Felix Salmon

Alea, who broke

the news that the CFTC’s proposed CDS futures were being tranformed into bankruptcy

futures, has a provocative post up saying that this is actually a

good thing.

The CFTC was right to restrict the credit event to bankruptcy

only.

Otherwise sellers of protection would been in the same situation that an insurance

company having to pay up in full for a new house if there was a fire in the

attic.Not an attractive proposition.

Main benefit of the CME contract:

given that the recovery rate is fixed ,it will allow for discovery of the

implied hazard rate.This a Good Thing.

Sellers of protection are always in the position of that insurance

company, though – which is why they insist on getting a bond back in return

for paying out. It’s a bit like the insurance company saying that they’ll pay

out in full on the fire in the attic, but only if they get the house in return.

Now I’m unclear on how the new CFTC contract will work, but I do like the idea

that it will help create a very clear hazard rate, which is similar to the default

probability. I know that Jochen Andritzky at the IMF has a complicated formula

for deducing the default probability from the combination of CDS spreads and

bond spreads, but that doesn’t work when the CDS market simply dries up, as

it has done in the case of Ecuador.

My worry is

that bankruptcy futures will make workouts much messier, but Alea, by email,

reckons otherwise:

I don’t think it will complicate workouts because the event "bankruptcy"

itself terminates the contract and if one party has an incentive to game the

event, the other party, the seller of protection, has an incentive to counter

the gaming.

I’m looking forward to learning more about how these contracts work –

and seeing whether they take off. As Alea points

out, it’s been tried before, unsuccessfully.

Richard Behar

of Fox News has quite the scoop today: minutes

of a World Bank board meeting (actually a Washington meeting of the board’s

budget and “development-effectiveness” committees) seem to show

a wholly dysfunctional relationship between the Bank’s board and its management.

France’s alternate board director helped lead the assault, backed by

the rep from Switzerland. The pair dismissed the management paper as a “lost

opportunity.” A director from Mexico found the paper “confusing.”

The directors or reps from Saudi Arabia, India, China, Canada, the United

Kingdom and three other countries carped that it “fell short of its

objective to establish a link between strategic priorities and budget allocation.”

Australia, the Netherlands and France went even further, complaining that

the Wolfowitz team “had not outlined a ‘vision’ for the bank linked

to both a medium-and-long term outlook.”

And that view was echoed by Italy, Japan, Brazil, Mauritius and others, who

concluded that the paper “simply provided a list of priority items without

articulating criteria… or a rationale.”

Says Behar:

From the day he was nominated by President Bush, Wolfowitz was never warmly

received by the bank’s board, which feared he would rock the boat that

had been sailed more comfortably by his predecessor, James Wolfensohn —

too comfortably, in view of the reform-minded Bush Administration. And the

directors were right.

Behar is – unsurprisingly for a Fox News journalist – very sympathetic

to the Wolfowitz cause. But even he realises that this level of mistrust between

Wolfowitz and the board can’t be good for anybody.

This story comes in the wake of news

that Luis Alberto Moreno, president of the Inter-American Development Bank,

is also having difficulty driving his institution while the board’s hands remain

firmly gripped on the steering wheel. Multinational Development Banks need a

high level of political skill at the top. If Moreno, a hugely admired career

diplomat, doesn’t have it, the hopes for Wolfowitz would seem to be slim.

(Via FP)

One of the weirdest puzzles of the Great Moderation is that equity-market volatility

has been going down, even as leverage

has been going up. Ceteris paribus, of course, if you increase the amount of

leverage in a company or a set of companies, then the volatility of their equity

will go up accordingly. On the other hand, if it’s precisely the decrease in

volatilities which is resonsible for the increase in leverage, then at least

one would expect equity-market volatility to stay the same: the Great Moderation

cancelling out the increased risk, as it were. But in fact equity volatilities

have gone down, which if anything would seem to imply that there hasn’t been

enough increase in leverage.

Tony

Jackson has an interesting take on equities in the FT today:

The conventional view is that they are, if not exactly cheap, at least not

as wildly expensive as other things. They are certainly at the low end of

their rating relative to bonds. And whereas some instruments such as junk

loans and credit derivatives are arguably in glut, the supply of equities

in the US and UK has been shrinking.

