Friday, December 19, 2008

The Global Credit Crunch: Benefiting House Buyers?

Despite the groans of Wall Street insiders over the housing slump, will the ongoing credit crunch be a good thing for prospective house buyers since real estate agents are now forced to slash prices just to make a sale?

By: Ringo Bones

Even though it is a sure sign of our ever-deepening global credit crisis when real estate agents and property developers start to aggressively slash their prices just to make a sale. They are even staring to reduce the prices of their “Root of all Gentrification” luxury-themed gated communities. Fire sale prices without the fire?

The bad news (or good news depending on which side of the transaction you lie) is that prospective buyers are still harboring a wait-and-see attitude. Understandably so given that property prices will certainly be slashed further in the near future. The better deal that’s still at hand in the near future can be too tempting to pass up. Worse still, the housing market could initiate a runaway deflation caused by delayed spending of the wait and see attitude of prospective house buyers.

No matter what side of the transaction you lie, sometimes you’ll wonder if this is just a simple by-product of the global economic downturn or a much-feared anti-gentrification backlash. Given that the new generation can now safely afford to be “noveau-poor” due to the new income opportunity paradigm provided by the Internet, they might be practicing a new form of Socialism for all intents and purposes. And since the “nuclear” family had fallen out of fashion for over 30 years now, real estate agents and property developers better start tweaking their antiquated business models if they chose to survive in our current climate of fiscal and consumer austerity.

The US Economic Downturn: A Boon for Indian Law Firms?

Rumored to have the world’s largest population of underutilized professionals, will the current US economic downturn be a good thing for Indian law firms?

By: Ringo Bones

Ever since globalization created the outsourcing market, low cost services – no matter how far away – has always been too tempting for the richest countries to ignore despite of quasi-protectionism legislation. And while the world markets waited with baited breath whether the US economic downturn will get much worse, the American economic hardship had inadvertently become a good thing to a service sector half a world away – namely Indian law firms.

Basing on the increased visibility of Indian law firms advertising on the Internet like the Singhania & Co. LLP Advocates and Solicitors for example, offering arbitration and all types of business assistance. And given that as a business model, outsourcing has proven to be very economically viable, it is inevitable that Indian law firms will soon be benefiting from the misfortunes of corporate America’s woes.

Outsourcing has since outgrown from the fledgling phoning in of DVD player queries. The evaluation of legal documents via legal outsourcing has recently reduced the cost overheads of US financial lawsuits and other corporate legalese and rigmarole. Given that corporate legal procedures are seldom cheap – especially when it involves filing for bankruptcy – every method of cost reduction, like legal outsourcing, had recently been in vogue. Looks like corporate America’s loss will be every Indian law firm’s gain. Looks like the US economic crisis might wind up helping others before it disappears.

Saturday, December 13, 2008

Pyramid Scheme Killed the Hedge Fund Star?

Dubbed by Wall Street insiders as a scandal bigger than ENRON, will the Bernard L. Madoff hedge fund scandal forever undermine investor confidence?

By: Vanessa Uy

When the 70 year old former NASDAQ chairman Bernard L. Madoff was arrested a few days ago as the result of an on-going investigation over might be one of the largest fraud case of the 21st Century. He is suspected of being responsible for creating a pyramid / Ponzi scheme disguised as a hedge fund firm that dates back to the 1960 which resulted in the defrauding of his investors by 50 billion US dollars.

Bernard L. Madoff started a hedge fund firm called Bernard L. Madoff Securities LLC was even regarded by many Wall Street insiders as “the birthplace of modern Wall Street” due to it’s pioneering business model. Bernard L. Madoff’s business model was deemed to tempting – even to seasoned investors due to his promise of relatively high return of investment when compared to the norm despite of the risks involved or the obvious lack of transparency. During its heyday, Madoff’s hedge fund firm was trading on average of 50 million shares a day. And even during October 2008, when the global financial crisis was already in full steam, his firm was still the 23rd largest market maker on NASDAQ.

What became of Bernard L. Madoff’s undoing is by running his hedge fund firm like a pyramid or Ponzi scheme, where money is being exchanged despite of the lack of trade in goods or services being provided – the primary reason that made it illegal. First tier investors were comfortably living off from the investment funds of latter entrants of their shaky pyramid scheme, which miraculously, only recently collapsed despite dating from the 1960’s. Bernard L. Madoff’s fraudulent dealings even predated mortgage backed securities and other complex credit derivatives which are primarily blamed for the ongoing global financial crisis.

Will Bernard L. Madoff’s stunt forever undermine investor confidence? Well, given that the start of 2008 saw the audacious rogue trading antics of Société Générale junior trader Jérôme Kerviel, lack of investor confidence will be the norm – rather than the aberrant exception – which will probably worsen our ongoing global financial crisis. Those new “green technologies” being peddled by newly elected US President Barack Obama will never get of the ground due to lack of investment. The pyramid scheme did indeed killed one of NASDAQ’s leading hedge fund “stars” by sending its greedy CEO to the slammer.

