allowing them to save time, go to the relevant pieces, and listen or watch the report on a plane. We tend to work for tax directors of global multinationals that have very little time and travel constantly.

Are there any technical aspects relevant only to Spain?
Well, for a whole year we have been waiting for the approval of the draft royal decree passing the detailed transfer pricing documentation rules. It seems that the legal text is finally coming towards the end of the year.

Before that, it is relevant to mention that the OCDE  has finally published last July the TP guidelines for attributing profits to Permanent Establishments. This is particularly important because the Spanish Tax inspectors were particularly virulent in the first half of 2008 on trying to determine permanent establishments in Spain of foreign companies, requesting additional profits to be left in the nation.

Also, on September 19, the OECD issued a discussion draft on the transfer pricing aspects of business restructurings, considering as such any cross-border redeployment or reorganisation of the multinational enterprise functions, risks or assets profile and therefore potentially a reallocation of their expected profits.

Therefore, if you have reorganised your business, affecting your Spanish subsidiary, you need to analyse whether it is necessary or not an arm’s length compensation due to the relocation of functions, for instance, from full fledge distributor to commissionaire, or from full fledge manufacturer to a contract manufacturer.

Attention must be paid to the following factors when doing that analysis:
If there have been changes in the entity’s functions profile that could justify a variation in the tax treatment;
If there was developed any local intangible previous to the relocation of functions, assets or risks.

One of the most sensitive issues in these cases is if there has to be any compensation for goodwill or a pre-existing Spanish local intangible (ie customer base), and if this is the case, how to value it, considering or not the loss of profit potential.

The post-structuring transfer pricing is also relevant, as well as analysing if the new structure or value chain creates any potential permanent establishment exposure for any of the non resident entities participating in the business restructuring. Remember that there have been relevant Spanish economic court announcements in respect to this, originated by the tax inspector assessment determining an EP and requesting additional profit after specific business restructurings involving principal entities in Netherlands and Switzerland.

Business reorganisations are absolutely frequent today considering that many multinationals are nowadays trying to capture the benefits of globalisation and technology by intensively reorganising its value chain.

Therefore, maximum attention must be rendered to this draft, and you need to incorporate transfer pricing and tax considerations in the decision making process, together with the standard business aspects when you reorganise your Spanish value chain.

Mr Crespo, how do you envisage the evolution of Transfer Pricing practice in Spain?
The area of transfer pricing is a line of service that, like all, has its own peculiarities. Nevertheless, concerning its evolution, it is not an area that presents different characteristics to other areas. It is evident that nowadays in Spain it meets all the characteristics of an emerging line, whose development has been produced at an abrupt way covered by the new regulation on the matter. Just like a newborn baby whose behaviour has to will be recognised with time, transfer pricing practice is a great stranger whose contents are still not well understood in many cases.

It is a question of time and training for businesses to become aware of the importance involved in their transfer pricing policies in many fields. We talk about tax, but it also means to quantify how the value of a variety of functions and divisions of a group of businesses contributes to the group as a whole, with the impact that this involves when the value chain of a group is designed and rewarded.

In the course of time, this specialty will reach a greater degree of maturity. This will mean that the services that are now taking place will evolve. They will develop into new products with more value and different to the ones that are now provided. It is important to highlight that the rhythm of the development and the evolution to more sophisticated and more complex products in the field of tax depends to a large extent on the own evolution of the tax administration. As their mechanisms of action are improved, the clients will feel the need to implement policies which perhaps are not currently considered to be necessary or, at least, do not represent a priority, and they will demand advice of a greater added value.

In short, I believe that it still remains a long way to go for us, and that we are living an embryonic phase in the development of a very technically complex specialty, but that will eventually, and with the logical maturing, evolve radically different from what we may initially think about the development phase in which we find ourselves at present time in our country.

www.deloitte.es

On your marks… get set… go

Posted on February 12, 2009 by

In the past five years, and including 2008, the Ministry of Finance in Finland has launched many packs of patchwork on tax laws and the systemic tax reform has been much awaited. Now the Ministry has appointed a new working group to consider the Finnish tax regime as a whole. Not a task to be accomplished in few weeks: the deadline is to issue the report by the end of 2010.