In short, equities have been overlooked and unpopular – until lately, anyway,

a qualification I shall get back to. So it is to be hoped they are less likely

to disappoint when things turn ugly.

This would help explain the puzzle, I think. Equities should have been more

volatile than they have been, largely because they should have risen more than

they have done in response to increased leverage. In fact, however, equities

have not responded as one might have thought to the increased gearing that the

corporate world has gone in for – which means that they might not have

as far to fall in the event of a downturn.

Jackson also warns that this state of affairs might not last much longer:

Until quite recently, as I said, equities were relatively unpopular. But

now, I worry that they, too, are being infected by the general mispricing

of risk.

This came to mind with last week’s news that a trio of big private equity

firms are running a rule over J Sainsbury, the UK grocer. With a market capitalisation

of £8.7bn ($17.1bn), (…) Sainsbury is trading on about 50 times historic

earnings and more than 30 times prospective.

I’m also reminded of Joe

Nocera’s interview with Carl Icahn on Saturday, which came in the wake of

Icahn announcing that he’d taken a position in Motorola:

Motorola has a very conservative balance sheet — and that’s what

drives Mr. Icahn crazy. He hates conservative balance sheets. Mr. Icahn is

almost surely right that if Motorola took on more debt and used more of its

cash to buy back its stock, it would increase the stock price. The question,

of course, is whether that’s the right thing to do.

The analysts I spoke to tended to think not. For one, the company has committed

over $4 billion to paying for a recent acquisition. For another, they said,

Motorola is in a very cyclical business — so a cash cushion is probably

not such a bad thing.

These are stock analysts, no? On the face of it, it’s weird that a stock analyst

can say in the same breath that a certain course of action would both increase

the stock price and be a bad thing to do. If it’s really a bad thing

to do, then the stock price wouldn’t increase – any gains to shareholders

due to increased leverage would be offset by a greater discount due to increased

risk.

My conclusion is that increased leverage doesn’t increase public share prices

nearly as much as theoreticians might think – which is why a lot of the

companies piling on the debt these days are private and not public.

Are you still reading the EIU report on Ecuador from last Friday? Silly. Don’t believe for a second that anything in Ecuador can remain germane through a whole weekend. (For what it’s worth, the EIU has Ecuador on a CCC rating with negative outlook, and says that “the Correa government seems determined to forge ahead” with a debt default.)

In any case, the outlook seemed to brighten on Monday, at least according to Felipe Hernandez of Deutsche Bank, who put out a note on the subject of a radio interview given by finance minister Ricard Patiño: apparently he said that “defaulting on external debt is not the policy of the government.”

At the same time, there were rumours in the market that Ecuador had already wired its February 15 coupon payment to Euroclear.

What’s going on? Patiño seems to be in no mood to clarify anything: in the same interview, he said that parts of Ecuador’s external debt is illegitimate and should not be paid. Says Deutsche’s Hernandez:

Minister Patiño reiterated official plans to audit the outstanding external debt to decide which is the illegitimate debt and that the illegitimate debt would not be paid. Plans to audit the external debt are likely to take at least a couple of months. Without the results from this, we do not expect the government making any restructuring proposal or any decision on the debt plans. In line with this, one should expect the government to meet debt payments at least until it has the results from the audit and a clear debt restructuring proposal. This does not necessarily rule out the possibility of some delays in the debt payments. According to Minister Patiño he expects to have a debt restructuring proposal ready some time in H1-07.

This morning, Walter Molano of BCP securities put out his own note, saying, essentially, that if you think you understand why the market in Ecuadorean bonds is moving, you’re probably wrong:

The aggressive statements issued by members of the Correa Administration are an overt attempt to push down Ecuadorian bond prices. At the same time, the close association between Ecuador and Venezuela, and the Chavez Administration’s growing propensity for market manipulation, suggests that the recent statements about the debt instruments were accompanied by surreptitious buyback operations. A game is, definitely, afoot in Ecuador. Government officials are playing a high stakes game of poker, and they are bluffing their way in order to bolster their bargaining positions. Nevertheless, the game is complex, and there are a lot of seasoned players on the table. Therefore, one should be careful. As the old adage goes, “If you can’t spot the patsy at the poker table, then you are the patsy.”