Monday, November 17, 2008

IMF and World Bank: Obsolete Financial Institutions?

Born out of the Articles of Agreement drawn up during the Bretton Woods Conference of July 1944. Are the IMF and the World Bank still relevant financial institutions in the 21st Century?

By: Ringo Bones

As the scheduled G20 Summit of the November 14, 2008 weekend at Washington, D.C. attempts to solve our current global financial crisis. Many leading academics of the financial world now wonder if there is a need to drastically overhaul the workings of the International Monetary Fund (IMF) and the World Bank since these institutions seem powerless in reversing the tide of current the global financial crisis whose worse is yet to come. Plus the criticisms of an overwhelming majority about the two institutions’ development programs which seems to entrap poor countries into an endless cycle of debt. Barring radical policy changes does the IMF and the World Bank still relevant in the 21st Century economic globalization that’s fuelled by credit and it’s derivatives?

Back in July 1944 at the Bretton Woods Conference - which was held in Bretton Woods, New Hampshire as a post World War II reconstruction and global development plan. The soon to be victorious Allied Nations were already planning their post World War II economic development in which Adolph Hitler was even powerless to utter the phrase “Are you already measuring the drapes?” in protest to this conference. The historic conference led to the establishment of The International Bank for Reconstruction and Development – also known as the World Bank – together with the International Monetary Fund or IMF under the Articles of Agreement. Among the main objectives of the former were stabilization of the foreign exchanges and improvement of foreign economic relations. Since the US dollar was then the form of currency in greatest demand, contributions to the Fund by the United States were to be an important ingredient in worldwide stabilization. The Bank’s headquarters are in Washington, D.C.

Presently, after many years of change, the consensus reached at the Bretton Woods Conference – were its used to be that various currencies were pegged against the US dollar and backed by gold as a means of global financial stability – no longer holds true. There are other countries that had managed to transform themselves into a formidable economic superpower rivaling that of the United States. Like China for example, with the country’s large currency reserves and strong economy has the ability to undervalue her own currency. Thus gaining an unfair advantage when it comes to the pricing of export products. But is our present global economic structure that’s modeled after the consensus reached in the Bretton Woods Conference of July 1944 is now having trouble keeping up with its commitment of promoting development of poor countries without entrapping them to an endless cycle of debt? The inability to efficiently adapt to recent financial trends, not to mention in tackling our current ever deepening global financial crisis.

Recently the G20 Summit in Washington with the official banner of “ Summit for Financial Markets and the World Economy” was beginning to be seen by many as “Bretton Woods Part II” or “Bretton Woods Version 2.0”. This is so because it has set some pretty lofty goals – in the staunchly conservative financial world it does pass muster as lofty - to end our deepening current global financial crisis. The world leaders in the G20 summit had very much reached a consensus to promote free market capitalism or free trade and the rejection of wholesale protectionism. Other notable reforms of the 10-page long G20 declaration include new regulations to curb risky practices of banks and other financial institutions. Credit Default Swaps – those extremely sexy financial instruments that instigated the current global financial crisis – are now targeted for stricter regulation by allowing them to be processed on a centralized clearinghouse for better monitoring.

The existing practices that make “common folks” bedevil the world’s two leading financial institutions, IMF and World Bank, were not tackled. Like measures to end free trade distorting trade subsidies and “debt entrapment” of poor nations. Though the powers-that-be say that the latest G20 Summit is only a part of a series of high-level meetings aimed at resolving our present financial crisis, I just hope that they will to their part to end our existing global financial woes. After all, this recovery process requires the involvement of everyone of us. I mean, isn't the G20's "Global Economic Crisis Action Plan" granting a bigger role for developing nations just a euphemism for "we need everyone's help"?

Thursday, November 13, 2008

Should the US Government Bailout Heritage Companies?

As the US financial crisis grows inevitably deeper, should the US Government bail out “heritage companies” via the American taxpayer’s money?

By: Ringo Bones

America’s “big three” automakers, namely: GM, Chrysler, and Ford had been in the headlines lately but not for the good reasons. The US top three automakers had been hard hit by the ongoing economic crisis, which if left alone the three leading car manufacturers would go bankrupt. But the question now is, should the US Government do what it can to save heritage companies – which America’s three leading carmakers surely does qualify as such – even to the extent of using the taxpayer’s money?

Throughout the developed world, heritage companies had always been perceived as an integral part of the country that they originate. The German government even legislated laws that only allow overseas Sovereign Wealth Funds extremely limited investments in their own heritage companies despite howls of protectionism accusations.

Ever since the global financial crisis became too big to ignore, the US Government acted upon several schemes to save ailing companies, which are perceived as heritage companies by many. Like the two leading equity loan providers of America: Fannie Mae and Freddie Mac, which if allowed to go bankrupt could make millions of American families homeless. Thus qualifying them as the most indispensable of the American heritage companies.

Though cars can be considered a luxury when compared to a secure roof over your head, America’s “top three” automakers are thus nevertheless very important heritage companies. Due to their historical significance and they also employ thousands of workers across the country. America would never be the same without them. But should the US Government save them? After all President-elect Obama’s economic recovery plan has a heavy emphasis on fiscal discipline.

