(Editor’s Note : The title is the comment a friend made while forwarding to me the letter sent earlier this week by JakeDesantis, an executive vice-president of AIGs financial products unit, to Edward M.Liddy, the chief executive of A.I.G. The letter, or the link to it, has been forwarded and quoted so many times in the last few days that I have no doubt that you, regular reader, have read it already. Here is the link for the occasional visitor who might not be as well informed.
The post below is an anonymous contributor’s reaction to the issue)
The morality of the payments is not really debatable at all, they're perfectly moral besides being legal. And before anyone tries to lynch me, allow me to explain why. It’s not that difficult .... the top three reasons are
1) They have a contract
2) They have a contract
3) They have a contract
It’s as simple as that, and the rest is just banana republic politics and plain thuggery. For eg ., since all this is related to financial markets, let’s just compare this to the simplest kind of financial instrument .. a forward contract ( as opposed to all those dastardly derivatives that are being blamed for this mess). Let’s say a year back you and I entered into a contract that in one years time, I would buy from you 1 ounce of gold in return for USD 1250 (basically a forward contract) . One year hence, i.e. today, I find that the price of that one ounce in the market is say USD 1000, and so I try to default on my contract with you to push that loss of $250 onto you. Now these are the arguments I would like to give to justify this:-
1) I will default because I can now buy that ounce in the market for $1000, so why should I pay you $1,250 - Go find someone else willing to buy it from you at $1250; Essentially this is what the US government wants to do when they say "Don’t pay them ....let’s see where they can get this kind of money in the current market " .
2) Someone else also made me pay USD 250 extra for a ton of oranges that I bought from them, so I intend to recover it from you. I don’t care if you have never eaten an orange in your life or are allergic to them ....you are all part of this nefarious conspiracy against me. Again, as per the govt's stand, no distinction is necessary between different people performing different functions, working in different markets or even working in different organizations ...go after them all and tax them @ 90%
3) During the course of the year I lost a lot of money in my other dealings in gold, hence I refuse to pay you because you also deal in gold. Like the govt saying that the very people who got us into the mess cannot be paid,without regard to any attempt to distinguish between people, like they're all one big faceless mass.
4) You fooled / tricked / conned me into entering into this contract a year ago ! You should never have done this deal with me! I, a poor innocent have become a victim to your fiendish, devilish intents. That’s right , poor little AIG , this 120,000 strong leading insurance company was "fooled" into entering into employment contracts that guaranteed a certain level of payments irrespective of what happened in the market . Poor folks, looks like they were operating without an HR dept, lawyers, out of some tin shack somewhere and just didn’t understand what they were doing.
5) There's too much poverty in Zimbabwe for me to honor this contract. Aka US Govt ...when people are losing jobs, they should be happy to have a salary and work for free ! We are suddenly all part of a national / world / universal community interested in zen and the art of collective peace !
6) Ok, ok; i shall honour this contract and buy from you at $1250, provided that you deposit $250 in my unmarked swiss account. Aka let them have their bonus, we'll tax it @ 100% ! Sneer Sneer- What’s that - What do you mean where does that tax money go ? Don’t be impertinent.
7) I am bankrupt- get in line with the others to recover your dues! Well, AIG was bankrupt wasn’t it . No wait a minute, we had to save it from bankruptcy under which btw, like any other creditors employees too would have NOT received any of their outstanding bonuses and perhaps not their salary also. However, it was decided to save it and its creditors + employees for the "greater good of the system" ....oops , but now I find I harbour animosities towards a select few, some of those evil millions of bonuses types , and so what the heck, let’s just declare "selective bankruptcy" , sort of like selective memory which will enable me to continue to pay some but not others at the mercy of my whims and fancies . Ain’t life great ! :-)
8) Stop whining - I am doing it because I CAN. And that’s really at the heart of this isn’t it ...I suddenly find myself able to cater to my worst instincts and renege on my word under the guise of taxpayer interests, morality, and other pithy homilies with one finger on a metaphorical trigger. And therefore I shall !
By,
Anonymous.
Showing posts with label Business / Economy. Show all posts
Showing posts with label Business / Economy. Show all posts
Friday, March 27, 2009
Saturday, May 31, 2008
The Third Oil Shock ?
