On the financial crisis

Prof. Gitter alerted me to the following interesting read on Steven Levitt's Freakonomics Blog about the current financial turmoil.

Even in Tough times there are people willing to spend on Art

Damien Hirst

Dead cow bounce

Sep 16th 2008
From Economist.com

An auction of works by Damien Hirst belies the turmoil in financial markets

Sotheby's

A VISIBLE show of support from his two main dealers and determined bidding by a mystery telephone buyer, believed to be Russian, helped dispel the gloom surrounding the financial markets. Enthusiastic bidding lifted the first round of Damien Hirst’s marathon two-day sale of new work at Sotheby’s in London on Monday September 15th.

The mystery buyer bid paid £12.8m ($23m including premiums) for ten of the evening’s 56 lots. This part of the auction raised £70.5m, more than was expected for the entire sale. Two further sessions were set for Tuesday.

Jay Jopling, Mr Hirst’s London dealer with whom he has worked for nearly 20 years, and a team from Larry Gagosian, his New York dealer, sat in prominent places in two rows at the centre of the auction room. Their support came despite the fact that they had been cut out altogether from the Sotheby’s auction and only learned about it in May when news of the sale was about to be made public. At the time Mr Gagosian told Frank Dunphy, Mr Hirst’s manager: “It sounds like bad business to me. It’ll be confusing to collectors. It’s a bad move.” A peace pact of sorts was agreed last Wednesday when Mr Dunphy took Mr Gagosian on a personal tour of the sale.

In the event, Mr Gagosian himself decided to travel to Moscow on the night, but one of his New York associates, Stefan Ratibor, was there bidding heavily for the sale’s star lot, “The Golden Calf”, a creamy-coloured bull preserved in formaldehyde, with solid gold horns, hooves and halo. Bidding opened at £6m for the piece, which was estimated to fetch at least £8m. Mr Ratibor dropped out at £8.5m and the calf was sold finally to for £9.2m (£10.3m including premiums)to an anonymous telephone bidder.

The winning bid set an auction record for Mr Hirst, beating the £9.65m that the daughter of the ruler of Qatar, Sheikha al-Mayassa al-Thani, paid last year for “Lullaby Spring”, a huge medicine cabinet made in 2002.

Guests arrived early to ensure they got seats. They included Mark Getty, the grandson of John Paul Getty and the new chairman of London’s National Gallery, Matthew Freud, a PR magnate, Peter Simon, a British retailer and founder of Monsoon and Accessorize, all three members of the Mugrabi family who own already nearly 100 Hirsts, and Sir Norman Rosenthal, a former secretary of the Royal Academy of Arts and one of Mr Hirst’s earliest supporters. Bianca Jagger sat in the front row.

Mr Jopling got the event off to a quick start, bidding £850,000 (£993,250 including premiums) to secure the first lot, a colourful triptych of spun household gloss, butterflies and manufactured diamonds, entitled “Heaven Can Wait”, which was well over the top estimate of £500,000. Mr Jopling also bought three other pieces, a medicine cabinet entitled “The Triumvirate”, that went for the bottom of its estimate, £1.5m (£1.7m with premiums), an oil painting of a photograph of the young Mr Hirst of which there are several copies, and for which he fought with Gagosian’s Mr Ratibor, winning with a bid of £900,000 (£1m with premiums). His best purchase was one of the finest pieces in the sale, a large cruciform vitrine of fish and fish skeletons, entitled “Here Today, Gone Tomorrow”, for which he bid just above the low estimate, £2.6m (£3m including premiums).

The crowded main room, four additional public rooms in Sotheby’s and countless telephone bidders slowed the pace of the sale. The 56 lots took well over two hours to sell, more than twice the expected norm. Only on a few lots was the bidding brisk; for most of the evening, the auctioneer, Oliver Barker, worked hard to squeeze one bid after another from potential buyers.

An exception to this was the mystery purchaser who bought ten lots, paying well above the top estimate for eight. These included twice the top estimate for two of the shiniest pieces on offer, a gold diptych cabinet of manufactured diamonds called “Memories of You/Moments With You”, and three times the top estimate for a large silver-coloured piece in a similar vein entitled “Fragments of Paradise”.

Mr Hirst spent the evening playing snooker, but on being told the sale figures, he pronounced: “I think the market is bigger than anyone knows. I love art and this proves I’m not alone. And the future looks great for everyone.”