The idea of Ecuadorean shenanigans is hardly new. Two months ago I wrote this:

If I was a devious Ecuadorean finance minister, I might even start buying up credit protection right now – and lots of it. CDS spreads would rise, and eventually arbitrageurs would drive down the price of the bonds, perhaps to levels less than say 80 cents on the dollar, where I could start buying my own debt back cheap without having to go through a formal restructuring.

Not much later, Ecuadorean bonds dropped significantly below 80 cents on the dollar; indeed, at one point, they were even below 70 cents. Did Ecuador buy back any bonds while they were down there? I have no idea. But it would be much easier and cheaper than going through a formal debt restructuring.

11:15am: OK, that’s it for the sovereign material, I’m done for the morning. Ed Parker threw away a comment as he was finishing up, saying that a US or Israeli bombing of Iran in 2007 would of course be bad news for Turkey — I wonder what the probability of that is. Lots of thanks to Fitch for embracing the blogosphere in such a friendly way!

11:10am: On the political front, Turkey survived the first big political risk when there was no suspension of Turkey’s EU accession bid in December. There won’t be real progress before the Cypriot presidential elections in early 2008, but the main danger period on the EU front appears to have passed.

The presidential elections are coming up in May, and the president is elected by Parliament. The Islamists have a majority in Parliament, but the secularist establishment is strongly opposed to an Islamist president, which could mean a push for a compromise candidate and political noise.

Turkey might also invade northern Iraq to take out PKK bases there, which could hurt Turkey-US relations.

Then there are parliamentary elections in November, and the parliament is likely to “return to weak, populist coalition governments”.

Conclusion: Turkey will likely muddle through in 2007, but there’s little chance of an upgrade until 2008, and some chance of a downward revision of the ratings outlook (if not the rating itself) this year, if things go worse than expected.

11:05am: The Turkish central bank continued to cut interest rates last year despite the fact that there was a clear pick-up in inflation, which spooked the markets in the spring. Inflation expectations remain high, there have been public wage increases of 12% this year and a minimum wage increase of 10%, which means that it’s going to be hard if not impossible to bring inflation down to 4%. So rates will remain high.

But it’s the current-account deficit ($33 billion, 8.4% of GDP) which is the biggest worry. It might come down a little bit, but not a lot. So Turkey is still very dependent on international financing, and is building up external liabilities.

The good news is on the FDI front: It was $18 billion last year and could be $14 billion this year, which has helped minimize the amount of hot money inflows. At the same time, foreign reserves are over $60 billion, which means the central bank “has firepower if there is a rush of hot money to the exit”.

11:00am: On the upside, Turkey’s main debt ratios are strong, with falling debt, falling deficits, and a stable primary surplus of more than 5% of GDP. The banking sector seems healthy and liquid, the IMF is happy, privatizations are bringing in lots of money, and Turkey looks set in 2007 to extend “the best sustained economic performance that Turkey has managed since at least the 1960s”. There could even be a 20% upward revision in Turkey’s GDP, which would help a lot of ratios.

On the downside, Turkey’s spreads tend to be the first to blow out when there’s any kind of market hiccup. What’s more, they’re not converging back to the EMBI, in the way that they always used to do. Domestic interest rates are still at around 20%, which means “there may be less scope to absorb any future market stresses”.

10:50am: Back from coffee for the last sovereign presentation: Ed Parker on Turkey. But first, some clarity on that Latin GDP per capita figure: Shelly Shetty told me that the drop in 2008 is likely due to a combination of weaker FX rates and constant population growth.

10:20am: Theresa Paiz Fredel’s up, on when/whether Peru can get its investment grade. She wants to see less external debt, a development of domestic markets, and macroeconomic prudence not only when commodity prices are high, but also in a down cycle. She’d also like to see a broader tax base. “Any of these factors, within the right context, could lead to an upgrade.” –but the most likely thing is a set of all of the above, offsetting weakness in political institutions and social development indicators.

9:50am: Brazil’s benchmark Selic overnight rate is now down into single digits, and could eventually get as low as 7%, says Scher. [UPDATE: This must refer to the real, not the nominal, rate.] Lots and lots of macro charts. To sum up: Macro policies are prudent, but there’s slow growth and lack of reforms to improve growth and the macro environment. An upgrade might come, “in the next two years”.