Tax regimes are generally reconstructed in pieces. This piece-meal approach may have a negative impact on decisions by companies and households. Corporations make long term plans and consistent tax system and practice is an important element in planning. This holds true also in investment plans of private individuals. When the tax system is evaluated as a whole, it is possible to estimate how the tax system influences the economy, the society and consider desired targets.

In international tax, competition countries have selected different approaches. Many countries have decreased their statutory corporate tax rates. As the rate race continues, a global reduction of economic activity and demand for government spending put more emphasis on indirect taxation. In the global economy companies and their profits are mobile whereas it is difficult to avoid tax on consumption. In Europe many jurisdictions are fueling growth and innovation through R&D tax credits, and various tax incentives for financing activities are still popular.

The Ministry of Finance wants to have a holistic view. When nominating the working group in September it was clearly stated that changes in the environment have to be observed. Four key transformation items were mentioned. Firstly, the population is getting older which increases the need to be more efficient in the private and public sector. Secondly, growth in productivity and profitability is more and more focused on know how and intangible property. The third element is that challenges in respect of sustainable development are bigger than ever and fourthly, the economic environment is more open than before.

What would the focus areas be for the new Finnish tax regime? The Ministry asked the group to consider especially the following:

structural changes in the tax regime in light of favourable growth in profitability, high employment and entrepreneurship
sustainable tax burden within healthy public sector
encouraging balance between social security programs and work
changes in corporate taxation and capital income taxation that support productivity and employment observing international development, especially in the EU
competitiveness of the tax regime.

Excellent targets, and certainly a motivating agenda. It is guaranteed that the pending work will get a lot of attention from corporations and private individuals in Finland and elsewhere.

Setting the standard on transfer pricing documentation
Finland launched transfer pricing documentation requirements in 2006 and now the tax authorities are reviewing the first documentation packs.

One of the leading transfer pricing experts of the Finnish tax authorities recently stated that the tax authorities have been somewhat surprised with the level of documentations they have received. On one hand, a lot of the documentation packages reviewed have been very good at meeting the required content structure. On the other hand, however, the economic analysis is, in many cases, either lacking completely or very thin.

Not surprisingly, the Tax Office for Large Tax Payers (“LTO”) in Finland has announced that they will select some 20 multinationals for a transfer pricing documentation review within the next 12 months. The selection process is random, though the companies selected will be from the customer base of the LTO. If a company is selected for a review, it will be asked to submit its transfer pricing documentation to the LTO. After the review the tax payer will be informed on whether or not the transfer pricing documentation is deemed adequate. If this is the case, the tax authorities have stated that this should give the tax payer some level of comfort and that a specific transfer pricing audit should not be launched at least for the year(s) under review. If the case is the opposite, ie the documentation is deemed essentially incomplete or inaccurate a transfer pricing audit will be initiated.

Withholding taxes may be claimed back
Shareholders residing in the European Economic Area should take a look at withholding taxes they have paid on Finnish source dividends since 1995. The Central Board of Taxation has recently issued a ruling (CBT 27/2008) and the Supreme Administrative Court (SAC 2008:23) has given a decision, coupled with ECJ Stauffer case (C-386/04), which is likely good news for international investors. The Central Board of Taxation stated in its decision that the dividend paid by a non-listed Finnish corporation to a Swedish corporate shareholder is exempt from withholding tax. This is because dividends between Finnish companies would have been tax exempt under the same facts and circumstances. The exemption requires that the non-resident shareholder is located within the European Economic Area, there is an agreement on exchange of information in force and the tax withheld at source cannot fully be credited in the home state.

The SAC ruled in its decision that a UK resident individual receiving dividends from Finnish corporations cannot be heavier taxed on dividend income than a Finnish resident under same circumstances. Resulting from these decisions and the Stauffer case, the government has issued a proposal which changes the Finnish withholding taxation. It may well be worth looking back and assessing whether there is an opportunity to claim back previously paid taxes.