To me at least, a financial bailout by the US Government on ailing heritage companies do make fiscal sense. And since the breakdown of the preexisting American free market capitalism is due to too much laissez-faire when it comes to government regulation. The switch over to state capitalism would be smoother and could serve as one of the conditions of a government funded bailout package. Which would make the economic recovery process more efficient since the companies can now be tailored to be in sync with the government’s economic recovery process.

Mortgage Backed Securities: A Serious Reaganomics Oversight?

The impact of unregulated Mortgage Backed Securities only reared its ugly head during the second half of 2007, turning the subprime mortgage crisis global. Human greed at it’s worst?

By: Ringo Bones

Well known for his staunchly laissez-faire economic policies, the former US president Ronald Reagan and his administration will forever be remembered for defending the underlying principles of American free enterprise. And also of promoting the Protestant Work Ethic as one of the leading principles that made the American economy what it was which made it outlast the former Soviet Union. But despite of the Reagan Administration’s sweeping economic reforms – affectionately nicknamed “Reaganomics” – that made the “Go-Go 80’s” possible. One of its serious oversights will forever mark the 1980’s as the “Decade of Greed”. Sadder still, the problem that drove our current global economy to the brink originated during this time period.

Back in 1977, Salomon Brothers and Bank of America jointly introduced the world’s first ever Mortgage Backed Securities or MBS. A college dropout initially hired to work in Salomon Brother’s mailroom, Lewis Ranieri, was assigned the task of selling these somewhat untested securities / bonds. Before the extensive Reagan Administration era lobbying in Capitol Hill made it available throughout America, Mortgage Backed Securities used to be legal in only 15 US states. Lewis Ranieri was then known to have a trader’s nerve and a salesman’s persuasiveness won lobbying battles in Washington that eventually removed legal and tax barriers against MBS. Ranieri then headed up a Salomon Brothers’ team that developed Collaterized Mortgage Obligations. Collaterized Mortgage Obligations are 2-year, 5-year, and 10-year Mortgage Backed Securities that are packaged to appeal to a variety of low, medium, and high-risk investors. Thus paving the way for the subprime mortgage crisis.

Though it is worth noting that the preexisting ideological climate of the Reagan Administration frequently confuses the Protestant Work Ethic with massive corporate earnings thus causing them to turn a blind eye when it comes to financial regulation. After all, it something earns money, then it must be good - right?

But everyone back then was too blind to see that Mortgage Backed Securities for all intents and purposes were high-risk bonds. As financial instruments, they are backed by more speculative or subprime mortgages, loans made out to high-risk borrowers. Which made them yield more interest than low-risk bonds. For 30 years or so, it was a veritable source of easy money until it triggered a subprime mortgage crisis that even hedge funds can’t even smooth out.

The incoming Obama Administration will now be facing a monumental task of solving a financial mess that can trace it’s roots back 30 or so years ago. It took 30 years of regulatory oversight to create our current financial crisis that is now sweeping across the entire world. Even the “greedy” people who caused this problem in the first place are no longer as rich as they used to be. And they used to claim that greed is good.

Monday, November 10, 2008

Is Obamanomics Socialism?

President-elect Barack Obama’s plan to save the US economic system has always been referred to by his detractors as socialism. But is “Obamanomics” merely just a system for spreading the wealth like it’s detractors claim it to be?

By: Ringo Bones

Our current global economic crisis can trace its pedigree back to the days of Reaganomics – i.e. the former US president Ronald Reagan’s view on economics that the Federal Government hinders rather than helps the US economic system. “Big Government” is bad for business and should get out of the way. Although right in many respects, I do find Reaganomics - as it was then affectionally called - somewhat hypocritical given that then president Reagan is staunchly against Marxist-Leninist Socialism / Communism. Yet he gave Wall Street overlords tax breaks and too much power.

It is a well-known fact that in the financial world – especially in the US – the existing financial power structure preclude their client’s opinions and views from ever becoming a factor in directing a financial company’s fiscal decisions. Thus the clients (this means every investing US taxpayer, including those government powers-that-be) must trust the financial company’s “top brass” – the Wall Street “ruling elite” to make the correct decisions for them. Using former president Ronald Reagan’s dictum “Trust but verify”, this makes the belief in an all wise and ever caring Wall Street a veritable twofold lie. A twofold lie because this assumes that the "ruling elite” at Wall Street knows what they are doing coupled with the assumption that the Wall Street “ruling elite” cares about the clients they are supposed to serve. But since socialism rests on the idea that one person can make a decision for another person without a working system of checks and balances, does this make the laissez-faire nature of President Reagan style economics / Reaganomics really just socialism in disguise?