9:40am: Roger Scher is back, talking about Brazil, saying that he revised the outlook on Brazil from stable to positive yesterday, but he didn’t upgrade. Can there be credit improvement without growth? Solvency has improved, but there’s been fiscal slippage, and the president is constrained by Congress. On the other hand, its external debt is tiny, despite the fact that its internal debt is both enormous and short-dated (average maturity of 31 months).

9:30am: A weirdness in a chart: Fitch is forecasting that Latin GDP per capita will rise from $5241 in 2006 to $5710 in 2007, but then go down to $5475 in 2008 — I wonder if that’s a misprint, or if it has something to do with expected FX rates.

9:25am: A conclusion! “Most of these Latin credits are unlikely to join the investment-grade league in the next 12 months.”

9:20am: Shelly Shetty is up, talking about which Latin countries might make investment grade: El Salvador, Guatemala, Panama, Peru, Colombia, Brazil, Costa Rica, and Venezuela are all BB-rated. Brazil, with loads of debt, is already a net public external creditor, while Peru, with a much lower debt burden, is a net public external debtor. Most confusing. Also relevant: None of the BB-rated Latin sovereigns, except Peru, is set to reach the median BBB level of debt-to-GDP ratio by 2010. Peru is also the fastest-growing of the Latin double-Bs.

9:10am: The risks seem to be (a) commodity prices, and (b) liquidity. Copper and oil are both falling, if still high. If oil falls to a bit over $50, then Ecuador’s current-account surplus is erased; at $40, the same thing happens to Venezuela. Not that anybody expects oil at $40. On the liquidity front, there has historically been a correlation between Fed funds two years ago, and volatility today. Volatility is low now, but will it go up in line with where overnight rates have gone?

9:05am: Roger Scher of Fitch wants to know if the EM party is over. (“I’m going to ask that question, rather than answering it”.) He says that the Chinese central bank is dedicating 1% of assets, $10 billion, to EM assets — I’m not sure where that number comes from. Ask Brad Setser. The question of course is whether investors like that will leave at the first crisis.

8:50am: A bit of an experiment this morning: I’m at the Warwick Hotel in Midtown, where Fitch is holding its annual Sovereign Hotspots conference. I’ve got my lapel tag saying “felixsalmon.com”, I’ve got my laptop — and, of course, amateur that I am, I’ve forgotten my laptop’s power cord. But so long as my battery’s working, I’ll try and blog the proceedings.

William

Hutchings of Financial News had a big piece on Friday examining the performance

of the most expensive hedge funds: places which blow away the standard 2-and-20

structure with structures like Citadel’s 8.75-and-20, GAM/Caxton’s 4.5-and-30,

or SAC’s eye-popping 0-and-50. Hutchings reckons those enormous fees aren’t

worth the money:

Most of the 20 funds surveyed that investors identified as expensive were

beaten last year by the equity market. Three had lost money for investors

in the first 11 months, though two, Quadriga and Denali Partners, pulled their

performance back into the black in December. Whitney, which had lost almost

32% of its Japan select fund in the first 11 months, declined to comment.

Some of the expensive funds have been generating single-digit net returns

for some time, according to investors.

Dealbook

picked up on an interestingly self-serving quote at the end of the piece:

Some investors are deterred by funds that charge fees below the standard

scale of 1.5% to 2% management fees and 20% performance fees.

A partner at a multi-billion hedge fund manager said some had declined to

invest in a new fund it launched because its fees were low: “They could

not take us seriously,” he said.

I don’t buy it: "They didn’t buy my product because it was too cheap"

is never particularly convincing, even when it’s true.

Alexander

Campbell is definitely in the same boat as William Hutchings:

Hedge fund returns have been falling for some time, and papers like this

one are just going to make more people ask the two questions that hedge fund

managers least like to hear: why, exactly, should I give you any of my money

to invest; and why, exactly, should you get to keep so much of it?