(Note : This post was originally written on May 29th 2008)
Today’s newspapers reported on the capping of production by IOC, something which BPCL has already done. The article claims that IOC is currently losing Rs. 300 Crore (~$75 million) a day on account of under-recoveries (basically it sells the oil below the cost price for it to get it to the consumer). The tale does not end there, the company will not be left with any cash to pay for crude oil imports by September-end if the fuel prices are not raised or duties not cut. “If the government does not act, we might see queues and shortages,” CMD for IOC was quoted, indicating a ‘major crisis’ was in the offing.
Those are grave words. There indeed seems to be a problem in the offing with crude oil not only scaling $130/ bbl (barrel = ~159 Liters.) but managing to stay above that level for some time now. For a commodity that was trading at sub $30/ bbl till 2004 it is a significant rise. In fact, oil has crossed its historic inflation-adjusted high of $101.70, reached April 1980.
The only other instances in the recent history have been what are termed: “the oil shocks”. The two (three if you take into account the blip in the 1860s as well, though the global economy was far less dependent on oil at that time and therefore can not really be termed as a “shock”) instances of such “shocks” have been in the years 1973 and 1980, both precipitated by geopolitical changes: the Yom Kippur War and the Iranian revolution respectively, resulting in a supply shortfall. This third shock is being driven by demand for oil by energy users like China, India, and the United States.
What is also driving the prices up are two factors on the supply side:
a) Unreliable supply from the non-OPEC countries: Russia, the largest non-OPEC supplier has not been increasing the supply and does not seem likely to in the near future. One of the key reasons being the lack of opportunity for foreign investment in a sector, which badly needs investments. Other non-OPEC producers like Mexico, have also seen slipping production, whereas the supplies from Nigeria are perennially under doubt due to internal strife
b) Reluctance of OPEC countries to increase output: OPEC countries have been expanding production but that is not sufficient to meet the growing demand. The publicly stated reason is that the prices are high on weak dollar rather than supply issues. What might be the real reason is that limited reserves mean that the OPEC countries are also trying to get the maximum return for their stocks.
That means in the foreseeable future the price/bbl will remain in $100+ band. What make it worse in the Indian case are the government’s policies, which are not only postponing trouble and but also accentuating the level of the measures that would have to be taken to resolve the gap.
The current government policy to partially (at best) link the supply to global prices means that the oil companies are quickly loosing the operating capability as highlighted earlier in the article by the IOC Chief.
This policy has also led to issuance of oil bonds worth $2.3 billion in Jan, 2008 alone. In the normal scenario if it was a direct subsidy it would have gone through the budget and would have constituted a part of the budgeted deficit. But by issuing bonds the government has been successful to keep such measures “off balance sheet”. Not so long ago, a large energy company went bankrupt and its top executives are serving time for keeping liabilities off balance sheet. I am not suggesting that the same is the case with the governments, but then there is the thought, as always, who polices the police.
In addition, subsidies on Kerosene and LPG have meant that the industry has been innovating to make diesel the fuel of choice to lower the TCO (Total cost of ownership), do a quick survey of your friends and you would immediately find out, why so many people chose the diesel model of the car they just bought. As Mr. Behuria (CMD, IOC) said “Diesel demand is growing at 20-22 per cent, a rate that will necessitate IOC to import two million tonnes, but the company plans not to shell out international prices and would rather restrict supplies,”.
But will the government take corrective action, especially with pricing/ subsidies when elections are close? The answer seems to be clear from the recent comments coming out of Delhi: FM has refused to lower the import and excise duties and also seems to be reluctant to introduce an oil-cess.
With CPI (M), a key coalition partner hammering away at the government on the inflation issue, government knows that the loan waivers it has offered the farmers will not come handy if it completely antagonizes the middle class.
However, by postponing the obvious and essential the government is only going to accentuate the magnitude of the final remedy. What the government can hope is that it can hold the status quo, till the elections, so that either it will have a 5 year term to resolve the quagmire it has created or it can sit in the opposition and rattle arms against the incumbent government on the growing menace of inflation.
Whatever the course of action, the economy is on for some testing times. So, fill up your tanks, and get ready for a rough ride!