I’m also one of those people who was never been able to have warmed up to the concept of trickle down economics – giving the ultra rich tax breaks to foster economic growth and working class prosperity. I’ve always viewed it like the way primitive cultures conduct human sacrifices to appease the gods. I mean if giving incentives to the very rich in the form of tax breaks really did benefit them, two things could have happened. Either they – the Wall Street ruling elite - would have been building mansions on the Moon by now thus generating an employment bonanza by hiring maintenance crews or have manage the economy so efficiently since the Reagan Administration that our current global financial crisis would not have happened. Ronald Reagan’s greatest oversight is probably the US financial system deregulation given that the root cause of the subprime mortgage crisis – namely mortgaged backed securities – had been busy making inroads into Wall Street since 1977.

Ever since the days of the Great Depression, successful schemes designed to fix the US economy always involved spreading the wealth. Each time the US Government creates roads, dams, and other infrastructure, it tends to spread the wealth around in the form of jobs. This scheme differs itself from Marxist-Leninist Socialism because it is governed by checks and balances that keeps corruption and malfeasance to the absolute minimum. But President-elect Obama better act fast on his plans to fix the American economy via infrastructure rehabilitation before the obstructionist policies of the opposing party can take hold. President-elect Obama should take advantage of this once in a lifetime chance of a party majority in the legislature to test out his Obamanomics to prove that there is hope yet for the long ailing US economy.

Thursday, October 23, 2008

Credit Rating Agencies Overhaul: A Way Forward for the US Economy?

Blamed by everyone in the financial world as the instigators of the global credit crunch. Will a credit rating agency reform revive the ailing US economy and possibly the rest of the world?

By: Ringo Bones

As of October 22, 2008, America’s three leading credit rating agencies – namely Moody’s, S&P, Fitch – had their respective CEO s testifying on Capitol Hill on the future stake of the credit rating industry. Credit rating agencies came under fire recently due to their dubiously unsound – and sometimes – illegal practices in order to gain competitive edge on their dealings. While forgetting what their respective companies are there for in the first place – managing financial risks.

As the US Congress’ House Oversight Committee grill the respective CEO s of the three leading credit rating agencies after the state of Connecticut sued them for illegal practices and credit rating abuse. The lawsuit was put forth by Connecticut Attorney General Richard Blumenthal after the US Securities and Exchange Commission (SEC) failed to pursue legal action against the three leading credit rating agencies during the last few years citing lack of resources for the failure to better regulate the credit rating industry.

Various credit rating “sins” scrutinized by the Congressional House Oversight Committee include the practice of notching on rating subprime mortgage backed securities citing the non-competitive nature of such a practice. The quality versus quantity nature of credit ratings – which companies pay on a per-deal approval basis – has come under fire. Especially on how the SEC, investors, the US banking industry and the major players of the global financial system’s perception of such practices as of late. Credit rating agencies are about managing financial risks, not overpaying executives for approving deals. Plus the long-term effects of such dubious practices by the three leading US-based credit rating agencies on accurate financial risk assessment. Will better government regulation of the credit rating industry be the best solution?

Wall Street insiders had been wary about the unsound credit rating practices of Moody’s, S&P, and Fitch in the few years leading up to the global credit crunch. The three leading credit rating agencies dubious practices had colored their credit rating judgement. Some financial insiders even accuse Moody’s of “drinking the Kool Aid” thus endangering millions of dollars circulating in the credit market system.

It’s about time that the US Government reign-in on the excesses and the unsound noncompetitive rating practices of credit rating agencies – especially on notching - because the current financial crisis has banks increasingly de-leveraging – i.e. lending less money to other banks. A practice that could spell financial disaster to our modern credit based economy if allowed to go on for too long. Maybe this overhaul of the credit rating industry will create a thaw on the global credit market to speed up the global economy which as of late is dangerously slowing down into a deep economic recession. For the sake not only of Wall Street but also of Main street as well.

Monday, October 20, 2008

On Bank Executives’ Extent of Accountability

The powers-that-be, the media and everyone had been demanding banking executives to be more accountable in their day-to-day dealings, but does this really work in practice?

By: Ringo Bones

Despite the powers-that-be and the media demanding bank executives to be more accountable of their financial / fiscal decisions and actions, we – the average investor – seems not to have any say on the matter. Why? , Because first and foremost bank executives are not placed in their positions by us citizens / voters. A case in point is what if Société Générale clients knew in advance of this year’s most famous rogue trader – Jérôme Kerviel’s intent. Can Société Générale clients threaten the banking board that if they won’t fire Mr. Kerviel, they will take their business – namely their cash deposits, portfolios and other investment instruments – elsewhere? Most likely it is a question of can’t rather than won’t. Like the recent shenanigans at Wall Street that lead to the downfall of Lehman Brothers and the US Government bailout of America's two largest equity loans provider - namely Fannie Mae and Freddie Mac.

Shouldn’t bank executives’ track records – from their C.V. s to their fiscal hits and misses - be made available for public scrutiny so that potential bank clients, investors and depositors can have a semblance of an informed choice – let alone arbitrage - on who will be handling their investment portfolios? Unless you belong to the top echelons of the Saudi Royal Household or if you happen to own a multi-million dollar portfolio forget about it. If it hardly works on our politicians running for public office, then one must try to reacquaint his or herself with the meaning of the words caveat emptor if they ever hope to maintain the economic viability of their respective portfolios during this hard economic times. Because in the real world, accountability ultimately starts and ends with you, the potential client.

