Bezzle years

In a recent Project Syndicate column economist John Kay nicely sums up the generic ways in which people are led down fake paths of wealth creation, only to have them blow up later. When the path is illegal, it may be called embezzlement, when it’s legal it’s been called “febezzle” or “functionally equivalent to bezzle.”  Kay explains:

“There are numerous routes to bezzle and febezzle. In a Ponzi scheme, early investors are handsomely rewarded at the expense of latecomers until the supply of participants is exhausted. Such practices, illegal as practiced by Bernard Madoff, are functionally equivalent to what happens during an asset-price bubble.

Tailgating, or picking up dimes in front of a steamroller, is another source of febezzle. Investors search for regular small gains punctuated by occasional large losses, an approach exemplified by the carry trade by which investors borrowed euros in Germany and France to lend in Greece and Portugal.

The “martingale” doubles up on losing bets until the trader wins – or the money runs out. The “rogue traders” escorted from their desks by security guards are typically unsuccessful exponents of the martingale. And the opportunity to switch between the trading book and the banking book creates ready opportunities for financial institutions to realize gains and park losses.

The essential story of the period from 2003 through 2007 is that banks announced large profits and paid a substantial share of them to their traders and senior employees. Then they discovered that it had all been a mistake, more or less wiped out their shareholders, and used taxpayer money to trade their way through to new levels of reported profit.

The essential story of the eurozone crisis is that banks in France and Germany reported profits on money they had lent to southern Europe and passed the bad loans to the European Central Bank. In both narratives, traders borrowed money from the future. And then the future came, as it always does, turning the bezzle into a bummer.”

— John Kay, The Bezzle Years, Project Syndicate, October 5, 2015

Installation by Philippe Parreno

---

Tragedy of the Horizon

Mark Carney, the Governor of the Bank of England, used a climate change analogy I have not heard before: calling it the Tragedy of the Horizon.  He was echoing the "tragedy of the commons," which is economist-speak for the recurring devastation of commonly owned (i.e., not privately owned) pasture land in England several hundred years ago. Everyone had the incentive to exploit the pasture land in the present; no-one had an incentive to preserve it for future use. This also explains the challenge of addressing climate change now. As Carney says in an appeal to business and finance to get real about the consequences of climate change:

“A classic problem in environmental economics is the tragedy of the commons. The solution to it lies in property rights and supply management. Climate change is the Tragedy of the Horizon.

We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors – imposing a cost on future generations that the current generation has no direct incentive to fix. That means beyond:

• the business cycle;
• the political cycle; and
• the horizon of technocratic authorities, like central banks, who are bound by their mandates.

The horizon for monetary policy extends out to 2-3 years. For financial stability it is a bit longer, but typically only to the outer boundaries of the credit cycle – about a decade. In other words, once climate change becomes a defining issue for financial stability, it may already be too late.”

— Speech by Mark Carney to Lloyds of London, September 29, 2015

---

New York, New York

After many underwhelming films at the 2015 New York Film Festival, I finally struck gold with a new documentary on Robert Frank, a Swiss-born American photographer and filmmaker.

If like me you are fascinated by New York’s economic and cultural milieu in the 50s to 80s- ironically when New York was more chaotic and corrupt than it is now - you will like this film. Frank seemed to know everyone passing through the art and literary scene. The film is cut in a fast-paced, collage style with an excellent score using iconic music from across the decades. 

Richard Estes

The best CEOs

I like the idea behind the Harvard Business Review’s new ranking of long term CEO performance.

HBR’s ranking used to be based on shareholder return and change in market capitalization. But of course these measures don’t take account of environmental and social impact. And they can be misleading because financial incentives often skew CEOs toward short termism to maximize share price. So this year the HBR has introduced a measure of environmental, social, and governance performance. The editor explains:

“HBR’s ranking of CEOs is meant to be a measure of enduring success. We track and analyze each CEO’s performance starting from day one of his or her tenure. Our goal is to create a list that gets beyond the most recent quarterly or even annual results and truly evaluates long-term performance...

Our view is that, in an era of big data and greater transparency, consumers and investors increasingly want to understand a company’s culture and values. They want to analyze its social behavior, not just its share price. These new measurements will only get better over time.”

— HBR Novermber 2015 issue

Weighting financial results at 80% and 20% for environment, social and governance, Jeff Bezos, CEO of Amazon, drops from #1 position based on financial results only, to 87. The ranking is based on data from Sustainalytics.