For further information tel: +358 207 555 314;  email: outi.ukkola@deloitte.fi; www.deloitte.fi

Technology Awards 2010

Posted on February 11, 2009August 6, 2019 by

Cleantech Award Winners

Best Cleantech Company of the Year North America
Tesla Motors

Best Cleantech Company of the Year Latin America
Vale

Best Cleantech Innovation Company of the Year, Western Europe
Lemnis Lighting

Best Cleantech Company of the Year Eastern Europe
General Electric

Best Cleantech Company of the Year Middle East
Suntrof Mulk Energy Group

Best Cleantech Company of the Year, Asia
Sparton Resources Inc.

Best Cleantech Company of the Year Australasia
Veolia

Best Cleantech Company of the Year Africa
Macquaire

Finance Technology Award Winners

Best Finance Technology Company of the Year, North America
Oracle

Best Finance Technology Company of the Year, Latin America
Itautec S.A.

Best Finance Technology Company of the Year, Western Europe
Telovia

Best Finance Technology Company of the Year, Eastern Europe
Intracom

Best Finance Technology Company of the Year, Middle East
Mubasher Financial Group

Best Finance Technology Company of the Year, Asia
Pennant Technologies

Best Financial Technology Company of the Year, Australasia
New Edge Group

Best Finance Technology Company of the Year, Africa
Safaricom

I.T. Award Winners

Best IT Company of the Year North America
Fortinet

Best IT Innovation of the Year Latin America
InvestChile – CORFO

Best IT Innovation Company of the Year Western Europe
Ai-One Inc.

Best IT Company of the Year, Eastern Europe
Ciklum

Best IT Company of the Year, Middle East
Sybase

Best IT Company of the Year, Asia
QAI

Best IT Company of the Year, Australasia
RDA Group

Best IT Company of the Year, Africa
Business Connexion

Trading Platform Award Winners

Best Trading Platform, North America
Deutche Bank

Best Trading Platform, Latin America
Citi

Best Trading Platform, Western Europe
Deutsche Bank

Best Trading Platform, Eastern Europe
Unicredit

Best Trading Platform, Middle East
Ahli United

Best Trading Platform, Asia
RBS Hong Kong

Best Trading Platform, Australasia
Commonwealth Bank of Australia

Best Trading Platform, Africa
Standard Chartered

Biotech/Medical Award Winners

Best Biotech/Medical Company of the Year, North America
Siemens IT Solutions & Services

Best Biotech/Medical Company of the Year, Latin America
Syngenta AG

Best Biotechnology Innovation Company of the Year, Western Europe
Amgen

Best Biotech/Medical Company of the Year, Eastern Europe
Thalesnano

Best Biotech/Medical Company of the Year, Middle East
Maquet Middle East

Best Biotech/Medical Company of the Year, Asia
Bharat Biotech International

Best Biotech/Medical Company of the Year, Australasia
3M

Best Biotech/Medical Company of the Year, Africa
La Gray Chemical Company

Leading family firms

Posted on February 10, 2009October 10, 2012 by itsupport

In order to extend their legacy of success to future generations, leaders must devise a strategic plan, not only for driving business growth, but also for effectively managing the intricate and constantly-evolving personal relationships that define

their company, and indeed their lives.

The Stanford Graduate School of Business Office of Executive Education is launching a new program entitled Leading Family Firms, that seeks to provide leaders of independent firms with the skills they need to rise to the challenges posed by the modern business environment. In essence the course explains how to manage future growth while overcoming the challenges and conflicts that threaten the legacy of their firms. In doing so, participants learn to apply a higher level of strategic thinking to all of the obstacles that they must overcome in turning a currently successful family firm into a future global business champion.

Challenges
The main objective of any business is to grow, but there are many considerations that a leader must face in order to achieve this.

One of the initial and principal challenges that faces a family business is the organisational structure of the company. It is imperative that the business has in place the correct management team, one that is well-equipped to drive the company forward and in the correct direction. Furthermore, from the outset, the leader of a family business must take a long-term view, and the key consideration in this is succession planning. A strong management team can provide the cornerstone when the time comes to begin thinking about a change in ownership.

Professor Hayagreeva Rao is a Director of Stanford’s Centre for Leadership Development and Research, and one of the new program’s instructors. “From the beginnings of the company’s life, certain structures and systems need to be in place in order to help nurture family talent. Education is a key attribute, as potential future business leaders need to be equipped with the right skills to manage a business,” he says.