Command Socialist Economy: Wall Street Reinvented?

Will the Bush Administration’s 700 billion US dollar bailout plan forever change the US economy from a free market economy to a tightly government controlled command socialist economy?

By: Ringo Bones

Ever since the eventual approval by the US Congress of the 700 billion dollar economic bail out plan to shore up America’s ailing economy in the wake of the failure of the country’s two largest equity loans provider – namely Fannie Mae and Freddie Mac. Many an opinion of the US Government’s 700 billion dollar economic rescue plan range from comparisons to the Bush Administration’s March 2003 invasion of Iraq - which could eventually result in a “Financial Abu Ghraib”. To the very radical transformation of the fundamental sociological / religious / ideological underpinnings of Wall Street’s perception of what free market capitalism should be.

Ever since Wall Street became a global financial powerhouse, the values that made it work are grounded not only in economist Adam Smith’s idealized version of capitalism. Capitalism that is not only centered on the fundamentals of a free market or laissez-faire economy, but also of the Protestant Work Ethic in which many a filthy-rich American patriot ascribes to the reason why the United States defeated the Soviet Union during the Cold War.

The bad news about free market / laissez-faire capitalism is that unlike Friedrich Nietzsche’s “warrior-poets with enlightened self-interests” of yore - who happen to be very good at self-policing / self-regulating. A laissez-faire economy appears to be unable to regulate itself. That’s why every economist from John Maynard Keynes onwards adopted a policy of government involvement in regulating the fundamentals of the free market economy to avoid it from cycling between the extremes of financial / economic bubbles that will eventually lead into a deep economic depression.

But regulation can also be taken so far. Like the idea of the Socialist Command Economy where only a few people – especially political party cronies – can get very rich. A case in point is one economist visiting the post March 2003 invasion of Iraq had labeled the country’s Saddam Hussein-era economy as a Socialist Command Economy, which – according to him - should be retooled as soon as possible for the good of the country. Though I wonder why Iraq’s crude oil rich neighbor Kuwait had lend 300 billion dollars to Saddam Hussein to fund their war with Iran during the 1980’s given that Socialist Command Economies tend to be given a low credit rating by the world’s leading credit rating agencies.

But isn’t the lack of regulation the root cause of our global financial crisis? Sadly the answer is yes because banks and other financial institutions are prone to adventurism when it comes to making money – i.e. the least effort for the greatest amount of profit. Which eventually is an anathema to the Protestant Work Ethic that everyone at Wall Street embraced in the first place. The easy money in which those who bought in early on credit default swaps, collaterized debt obligations, mortgage backed securities and other very complex financial instruments’ speculative bubble. Financial instruments whose sheer complexity supposedly will generously generate profits on it’s own accord (?), now increasingly looks like a multi-billion dollar pyramid scheme that ran our fragile global economy to the ground. Looks like we now badly need government leadership with the wisdom to distinguish between John Maynard Keynes and Karl Marx.

Saturday, September 20, 2008

Exchange Traded Funds: The Ideal Investment Vehicle?

Ever since it’s ad hoc genesis in 1989, exchange-traded funds or ETF s has been seen by many as the most innovative investment vehicle of the last two decades. But are ETF s too good to be true in the face of our current global economic slowdown?

By: Ringo Bones

Recently hailed by a number of investment savvy as one of the methods that made them profit from the sky-is-the-limit crude oil prices of July 2008, crude oil ETF s really paid their investors rich dividends. But is this just a case of Emperor Nero fiddling away while Rome burned to the ground thus forever reinforcing the notion that our current global financial system can only thrive in an environment of extreme financial disparity? To find out if ETF s truly deserving of this reputation, let us first examine what makes them tick.

An exchange-traded fund or ETF is an investment vehicle traded on the world’s stock exchanges, much like stocks or bonds. A typical ETF holds assets such as stocks or bonds by trading them at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Majority of ETF s are valued by pegging or tracking at an index, such as the DOW Jones Industrial Average or the S&P 500. An ETF is seen by many as attractive investments because of its low costs, tax efficiency, and stock-like features.

An ETF combines the valuation feature of existing mutual funds or unit investment trusts, which can be purchased or redeemed at the end of each trading day for its net asset value. Close-end funds are not considered to be exchange-traded funds, even though they are funds and are traded on an exchange. In general, ETF s will not require a lot of micro-management. You can simply set them up and forget them and then rake in the dividends. In fact, some investors take this to the extreme by building so-called “lazy portfolios”.

A poll was conducted on a group of investment professionals in March 2008. 67% of those polled say that ETF s are the most innovative investment vehicle developed during the last two decades, while 60% reported that ETF s have fundamentally changed the way investment professionals constructed investment portfolios.