But I, contrarian that I am, am much more impressed with Christopher

Holt’s response to the Hutchings piece. Here’s the bit which really made

me sit up and take notice:

Like all participants in a market economy, hedge fund managers charge the

highest price they can. The result is an equilibrium between supply and demand

for which no one – not the manager nor the investor – is to blame.

The fact is that hedge funds are mostly size-constrained, and most of the biggest

and most famous ones are closed to new investors in any event. In that kind

of supply-constrained situation, it makes all the sense in the world for the

fees to rise, since with a standard 2-and-20 fee structure, all these famous

funds would be monstrously oversubscribed.

Hutchings and Campbell might stop to wonder when they start to sound like mutual-fund

reporters on the personal-finance beat. No hedge fund investor is asking them

for their advice on which hedge fund(s) to invest in, and, to reiterate, most

of the most expensive hedge funds are closed and therefore impossible to invest

in in any case. The only people who might care about the fees are the people

who are already invested in these funds – and those people tend to have

made so much money from the funds that one can forgive them for feeling a bit

smug in their seeming profligacy.

There’s a telling quote at the end of Hutchings’ story:

“It is not rational,” said a private banker. “Plenty of

high net worth individuals like to show off to each other their investments

in reputed hedge funds. They use the word ‘vintage’ to describe

the year in which they became an investor. It is just as though they have

bought a fine wine.”

Why isn’t that rational? If I bought into a now-famous hedge fund just before

it started a 10-year run of 40% annualized returns, I’d be pretty chuffed too.

There seems to be some appetite for the recondite stuff here – so let

me draw your attention to a press release with the scintillating title of "Belize

2015 Notes Amended".

The ostensible subject of the press release is that Belize is the first country

in more than 70 years to use a collective action clause (CAC) to modify the

payment terms of a bond. [UPDATE: I meant to add, under New York law.] This is marginally interesting. Reading between the

lines, however, there’s more:

The Government of Belize today announced that holders of the Government of

Belize 9.75% Notes due 2015 have, by the requisite supermajority consent provided

for in the Note documentation, approved modifications of the terms of the

Notes to conform the maturity date and coupon structure of the Notes with

the financial terms of Belize’s new bonds maturing in 2029…

Belize has also announced that it will accept late tenders of the 2015 Notes

into the exchange offer up to February 14, 2007.

You see that final sentence? This is an exchange, where bondholders

are asked to tender their existing 2015 bonds for new 2029 bonds. (Details are

here.) Bondholders

only voted to change the payment terms on the 2015s as they were exiting out

of them anyway – this is known as an exit consent.

The key here is that when the holders of the 2015 bonds voted under the collective

action clause, they were reducing the payment terms on the bond in the certain

knowledge that they would not and could not be affected by that vote –

since they were tendering their bonds to the Government of Belize anyway. The

only people who would be affected were the people who didn’t like the

offer, and wanted to stay out of it. This essentially forces them into the offer

anyway – which it’s why it’s a little bit funny that Belize is accepting

"late tenders" of the 2015s. They end up with the same instrument

either way. (I’m not sure if the new 2029s will be fungible with the old 2015s,

however – they might have different Cusip numbers or tax bases or something

like that, in which case it’s now a no-brainer for any holdouts to enter the

exchange.)

After Ecuador used exit consents in 2000, there was a big backlash, and countries

have been very careful about using them since. What’s more, when CACs were being

pushed by people such as John Taylor at Treasury, those of us who were following

the international financial architecture debate were assured that CACs would

never be used with exit consents: they were an alternative

to exit consents.

It smelled like bullshit then, and it turns out that it was bullshit.

We now know that countries can use exit consents with CACs with impunity. And

although Belize’s exit consents were not particularly coercive, future ones

might well be much, much worse.

(Thanks to Matthew Tubin for the tip.)

Tyler

Cowen is in a provocative mood today, in a post on adverse selection and

health insurance:

When I argue that adverse selection is not the key, I hear a common response:

"*You* try getting insurance after you have been diagnosed with an advanced

brain tumor," or something along those lines.