“In addition to this, it is vital that family members learn the ‘nuts and bolts’ of the company, so that they understand every aspect and every component of the business,” says Professor Rao. In this way it is vital that the family puts in place adequate provisions to ensure the development of potential successors, as this will also ensure the continued development of the business itself.

Another key challenge, inextricably linked to the growth of a business, is that of innovation. Here, a methodical approach needs to be adopted. There is a strong call for a clear strategy when it comes to product development, as substantial time and resources can easily be spent producing a limited discernible outcome.

“A growing business is in many ways similar to a venture capital firm,” says Professor Rao, “as it is an environment where new ideas and products are fostered. When it comes to product innovation, products that are in the pipeline need to be tested internally, using the venture capital model. Testing of products needs to be undertaken over different stages of development, with capital only applied to the product once it has successfully completed each round of testing.”

And when it comes to raising capital, the leader of a family business also needs to be prepared. “Raising funds can be a tricky period for the family business, whether it involves assuming debt, a venture capital investment or a listing on the public markets,” says Professor Rao.

Different leaders have different attitudes towards risk, so loan funding may not always be attractive, whereas the loss of control of a large proportion of their business may deter many from taking on venture funding. And the prospect of an IPO may instil fears of a loss of family identity.

“Raising capital is very much a question of psychology and finance,” says Professor Rao, “and it is important to maintain a balance between family and business; it is vital that neither the business nor the family position is weakened at the expense of the other.”

Sometimes this requires innovative solutions. “I know of one Dallas-based media firm that split into two distinct parts; one part was kept under family ownership, and the other was made public. It is vital to consider what is best for each individual business, and no two firms are the same.”

Globalisation also poses considerable challenges. On the one hand, often the leader of a family business relishes the prospect of expanding his firm – of establishing a global footprint. On the other hand, however, in doing so he faces the real possibility of diluting the family’s identity, and this is an emotional decision to take.

Furthermore, the question of where to globalise is critical, and to what extent. “It is really a question of scaling,” says Professor Rao, “if the business over-scales it is liable to over-stretch itself and weaken, but if it doesn’t stretch far enough there is the threat that someone else will take advantage of your shortfalls.”

To address these challenges the program closely examines case studies of companies that have globalised successfully, as well as those that have failed. It also offers the opportunity to meet the leaders of these companies.

“Smart companies make change look very simple,” says Professor Rao, “and they keep globalisation simple.”

Who should apply?
The program is aimed at companies meeting three criteria; those in which members of one family are significant shareholders, those in which at least one family member is active in top management or the board, and those that have substantial assets and/or widely distributed operations.

Application to the program is open to family members involved in any aspect of the firm, including board members, top executives, future company leaders, significant shareholders, family foundation managers, and spouses of key decision makers. Furthermore, senior executives and board members from outside the family who actively participate in the business are also invited to apply.

Participants of the program have diverse backgrounds; representing a wide array of businesses across many sectors, and originating from many global locations. In this way program participants are able to bring to the forum the various issues that affect businesses the world over. Participants are invited to use the program as a ‘mirror and a window’; the mirror enables them to observe themselves and the way they run their business, and the window enables them to look out at other people and see their issues and solutions.

During the four-month break between classroom modules, participants take part in a unique experience that challenges them to put their newly acquired knowledge into action. Based on their learnings during the first module, participants work with program faculty to design a structured leadership project to implement during the break. In addition to discussing status reports with program faculty, participants share their experiences and solicit feedback from fellow participants along the way, bridging the gap between classroom theory and practical application.