ETF s had their ad hoc origins in 1989 with Index Participation Shares, which - for all intents and purposes - was an S&P 500 proxy that traded on the American Stock Exchange and the Philadelphia Stock Exchange. This product, however, was short-lived after a lawsuit by the Chicago Mercantile Exchange was successful in halting the sales of ETF s in the United States. A similar product, Toronto Index Participation Shares started trading on the Toronto Stock Exchange in 1990. The shares, which pegged the TSE 35 and later the TSE 100 stocks, proved to be so popular. The popularity of these products led the American Stock Exchange to try to develop something that would comply with Securities and Exchange Commission or SEC regulation to be sold on US soil.

ETF s had been available in the US since 1993 and in Europe in 1999. Exchange traded funds have traditionally been classified as index funds. But in 2008, the US Securities and Exchange Commission started to authorize the creation of actively-managed ETF s. Usually investors only buy and sell ETF s in market transactions. But institutional investors can redeem large blocks of shares of the ETF – known as creation units – for a “basket” of the underlying assets or alternatively, exchange the underlying assets for creation units. This creation and redemption of shares enables institutions to engage in arbitrage that causes the value of the ETF to approximate the net asset value of the underlying assets.

Exchange-traded funds offer public investors’ undivided interests in a pool of securities and other assets and thus are similar in many ways to traditional mutual funds. Except shares in an ETF can be bought and sold throughout the trading day like stocks on a securities exchange through a broker-dealer. Unlike traditional mutual funds, ETF s does not sell or redeem their individual shares at net asset value (NAV). Instead, financial institutions purchase and redeem ETF shares directly from the ETF. But only in large blocks that vary in size from 25,000 to 200,000 shares called “creation units”. Purchase and redemption of creation units are generally in kind. With the institutional investor contributing or receiving a basket of securities of the same type and proportion held by the ETF. Although some ETF s may require or allow purchasing or redeeming shareholders to substitute cash for some - or all - of the securities in the basket of assets.

The ability to purchase and redeem creation units gave ETF s an arbitrage mechanism intended to minimize the potential deviation between the market price and the net asset value of ETF shares. Existing ETF s have transparent portfolios, so institutional investors will know exactly what portfolio assets they must assemble if they wish to purchase a creation unit. And the exchange disseminates the updated net asset value of the shares throughout the trading day, typically at 15-second intervals.

In practice, many experts have viewed exchange-traded funds with mixed feelings. John C. Bogle, founder of The Vanguard Group, which is a leading issuer of index funds and – since Bogle’s retirement – of ETF s. Bogle has argued that ETF s are nothing more than a representation of short-term speculation because their trading expenses decrease returns to investors. And also, ETF s provides insufficient diversification. But Bogle later concedes that a broadly diversified ETF that is held over time can be a good investment.

But major investing institutions, like The Vanguard Group or Fidelity Investments for example, already control billions of shares. It is easy for them to create an ETF by simply peeling a few million shares off the top of the pile. Then putting together a basket of stocks to represent the appropriate index, say the NASDAQ composite or the TBOPP index made up for the start-up article. Does this serve as proof that patience and prudence together with a good perspective on the marketplace is still the cornerstone of a good and profitable business model then?

Wednesday, August 20, 2008

Crude Oil-Based Economics: Still Economically Viable?

After the high energy prices of July 2008 has done it’s worst to our fragile global economy still reeling from the credit crunch, will the present under 115 dollar-per-barrel crude oil prices be a viable long-term solution?

By: Vanessa Uy

Now that the furor over high-energy prices has (hopefully?) died down, does this mean the worse of the energy crisis is now far behind us? Well, not exactly. The crude oil prices which are steadily declining (hopefully)on a weekly basis is by no means immune from the Machiavellian-like machinations of commodities speculators, less than democratic nation-states, and most of all OPEC.

Throughout of its 47-year history, the Organization of the Petroleum Exporting Countries or OPEC has been a cartel in name only. Given that the people who still care about OPEC’s historical track-record probably experienced first hand back in the time when gasoline was still sold at 10 US cents or 25 US cents per gallon, probably compares it to some post-Pablo Escobar narcotics cartel. Forever endangering the democratically elected governments of Latin American countries by financing local terror groups. The question now is, is OPEC really like a narcotics cartel devoid of any semblance of Corporate Social Responsibility?

Sadly, this was proven back in the March 2008 OPEC meeting in Vienna. OPEC member oil companies declined to increase their production quotas despite fairly legitimate reasons to do so. At this time, crude oil prices were teetering just above 100 US dollars a barrel. Plus, the United States is either near or already in an economic recession with much of the rest of the world feeling the knock-on effects. OPEC ministers were nonchalant despite of the dire situation of our global economy back then. The OPEC ministers even choose to a consensus of reducing overall production because the inevitable global economic slowdown will probably reduce crude oil demand anyway. Is there something wrong with this picture?