"Indian Economy to gorw close to 8% despite global woes"-Prime Minister Manmohan Singh hopes that India will remain the second fastest growing economy

My post last week was regarding the GDP in India that hit 7.9% for the first quarter as a result of high interest rates, high inflation and increased input costs. The report stated that this was the slowest growth observed in the last 3 years. However, I was reading the Economic Times earlier this week and I found it interesting that Indian Prime Minister Manmohan Singh was quoted as saying that inflation, which stood at 12% in late August, is now showing some signs of moderation due to steps taken by the government.
I think the Indian government is working well in order to maintain a high growth rate for the present fiscal year. The government has cut import duties and banned exports of food items, while the Reserve Bank of India (RBI) raised its key lending rate in both June and July to tame inflation. The discount rate at which The RBI repurchases government securities from the commercial banks, depending on the level of money supply it decides to maintain in the country's monetary system now stands at a seven-year high of 9 per cent. Will all this effort enable India to maintain high growth rates in spite of the global slowdown? Prime Minister Manmohan Singh sure hope so!
I think it is interesting that the Indian government is expecting growth not to be deterred in spite of being hurt by the global slowdown and the steep rise in the international prices of petroleum.

The Fed Bails Out AIG - Newly Arising Problems?

While Joe Biden - Barack Obama's Vice Presidential running mate claims that U.S. tax rates will be raised, we have to question about whether the government is using their tax dollars the right way.

As we all know, recently the government has agreed to bail out AIG - the world largest insurer - for $85 billion in exchange for a nearly 80 percent stake in the company. The pay back date is set 2 years from now.

Do you think the government is using US citizens' tax dollars efficiently?

AIG made wrong decisions and they have to take their responsiblities. Not to say their budget spending in the recent years were ginormous, they even paid a billion dollar to advertise on the jersey of English soccer club Manchester United 2 years ago. And now the Fed authorized the Federal Reserve Bank of New York to lend up to $85 billion to them.

Will this make inflation increase dramatically as we have too much money on the market?

What about the jobs?

So we all know that Bank of America has taken over Merrill Lynch and that AIG is in shambles right now, almost the Fed for a credit line that is $75 billion dollars strong. What we also know is that as a result of all these acquisitions, failures and merger's alike, numerous jobs will be lost. Only a fraction of those jobs will be recovered in the near future, in the same field, while the rest of the workers will scramble around searching for anything to sustain their existence. 

Here's what I really think would happen. All that talk about jobs going overseas, well, welcome to a real world solution here. Apart from just jobs going overseas to cut back costs even further, what I foresee happening is American people going overseas, in numbers. Considering that almost 50000 jobs have been cut in NY itself, people will go the distance to secure their future. There are many countries all around the world that need experienced, college educated individuals to build up their financial institutions and teach the locals the rules of the game. I honestly feel that many, if not thousands of workers will be placed overseas, in places like Dubai, Shanghai, Delhi, Phillipines, Brazil. Countries and cities that are bustling with needs. These individuals may not get paid the same compensation they get here, but their lifestlyes in those countries will be phenomenal. Great wages, meagre expenses and great education for your kids. Plus, job security and tremendous respect for their expertise and experience. 

If the world is calling, would you answer?

Antitrust Case against Google-Yahoo Deal

The Sept 9, 2008 issue of The Wall Street Journal mentioned that the Justice Department had hired former U.S. antitrust chief and former Walt Disney Vice-Chairman, Sandy Litvack to investigate the antitrust case against the Google-Yahoo deal. According to the deal, Google will sell and place ads on Yahoo pages and both companies will share the revenue from online advertising. Both companies argue that the deal would decrease competition between the two contenders and would benefit advertisers by increasing their access to potential customers.

The main argument against the deal is that Google controls 70% of online searches, whereas Yahoo only has 20% share of the search market. In comparison, Google usually does a much better job at placing ads online and making money off of it. This could lead Google to persuade Yahoo to sell its share of the search market, therefore giving Google a control of 90% of the search market. This way, Google can monopolize web searches and set higher prices for online advertisers.

Poor State of the Economy Seems to be Global

On Monday, the stock market plummeted in the United States, due in part to the poor state of AIG (whose stock fell 50 percent), and Lehman Brothers Holdings Inc. filing bankruptcy.  The Dow suffered its lowest drop since September of 2001.  It's interesting to note how this poor economy is not just located in the United States.  Countries all over the world are injecting money into their economy (For instance, the European Central Bank injected 30 billion euros to money markets on Monday, and on Tuesday, injected 70 billion euros, according to World markets tumble.)  The Bank of England also pumped more money into England's economy, as well as Japan putting money into theirs.  The financial markets in a great number of countries are suffering; Tokyo's Nikkei 225 index decreased to 11,609.72, a decrease of nearly 5 percent.  Germany's and Russia's economies also suffered.  Did the problems of the US stock market affect these economies?  Or are the problems in the United States a further indication that there is a major problem in the global economy?