Is it for you?
This is a program that challenges the leaders of family firms to confront the often latent tensions underlying the inevitable decisions that lay ahead, whether they involve strategic direction, family control, outsider involvement, tradition versus change, succession planning, or philanthropy. By taking part in an innovative curriculum that includes an intensive personal leadership project, participants learn to apply a higher level of strategic thinking to all of the obstacles that they must overcome in turning a currently successful family firm into a future global business champion. n

For further information www.leadingfamilyfirms.com

High time to regulate rationally

Posted on January 7, 2009 by

But my generation in more recent times thought we had transformed economics into “the cheerful science.” This was to be brought about by two reinforcing elements: (1) The efficiencies of a competitive market system would speed up the growth of productivity and thereby elevate the quality and duration of humane human life. (2) Equally important, those instabilities and inequalities inseparable from old-time pure capitalism can be moderated – moderated, not eliminated – by evidence-based government policies of central-bank macroeconomic controls cum tax and expenditure programs that lean against the winds of both excessive inflation and insufficient demands for job seekers.

A pathetic and unrealistic dream of utopian do-gooders? That was a view expressed by libertarian philosophers such as the late Austrian Friedrich Hayek and the late American Milton Friedman. However, economic historians, measuring the macroeconomic performances from 1950 to the present time on four continents, document a different story.

The ‘serfdom’ that both Hayek and Friedman feared would be the outcome from centrist Mixed Economy programs has turned out to be a popular way of life in many democracies. My Harvard mentor Joseph Schumpeter thought that what he called “capitalism in an oxygen tent” would stagnate. Not his first erroneous prediction.

Economic historians document happier scenarios. From the wee island of Mauritius off the African coast to the snowy fields of Finland or the semi-tropics of Eastern Asia, the Mixed Economy has alleviated poverty and lengthened life spans of improved quality. Far, far from perfection, yes. But almost like a controlled experiment in the biology lab, China and India now contrast beneficially with Mao’s China or Nehru’s India.

Their older antipathies to the market cost them dearly. And at the same time the advanced economies of Western Europe and North America gained naught from the deep sleeps of earlier India and China.

My readers might say, OK, if you were writing those words back in the 1990s. But the realities now – for 2008 and the coming few years – warn that America’s new financial engineering gimmicks have jammed up the whole financial system. Centuries ago, bubonic plague spared no one.

Today and tomorrow subprime shenanigans in mortgage and other lending may well foretell a long period of slump and even bankruptcies for many.

If lucky Americans find it hard even to contemplate such pessimism, Japanese observers might help clue them in. Before 1990, Japan had been in her “miracle” of fast development. Within only a few decades, she had grown from a poor, Asian level of living to second place to America as a world economy. In 1990, this came to an abrupt stop.

Older Japanese will remember Japan’s long, long post-World War I slump, from 1919 to beyond 1929. Some of that history repeated itself after two bubbles burst in 1989: the Nippon stock market crash and the bursting of Japan’s real estate bubble.

One can speak accurately of Japan’s subsequent ‘lost decade.’ That might be an understatement. From their overconfident view about a new Japanese pattern of corporate governance – with its decision-making by unanimity and its sought-for pattern of lifetime employment with one firm – there has been a long distance to fall.

Strange to say, when I lecture in various places in the US today, I detect similar beginnings of an American self-identity crisis. Of course, such tides do rise and ebb in recorded history. But this does not mean that all ups and downs are of the same amplitude or duration.

What, then, have the last few years done to dispel the complacencies of Economics the Cheerful Science described in my opening paragraphs?

I suspect that honest contemporary economists will be asking themselves increasingly: At the Bank of England and the Federal Reserve, did we become over-focused on the topic of “inflation targeting”?

Did the Bank of England forget that a Northern Rock Bank had no insurance for its depositors such as what US banks have had since the 1930s? And yet it watched, without raising an eyebrow, when Northern Rock was doing the stupid, risky things that gigantic Citibank, Bank of America and American Insurance Group were then doing.

Human nature always seeks a scapegoat. The jury, after hanging at random a few of us MIT creators of financial engineering temptresses, will have to pin major blame on the post-1980 Reagan Republican Party deregulators.

When lobbyists’ election gifts paralyzed their consciences, the Reagan-Bush-Bush crowd emasculated Securities Exchange Corporation controls against dishonest accounting practices. They had to know that if you dangle a loophole before a CEO – be he human or chimpanzee or robot – he will reach for it.

Millions around the world have been the victims. But most CEOs – at least those who don’t go to jail – can smile all the way to the bank after cashing in their golden-umbrella severance pay and stock options. Alas.