What is wrong is that a fall in crude oil prices is one of – if not the main – mechanisms in which an economic recession or retail slowdown corrects itself. As crude oil prices now a mere shadow, relatively speaking, of its almost 150 US dollar a barrel peak back in July 2008, the US economy did got a little better. Despite the housing market still at a slowdown, everyone at the US Federal Reserve must had patted themselves in the back for formulating a monetary policy that saved the US economy – i.e. it strengthened back the US dollar. But the question now is, can we keep crude oil prices under 100 US dollars a barrel until the year 2050 were economically viable alternatives to crude oil fueled systems will be invented?

The problem with this scenario is that replacement technologies for our crude oil incumbent industry will never be invented if the economic incentives for doing so are not there. Despite the environmental harm, not to mention the political instability plus the cost in human lives of our young people in their prime dying in some senseless war just to keep crude oil prices artificially low. Our Quixotic search for cheap crude oil is one of the main stumbling blocks for the development and implementation of environmentally renewable energy technologies like solar photovoltaic cells and wind turbines. Imagine if Halliburton and their ilk were around back during the days of the Amistad Case. The whole world would probably still be engaged in the Transatlantic slave trade and using whale blubber to run our cars, heat our homes, and generate electricity.

For the sake of the global economy, America – the world’s last true superpower – must take the lead in developing new technologies to free the whole world being shackled to a crude oil incumbent economy. Or are the policymakers on Capitol Hill too blind to see that America's addiction to foreign (especially OPEC’s) crude oil has made the US economy a virtual mendicant to every other country’s Sovereign Wealth Funds. Plus, the present US Government can’t even provide justice to the genocide victims in Darfur, Sudan because the US Government borrows money from one of the perpetrators – i.e. Beijing Government – just to buy America’s present crude oil needs from OPEC.

Friday, July 25, 2008

Hedging for Crude Oil: An Unfair Leverage?

Even though the latest peak price for crude oil is still a tad under $150 before retreating a bit, this wild price swing has already done its damage to the global economy. The question now is; is the blame – like the crude – still plentiful to go around?

By: Vanessa Uy

Many factors are supposedly blamed for our current middle of 2008 high price of crude oil. From simple supply depletion (we are using up our “known” oil reserves at a rate of 8% annually at our current rate of consumption), to the “supposedly” increased demand from newly emerging economic powerhouses like China and India. Add to that the perennial issue of Geopolitical Instability thus making all of us eternally gullible to the excuses of the crude oil conglomerates’ reasons for jacking-up their prices once again. As of late, economists around the world seem to have reached a consensus that at least 60% of our current price of crude oil is due to unregulated futures speculation by hedge funds, banks, and other financial institutions. Which Capitol Hill counters yet again with a counter blame pointed squarely at OPEC and our present “Geopolitical Instability” - courtesy of the Bush Administrations’ Neo-Conservatives, Halliburton, and their ilk.

Speculation of commodities’ prices – especially crude oil – is not new. It’s been around since Wall Street opened for business. But it is always viewed by many with suspicion because it’s as far removed as a self-policing corporate entity with enlightened self-interests as it can get. Hedge funds are used in unregulated futures speculation by banks and other financial institutions using the London International Commodities Exchange (ICE) Futures and the New York Mercantile Exchange (NYMEX) futures exchanges. Add to that the uncontrolled inter-bank or “Over – the - Counter” trading to avoid regulatory scrutiny. Thus making the US margin rules of the government’s Commodity Futures Trading Commission that allows speculators – via a regulatory loophole – to buy a crude oil futures contract on the NYMEX by just having to pay 6% of the value of the contract. The “somewhat questionable” margin rules had recently fed the skyrocketing crude oil price frenzy, especially if you consider the unfair 16 –to- 1 leverage, which left us – the average consumer – holding the bag. Sadly, government regulators around the world are powerless to address the “apparent” injustice.

Luckily, this extremely large leverage of 16-to-1 that had driven our current crude oil prices to wildly unrealistic levels have been a “Godsend” to various petroleum companies and various financial institutions whether these firms admit it or not. As of late, high crude oil prices had become a valuable tool for these firms to offset financial losses incurred since the September 11, 2001 terrorist attacks and the more recent sub-prime mortgage debacle. Given the mainstream perception that “market forces” are inherently good and self-policing, does this mean that there is a “method” to this skyrocketing crude oil price “madness”? Meaning who among us in their right mind would easily assume that the multinational petroleum conglomerates would be inclined to practice corporate social responsibility every time these conglomerates’ profit margins go through the roof? - Definitely not me.

One “perceptual construct” of the GOP and oil lobbyists -run policymakers of Washington DC and also of the phobophobic mammon peddlers running Wall Street frequently used to justify our skyrocketing crude oil prices is the this “Hoax of Peak Oil”. The “Hoax of Peak Oil” is this perceptual construct of scant proof citing crude oil production has reached a point when more than half of all our global reserves have been used up. Thus forming a conclusion with no proof whatsoever that the world is already on the wrong side of the “Bell Curve” when it comes to plentiful and cheap crude. Not only is this idea been used to swindle the average consumer from our hard-earned cash but also sacrificed countless young men and women around the world in the prime of their lives in the name of “crude oil supply security”.