By,
Nautilus
(http://amariusqueadastra.blogspot.com)
Today’s newspapers reported on the capping of production by IOC, something which BPCL has already done. The article claims that IOC is currently losing Rs. 300 Crore (~$75 million) a day on account of under-recoveries (basically it sells the oil below the cost price for it to get it to the consumer). The tale does not end there, the company will not be left with any cash to pay for crude oil imports by September-end if the fuel prices are not raised or duties not cut. “If the government does not act, we might see queues and shortages,” CMD for IOC was quoted, indicating a ‘major crisis’ was in the offing.
Those are grave words. There indeed seems to be a problem in the offing with crude oil not only scaling $130/ bbl (barrel = ~159 Liters.) but managing to stay above that level for some time now. For a commodity that was trading at sub $30/ bbl till 2004 it is a significant rise. In fact, oil has crossed its historic inflation-adjusted high of $101.70, reached April 1980.
The only other instances in the recent history have been what are termed: “the oil shocks”. The two (three if you take into account the blip in the 1860s as well, though the global economy was far less dependent on oil at that time and therefore can not really be termed as a “shock”) instances of such “shocks” have been in the years 1973 and 1980, both precipitated by geopolitical changes: the Yom Kippur War and the Iranian revolution respectively, resulting in a supply shortfall. This third shock is being driven by demand for oil by energy users like China, India, and the United States.
What is also driving the prices up are two factors on the supply side:
a) Unreliable supply from the non-OPEC countries: Russia, the largest non-OPEC supplier has not been increasing the supply and does not seem likely to in the near future. One of the key reasons being the lack of opportunity for foreign investment in a sector, which badly needs investments. Other non-OPEC producers like Mexico, have also seen slipping production, whereas the supplies from Nigeria are perennially under doubt due to internal strife
b) Reluctance of OPEC countries to increase output: OPEC countries have been expanding production but that is not sufficient to meet the growing demand. The publicly stated reason is that the prices are high on weak dollar rather than supply issues. What might be the real reason is that limited reserves mean that the OPEC countries are also trying to get the maximum return for their stocks.
That means in the foreseeable future the price/bbl will remain in $100+ band. What make it worse in the Indian case are the government’s policies, which are not only postponing trouble and but also accentuating the level of the measures that would have to be taken to resolve the gap.
The current government policy to partially (at best) link the supply to global prices means that the oil companies are quickly loosing the operating capability as highlighted earlier in the article by the IOC Chief.
This policy has also led to issuance of oil bonds worth $2.3 billion in Jan, 2008 alone. In the normal scenario if it was a direct subsidy it would have gone through the budget and would have constituted a part of the budgeted deficit. But by issuing bonds the government has been successful to keep such measures “off balance sheet”. Not so long ago, a large energy company went bankrupt and its top executives are serving time for keeping liabilities off balance sheet. I am not suggesting that the same is the case with the governments, but then there is the thought, as always, who polices the police.
In addition, subsidies on Kerosene and LPG have meant that the industry has been innovating to make diesel the fuel of choice to lower the TCO (Total cost of ownership), do a quick survey of your friends and you would immediately find out, why so many people chose the diesel model of the car they just bought. As Mr. Behuria (CMD, IOC) said “Diesel demand is growing at 20-22 per cent, a rate that will necessitate IOC to import two million tonnes, but the company plans not to shell out international prices and would rather restrict supplies,”.
But will the government take corrective action, especially with pricing/ subsidies when elections are close? The answer seems to be clear from the recent comments coming out of Delhi: FM has refused to lower the import and excise duties and also seems to be reluctant to introduce an oil-cess.
With CPI (M), a key coalition partner hammering away at the government on the inflation issue, government knows that the loan waivers it has offered the farmers will not come handy if it completely antagonizes the middle class.
However, by postponing the obvious and essential the government is only going to accentuate the magnitude of the final remedy. What the government can hope is that it can hold the status quo, till the elections, so that either it will have a 5 year term to resolve the quagmire it has created or it can sit in the opposition and rattle arms against the incumbent government on the growing menace of inflation.
Whatever the course of action, the economy is on for some testing times. So, fill up your tanks, and get ready for a rough ride!
By,
Nautilus
(http://amariusqueadastra.blogspot.com)
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