---

Guerrilla Girls

At the new Whitney Museum in New York early this summer I came across the Guerrilla Girls for the first time.

This anonymous art group set themselves up in the 1980s to protest inequality in the art world - and they celebrated their 30th anniversary this year.  Members of the group don guerrilla masks and do provocative, but humorous, stunts to protest sexism and racism in art. One theme is the missing voice of women in art shows by the big name museums. (See one of the group’s early posters below.)

The group's message came to mind a few weeks ago when I saw two wonderful shows by women artists at the Tate Galleries in London: Agnes Martin and Barbara Hepworth. Their work had such refreshing and energizing sensibilities. Kudos to the Tate.

Described as an abstract expressionist, Martin’s work felt like something I’d never seen before. Hepworth’s sculpture was done in Cornwall and when I went to Cornwall a few days later I was struck by the magical way she had captured the light and landscape there.

The exhibits left me pondering what I’d missed out on as a result the missing voice of women in art. The same is true of films and literature, of course.  There's so much value in diverse perspectives.

---

What's wrong with banks - a German inside job

I thought “Inside Job” directed by Charles Ferguson was by far the best documentary on the 2007-8 financial crisis. But a more recent German feature production called "Master of the Universe" does a better job of explaining bank culture and why it is so hard to reform.

"Master of the Universe" is an inside story of a German banker caught up in the frenzies of the 1990s East Asian crisis, the US housing boom, and the recent European sovereign debt crises. The film doesn’t have the thriller pace of "Inside Job," and it feels like the director, Marc Bauder,  suffered some of the challenges I did when making my film "The Banking Brain," also on the crisis: No access to banks for good B roll.  Nearly impossible to get someone with a bank job to speak on the record.  On a tight budget, turning very abstract concepts into images. But Bauder's film is a good effort on an important topic.

---

Banks too complex to manage

There’s been an ongoing debate since the 2007-8 financial crisis about whether the biggest banks are now too complex to manage, exposing tax payers to more bailouts.

The chief economist of the Bank of England Andrew Haldane has offered some interesting data on bank complexity. He shows how it has even increased since the crisis. Referring to banks that are so big they are officially called systematically important financial institutions or SIFIs, he notes that:

“In 2006, the average SIFI had a balance sheet of $1.35 trillion – roughly the same as the annual GDP of a small G7 country. The largest SIFI had a balance sheet totaling $3.0 trillion. This is many multiplies of the largest non-financial firm. It also only covers on-balance sheet positions. Turning to off balance sheet positions, the derivatives portfolio of an average SIFI totaled $19 trillion in notional terms in 2006. For the largest SIFI, it was $60 trillion. This, too, is many multiples of the largest non-financial firm’s position.

These massive SIFI balance sheets were, in turn, spread across a very large array of distinct legal entities within each group. In 2006, the average SIFI had around 328 legal entities within the group. The largest had almost 900 distinct legal entities. Most of the largest global SIFIs had numbers of legal entities running to four figures. By comparison, the world’s largest non-financial firms had less than half this number of legal affiliates.

A final complexity metric is the proportion of so-called trading assets. This is a diagnostic on the diversity of a bank’s business model – whether it is engaged in investment as well as commercial banking… The average SIFI had a trading book of around a quarter of assets in 2006. For the largest, this was closer to around 50% of assets.

Since the crisis, there is little evidence of these complexities having reversed…The balance sheet of the average SIFI has not shrunk. In fact, it had risen to around $1.8 trillion by end-2013. For the largest SIFI, it was around $4.0 trillion. The pattern is even more striking off balance sheet. For the average SIFI, the derivatives book has risen by over 50% to over $30 trillion by 2013. For the largest, it had risen to $75 trillion.

On the other complexity metrics, the number of legal entities for the average SIFIs is essentially unchanged comparing 2006 and 2013. And despite a significant rise in risk weights, there had been only a modest slimming of SIFI trading books by 2013, with the average share of assets going from 22% to 19%. ”

— On Microscopes and Telescopes, Andrew Haldane, March 27, 2015

Tomas Saraceno

---

Truth and beauty - what's wrong with economics

Recently I went to a discussion called “What’s wrong with economics?” organized by the New York Review of Books. I wasn’t sure what to expect – instinctively I imagined most NYRB readers would dislike economists.