To be sure, this is a real point but it is not adverse selection. Adverse

selection requires asymmetric information, namely that I know more about my

brain tumor than does my potential insurance company. The more likely problem

is that the tumor is common knowledge, or would be if I applied for insurance,

and the company won’t sell a policy for any price cheaper than the costs of

treatment. There is no asymmetry of information, rather insurance simply is

no longer possible. In the limiting case, imagine that a predictor-demon could

forecast your lifetime medical expenditures with certainty, and then blog

them by your social security number. Such a person, no matter how healthy,

couldn’t buy insurance either.

Scream all you want, but that is not inefficient per se. Covering

these people, by the use of government policy, is a transfer, not an efficiency

improvement.

Cowen’s commenters do find inefficiencies in the amount of work that insurance

companies do to sort insureds into ever-finer buckets. But my main issue with

Cowen here is that as the world becomes more dynamic, the chances of someone

having the same health insurance for years or decades becomes smaller and smaller.

And finite health insurance is no health insurance at all – because the

whole point of health insurance is that it insures you against unexpected large

future medical expenses. But if you incur some such expenses and then lose your

health insurance, then at that point you become de facto uninsurable,

and you end up bearing all your large future medical expenses yourself anyway.

In other words, what you thought was health insurance failed to insure you against

your large future medical expenses.

Now the correct economic term for this might not be "adverse selection".

But it’s certainly a suboptimal way of providing health care.

Floyd

Norris unpacks the Q4 GDP numbers in the NYT, and concludes that

Lower inflation and improved exports made a mediocre quarter appear much

better than it was.

Nouriel Roubini

has much the same conclusion, but cites consumer spending as the main factor

keeping GDP figures afloat. Barry

Ritholtz splits the difference, saying that yes, consumer spending was high

at 4.4%, but that was mainly because of low – in fact, negative –

inflation, with nominal spending rising a pretty mediocre 3.6%.

In every quarter, of course, some GDP components are healthier than others.

But it is a bit weird to find so much ink spilled on worrying about how low

inflation is!

First, Sushil Wadhwani closed

his flagship $1 billion global macro hedge fund, which lost money in 2006. Reports

Edward Chancellor

at Breaking Views:

Wadhwani believed that the gaping US trade deficit would push down the value

of the dollar against the yen. That hasn’t happened – yet. He also expected

Treasury bonds to fall as long-term U.S. interest rates climbed. These failed

macro bets produced disappointing results.

Now, SemperMacro looks like it’s headed

in the same direction:

SemperMacro, which is part of London-based Fulcrum Asset Management LLP,

was set up by Christian Siva-Jothy, a former proprietary trader at Goldman

Sachs, and Gavyn Davies, who helped lead the BBC, Britain’s state broadcaster,

from 2001 to 2004 and was chief economist at Goldman Sachs for three years.

According to people familiar with the matter, SemperMacro lost 15.7% in 2006,

partly from losing bets on the U.S. dollar and Japanese stocks, though returns

were consistently negative throughout the year. When an 18-month lockup ended

in December, many investors took their money, taking the fund down to around

$500 million from a peak of about $1.5 billion.

This is all good news for people who say that hedge funds spread risk and that

for every fund which is on the winning side of a trade – say, the short-yen

carry trade – there’s another fund which gets burned by being on the losing

side.

On the other hand, Brad

Setser has found an estimate

saying that the yen carry trade is as large as $1 trillion. There certainly

isn’t anything like that much money in global macro funds, even assuming that

those funds are long yen. And Nouriel

Roubini worries about the systemic risks posed by a disorderly unwinding

of the carry trade, a la 1998, contrasting "macho men" (Michael

Lewis, Julian Robertson) with the "wise folks" of "Summers,

Trichet, Stark, Rattner, Knight, Rhodes, Dallara".

I’m somewhere in the middle, and not only because I would never pick Charles

Dallara in an analysis fight with Julian Robertson. Obviously any unwinding

of global inbalances can, in theory, pose a systemic risk. And it’s the job

of central bankers like Trichet and Stark and Knight to worry about anything

which can, in theory, pose a systemic risk. But I still suspect that the next

crisis won’t look exactly like the last one. And I also suspect that the smart,

fast hedge funds are just as likely to benefit from an unwinding trade as they

are to lose their shirts.