PRESIDENT Robert Mugabe and PRIME MINISTER Morgan Tsvangirai

After years of a deadly power struggle between Robert Mugabe and the Zimbabwe African National Union – Patriotic Front (ZANU-PF) and Morgan Tsvangirai and the Movement for Democratic Change (MDC), Zimbabwe, for the time being, is politically at peace.

Today in front of a crowd of 3,000 in Harare's International Conference Centre Mugabe, Tsvangirai, and Mutambara signed an agreement dividing power amongst the factions. Robert Mugabe will be President, leader of the opposition party Morgan Tsvangirai will be Prime Minister and Dr. Arthur Mutambara will be the debuty prime minister.

Some powers of Robert Mugabe as president will be to command the Army and chair the Cabinet of Zimbabwe. The powers of Morgan Tsvangirai as prime minister will be to head Council of Ministers, which handles daily affairs, and will control the police. Of the council, 15 members will be from the ZANU-PF party and 16 will from MDC, including three from deputy prime minister's Dr. Mutambara breakaway faction of the MDC.

In the early years Mugabe's rule the economy was prosperous. According to a 1995 World Bank report, after independence, "Zimbabwe gave priority to human resource investments and support for smallholder agriculture," and as a result, "smallholder agriculture expanded rapidly during the first half of the 1980s and social indicators improved quickly." He was Knighted by the Queen Elizabeth in 1994, and received many honorary degrees from such institutions as the University of Massachusetts, Morehouse College, and National University of Science and Technology.

Upon independence in 1980 it was written in the constitution that in cooperation with the British Government land was to be taken from white owners and returned to blacks. However when the British Government repealed from their original plan to compensate the whites in 1997 Mugabe went ahead anyway in 2000 with the land reform causing great controversy.

While Mugabe meant well by in returning land to the black Africans, he did so hastily without educating them on how to cultivate it. This type of policy is what led to 11million % inflation.

Acquisition of Merrill Lynch by Bank of America

Bank of America has been making major acquisitions every year to solidify its holdings and to stay ahead of the race against other commercial banks like J.P. Morgan and Wells Fargo & Co.

In 2004, it acquired FleetBoston Financial, which strengthened its position as the bank with the largest FDIC-rated deposit market share in the U.S. This left J.P. Morgan (second in line) way behind in the ranking. In 2005, it acquired MBNA, which made Bank of America the leading credit card issuer globally. In 2006, Bank of America acquired the U.S. Trust Company. In 2007, Bank of America acquired ABN AMRO North America and LaSalle Bank Corporation which made it the leading bank in the Northeast and Midwest markets. On July 1, 2008, Bank of America officially acquired Countrywide Financial Corporation, which makes the bank the controller of 25% of the home loan market. And now it acquired Merrill Lynch & Co.

J.P. Morgan has always been the leading contender of Bank of America when it comes to commercial banking. Since Bear Stearns Co. was bought out by J.P. Morgan for only $2 a share, I wonder if one of the reasons for Bank of America to acquire Merrill Lynch & Co. is to maintain its position against J.P. Morgan. Acquisition of Merrill Lynch now makes Bank of America the largest financial services business in the world and also allows access for Bank of America to engage with emerging markets outside the U.S. such as India.

So, is it presently more beneficial to be a commercial bank like Bank of America and J.P Morgan, or to be an investment firm? Following the acquisition of Bears Stearns, the Federal Reserve made a cut in its discount rate (the rate at which banks borrow money from the Fed) from 3.50% to 3.25%. The collapse of Lehman Brothers and acquisition of Merrill Lynch would further heighten the anxiety in U.S. financial markets, and could worsen the credit crunch.

Goldman Sachs and Morgan Stanley are now the only two remaining independent broke-dealers left in the country. With the bankruptcy of Lehman Brothers, and the acquisition of renowned independent firms like Bear Stearns Co. by J.P. Morgan and Merrill Lynch by Bank of America, it will be interesting to see how Goldman Sachs and Morgan Stanley hold up this year.

Poor veggie sorting leads to outbreak

The largest outbreak of food borne illness in a decade for the United States may have been caused by poor vegetable sorting in Mexico. Neither Mexico or the United States have safety requirements for farms or processing plants. Even though many Mexican producers grow vegetables under strict sanitary procedures for exporting to the US, many don't, and it simply takes an online registration for any Mexican company to export produce to the US.
The US FDA only conducts spot check on less than 1% of all imports, leaving it up to grocery's and restaurants to check their already purchased goods to decide if their ok for use. Some Mexican producers hire private companies to check the producers own sanitation standards. Few groceries will only buy from producers who have done this, but there is no public record of the groceries who do. All of this makes it extremely hard for consumers to have any idea if the goods they are buying or eating have come from and if any sanitation was used in the process. It seems that at the very least public record of what groceries buy from inspected producers would give the consumer some background on the food and could avoid outbreaks like this.