The best panel featured Nobel prize winning economist Paul Krugman, Robert Skidelsky (an economic historian most famous for his very good biographies of Keynes), and Benjamin Friedman a leading economist and author from Harvard University. Friedman said he thought that since the financial crisis economists have had little constructive to say about what went wrong and what to do about it.  He thinks economists have blind spots driven by their obsession with mathematics and formalization. The most obvious blind spot he said is the finance sector, which has very obviously been failing at its primary job of allocating resources efficiently. Krugman felt there is nothing essentially wrong with economic theory – used properly, it predicted the crisis and offered the right fixes – but he thinks schools have become so mathematical and “teched up” that the new generation of economists can’t see the wood for the trees and the older generation has sold out to politics and ideology. Skidelsky said methodological authoritarianism in economics had closed minds. Mathematics as a check on theory is fine, but not as a driver. Or as one later speaker put it, economists are mistaking beauty for truth. Skidelsky felt economists do their profession much harm because they are prone to hubris. They turn people off because they are seen to rate efficiency more highly than justice.

Later speakers included philosophers, lawyers, anthropologists, and sociologists and got the most applause from the crowd. Here the criticism of economics was constant and included: that economists are so obsessed by theory and that the profession has lost its purpose; there is too much inbreeding and group think (e.g. over 60% of Harvard economic professors are Harvard or MIT graduates); economists are losing track of reality because very few are employed in business now and most are in academia or institutions they can make resemble academia; and economists have an intellectual monopoly on an area with huge social welfare implications.

Filming Revolutions - "Maidan" and "The Square"

“Maidan” is a moving, sometimes harrowing documentary on the public protests that brought down the Yanukovych government in Ukraine early last year. But worth seeing.

First released at the Cannes Film Festival in 2014, probably only 2 months after the last footage was shot, much of the film is a series of still, long takes of the crowds, over successive days. At first it was like watching paint dry but the tension builds towards the harrowing second half with scenes of violence and grief. The approach contrasts with another recent "revolution" documentary, "The Square," about the Arab Spring in Egypt. The Square has a more common format – fast-paced editing of hand-carried camera footage in the midst of the action and interviews to get to know the main characters and their motivations. Both films try to make you feel what it was like to be there. “Maidan” is the film that lingers.

Measuring oceans of plastic

Two recent studies show how much plastic we are throwing into the oceans – a common resource everyone is abusing. According to a joint US-Australian study:

“A staggering 8m tonnes of plastic waste are entering the world’s oceans every year, or the equivalent to five grocery bags filled with plastic for every foot of coastline in the world.”

— Financial Times, Febuary 12, 2015

freeimages.com

---

Anthropocene - the new man age in geological time

Scientists are apparently debating whether to name a new geological chapter in the earth's history, calling it the Anthropocene, reflecting the impact human's are having on changing the earth's ecosystem. This would end the Holocene epoch which started 12,000 years ago - at the end of the last Ice Age. According to the FT:

“Ice, wind and water are no match for humans when it comes to shifting sediment around the globe. We mine up to nine gigatonnes of coal and 13Gt of aggregate annually, which together exceed everything dumped in the oceans by all of the world’s rivers”

— Financial Times, Anjana Ahuja, January 23, 2015

Battle of Algier

The brilliant, classic "Battle of Algiers" (1966) is playing in New York in a mini-festival called War on War. Directed by Italian Gillo Pontecorvo, the film reconstructs a year of the French-Algerian war in the 1950s. Shot in documentary style, reminiscent of Roberto Rossellini's equally great film "Rome: Open City" about the Nazi occupation of Rome, "Battle of Algiers" shows the strategies of both sides as the violence spirals. What is most shocking is that it could easily be about the Middle East today, only the characters have changed.

---

Leviathan

"Leviathan" is a powerful and gorgeous-to-look-at new film by Russian Director Andrey Zvyagintsev. The film is causing a flap in Russia - for being "anti-Russian."

At a recent screening in New York the director described "Leviathan" as a universal story of man versus the all powerful, unchecked state, but one with a distinctly Russian flavor. He said he got the idea from an incident in the US when a mechanic went on a rampage with a bulldozer, flattening the town hall and the mayor’s house over a zoning dispute.