Robert

Reich, divining no "intestinal fortitude" on the part of the Democrats

for a carbon tax, reckons that a windfall tax on oil company earnings is the

next best thing:

The Dems should propose a temporary windfall profits tax on oil companies

(temporary, that is, until the oil company’s current oil earnings boom

falls back to a normal range), the proceeds of which go into a fund to finance

R&D in non-fossil based fuels. Market fundamentalists who holler that

oil companies should be allowed to reinvest their profits in new oil exploration

aren’t paying attention to the environmental costs. But the windfall

tax should be designed so that, to the extent oil companies do wish to invest

in non-fossil based fuels, such profits are exempt.

It’s certainly politically much easier to soak Big Oil than it is to soak Small

Commuter – especially when commuters see their hard-earned dollars turning

into the largest annual corporate profit ($39 billion) the world has ever seen.

The Globe and Mail’s Shawn

McCarthy has a good story under the headline "Exxon’s ‘outlandish’

earnings spark furor":

Senator Hillary Clinton of New York, a leading candidate for the Democratic

presidential nomination in 2008, took direct aim yesterday at the oil companies’

gains.

"Instead of lining the pockets of big oil, we need a new direction in

energy policy that rewards innovation, creates jobs and reduces our dependence

on foreign oil," she said in a statement…

Democratic Congressman Ed Markey, a member of the House of Representatives

energy committee, called the record profits "outlandish," saying

they came "at the expense of the driving public."…

In its newspaper ads, the company says that between 1991 and 2005, it invested

more than it had earned in profits in order to find, develop and refine crude

oil and natural gas.

Over the past five years, it has invested $82-billion worldwide, nearly a

third of it in North America.

In 2006, however, Exxon spent more on buying its own shares on the open market

than it did on capital investment.

The company spent $25-billion on its share repurchase plan, which was designed

to boost its stock price, while it allocated $19.9-billion for capital investment

in 2006.

The Democrats seem keener on fiddling around with tax incentives for oil exploration

– which are a drop in the bucket compared to oil companies’ profits –

than they are on a windfall tax. Maybe a windfall tax makes it easy to accuse

them of "class warfare". But I kind of like the idea: Make the oil

companies pay for some of the cost of the war which is responsible for so much

of their profits.

Related: If I were an oil company, I might seriously consider selling off my

gas stations for PR reasons. With oil company names emblazoned across gas pumps,

it’s easy to blame the companies for high prices. So spin off the gas stations

as their own entity, a bit like Coca-Cola spun off its bottlers.

It’s not just Martin

Hutchinson who looks at the IMF’s report

on financing its running costs and sees a picture of obsolescence. The

Economist, too, is getting in on the act:

Mr Crockett’s team wants the fund to fund itself by building an endowment

it could live off forever. But if this goes on, the IMF will have to answer

the question: should it live forever? If borrowers won’t take its tainted

lucre, and financial crises remain so scarce on the ground (admittedly two

GIGANTIC if’s), then the calls for the IMF to dissolve itself and return the

money to its national shareholders—a position formerly the province

of the lunatic left and reactionary right—will start to sound a lot

more reasonable.

It’s probably worth pointing out that none of the IMF’s shareholders really

need the money: Brazil and Saudi Arabia don’t need more foreign reserves, and

Italy and the USA aren’t going to pay down much in the way of debt if they get

their IMF quotas back. Much better that the money stay in Washington, just in

case: no one thinks that there will be no more global monetary crises, ever.

What’s needed is a way of bringing the Fund out of the red – and the

Crockett report comes up with exactly such a way. Sell the gold, which is doing

no good sitting in vaults, and buy income-producing bonds which can be used

to pay economists to do crucial-if-boring things such as the generation of reliable

and internationally comparable macroeconomic statistics. The Economist, of all

publications, should like that idea!

Dean Baker is an excellent blogger, and was the first person that I know of

to pick

up on the fact that President Bush’s health plan could decimate the social

security benefits of the working poor: a very important, and definitely underreported,

consequence of the proposal.

But are the social security implications of Bush’s health plan the reason that

Democrats don’t seem to be interested in it? Baker would seem to

think so; I hope he’s right. I suspect, however, that old-fashioned partisan

party politics might be playing an important role as well. Just because there’s

a good reason to oppose the Bush health plan doesn’t mean that lawmakers don’t

actually oppose it for less good reasons.