"Leviathan" is set in an austerely beautiful and remote part of north-western Russia on the Barents Sea. The story follows Kolya a mechanic who is slowly crushed by corrupt provincial leaders and the judicial system as he resists their efforts to seize his land. In the end his house is flattened by the government's bulldozer.

The film casts Putin's political machine, the judicial system, and the Russian Orthodox church in a very bad light. Ironically the film was partly funded by the Russian Ministry of Culture. The film has just won a Golden Globe for best foreign film and is on the short-list for the Oscars.

According to the FT:

“In an interview, Mr Zvyagintsev said he did not intend Leviathan as a political treatise against the Putin regime. Recent geopolitical events, he said, had overtaken the film’s release. “The story is completely universal, not just in a special geographical context but in the sense of time. It’s not about a concrete era,” he said. “It just so happens that the era in which we filmed it bears a little bit too much resemblance to [current events].”

— Financial Times, January 20, 2015

---

Reality films

Film Director JC Chandor is doing good service by making films about the messy, imperfect, compromises that inevitably stalk the real world of doing business. His latest film "A Most Violent Year," set in New York in 1981, tracks the drama of the hero's choices as he navigates a lawless environment and closes an ambitious deal. New York at the time was broke, visibly in decay, and violence was at its peak.

In an earlier film "Margin Call" (2011) Chandor captured the business culture in investment banks during the recent financial crisis. While the personalities he drew were mostly unattractive, and the ethics of the choices were mostly bad, he did capture the pressures that shaped them.  He made his characters human. This is an advance on the caricatures in films such as Scorsese's "Wolf of Wall Street" and Cronenberg's  "Cosmopolis."  Most filmmakers either are not interested in the world of business for ideological reasons or they have no access. Chandor  grew up in a banking family and has both interest and access to people who can help him make this world come to life in an authentic way.

"A Most Violent Year" is more optimistic than "Margin Call." The hero's rule is that "you must take the path that is most right" - and in the real world finding the right path is a constant struggle. This is a nuanced film about trying to live a moral life.

---

Tamburlaine

Christopher Marlowe’s Elizabethan era play Tamburlaine has been showing in New York. Based loosely on facts, Tamburlaine is a 14th century warrior – a self made man who rises from farmhand to bloodthirsty conqueror of much of Central Asia, the Middle East and North Africa. In this play he becomes a timeless anti-hero caught in a spiral of endless wars that still resonate in these regions.

The superb actor John Douglas Thompson who plays Tamburlaine with huge energy and charisma is on stage for almost all of the four hours of this abridged version of Marlowe's two plays, Parts 1 & 2. At a separate event Thompson described how he prepared for this exacting part.  The main challenge was how to make Tamburlaine likeable or at least fascinating to the audience for some of the time. How to at first seduce them, then shock them by their complicity with evil. And he succeeds in doing this. Thompson researched recent violent leaders such as Idi Amin, the heads of South American drug cartels, and fictional anti-heroes in films by director Quentin Tarantino who he says is the Christopher Marlowe of our time. Both  Marlowe and Tarantino, he said, depict our fascination with the power, charisma, energy, and fearlessness of the anti-hero, and the loyalty culture they build around them, despite the evil they propagate.

Tamburlaine was written at the beginning of a time of daring global exploration and competition for resources. As the New York Review of Books explains:

“Tamburlaine was in the first place a history lesson, whatever its reliability: a synopsis for London theatergoers of earthshaking events not all that distant in place or time. The historic Tamerlane died at the beginning of the fifteenth century, after carving out an immense empire stretching from Turkey to India and embracing large swaths of Mesopotamia, Persia, and central Asia. An inevitable eerie accompaniment to a modern production is the sense of a war begun long ago that continues to unfold. The geographic names with which the text is dotted—Syria, Egypt, Turkey, Gaza, Arabia, the Red Sea—provide their own form of commentary without any directorial intervention. The history of the present moment becomes a co-author, adding its own expressive footnotes. As death closes in, Tamburlaine studies a map of the world, tracing his victories and measuring how far he fell short: “And shall I die, and this unconquered?” As he reels off the place names, the contemporary spectator is apt to feel that map itself closing in, as distant places and events—the burning of cities, the massacring of populations—begin to intrude on the theatrical space. Tamburlaine dies, but the play remains unresolved, like an open wound.”

— Geoffrey O'Brian, New York Review of Books, November 24, 2014

---