Many economists around the globe have now questioned the Industrial World’s inability to transition away from “petroleum incumbency”. More than half of them, are now weary that the recent speculative bubble in crude oil – which has gone asymptotic since January 2008 – is about to go pop. Sadly, crude oil might have to reach the $500 per barrel price before this bubble will burst or the “Industrialized West” embraces alternative energy – whichever comes first. Probably because of unscrupulous speculators and futures’ traders paroxysm (i.e. sudden violent emotion or action) against the increasingly rave reports on Fortune and The Economist about renewable energy – like wind and solar – receiving big time venture capital investments since 2005.

History has told us since the Exxon Valdez disaster of 1989 and the August 1990 invasion of Kuwait by Iraqi strongman Saddam Hussein that we must move on from our unsustainable “Petroleum Incumbent” transportation and energy systems with ever increasing urgency. Our crude oil addiction is just simply unsustainable. Not just in terms of preserving a healthy environment, a dynamic and equitable economy, but also of the high cost in human lives as well that the global crude oil conglomerates seem to continue to overlook.

Monday, June 30, 2008

Socially Responsible Tourism Anyone?

If we follow the “money trail” of our current tourism industry, chances are the locals living in our lucrative travel destinations receive very little – if at all – of the dollars that we shell out. Is it high time for something better?

By: Vanessa Uy

“Take only photographs and leave only footprints.” This enlightened adage which became increasingly popular during the 1990’s was meant as a guide in preserving our ecotourism sites for the next generation. But as ecotourism grew into a full blown lucrative industry a few years on, it seems as if everyone forgot to inject the concept of fiscal sensibility in managing this upstart form of tourism. After all, the “dollar value” of our ecotourism destinations can only be maintained if it’s ecological balance is preserved, and this won’t come for free. Especially if what we are trying to preserve is for all intents and purposes a tradable commodity.

But still there is often overlooked problem – the locals. Over the years, steps are already taken to preserve a typical ecotourism site’s biodiversity. Yet the locals are denied the benefits of the revenue generated by their local community. Some are even forcibly evicted from their ancestral lands every time a rich land owner buys large tracks of pristine wilderness to be developed into an ecotourism site which – sad to say – winds up looking like the Checkpoint on the 38th Parallel of the North-South Korean border. Some parts of the world, the ecotourism industry is for all intents and purposes still unregulated. Like here in the Philippines with the example I cited before where the facilities ending up like a hardened military base made to withstand a multi-megaton nuclear explosion rather than an inviting ecotourism site.

Though there are some schemes already existing where governments oversee that the money generated by ecotourism are appropriately allotted so that the locals can benefit from it. Like scholarships and training for those who want to serve as tourist guides and park rangers. Providing environmentally friendly cottage industry concessions for the locals like developing their own herbal and folk medicine / apothecary. And also for adequately budgeted scientific studies to accurately measure the impact of ecotourism. So that adequate measures for protecting the sites can be legislated. Sadly though, enlightened measures like these are the exception -–rather than the rule when it comes to the ecotourism industry.

Monday, May 5, 2008

Subprime Mortgage Loans: No Money, No Credit Rating, No Problem Service?

Ever since the subprime mortgage debacle became headline news in the latter part of 2007 that resulted to a massive slowdown of our credit driven global economy, economists are now formulating cures and future preventives. Will it work?

By: Vanessa Uy

Ever since President John F. Kennedy’s speech about sending a man to the Moon, political rhetoric has become the latest selling point of the American industry. If sending man to the Moon made the US Military-Industrial Complex rich beyond their wildest dreams, shouldn’t other political rhetoric – if exploited right – could – in theory - benefit other industries as well? Like the proverbial “American Dream” of home ownership. One of the latest proponents of the home ownership rhetoric is the current American President George W. Bush whose speech about fulfilling every working-class American’s dream of homeownership was even caught on TV. Given the less than stellar records when it comes to corporate social responsibility and ethical business governance of American financial institutions (the Savings & Loan scandal of the 1980’s is an excellent example), are these financial institutions up to task in fulfilling every working-class American’s aspiration of home ownership? To fully understand our current subprime mortgage debacle, lets examine first the history of equity loan providers in America and their stance about Civil Rights.

Back in the 1960’s when an overwhelming majority of the American financial institutions thought that the concept of corporate social responsibility, ethical business governance and fiscal transparency – which are now the most overused selling points of financial institutions - were mere ideological musings of Marx and Lenin back then. These financial institutions were even engaged in a practice that would be deemed unacceptable by Civil Rights groups today, and they called it “Red Lining”. “Red Lining” is a very controversial practice adopted by equity home providers’ back in the 1960’s. Equity loan and other financial service providers literally draw a red line around neighborhoods whose populations are overwhelmingly African-American, Hispanics or other cultural minorities as no go zones when it comes to giving these people access to home ownership loans. Thus forever denying these people the proverbial “American Dream” of home ownership.

When the Republican / GOP neo-conservatives gained congressional power during the Clinton Administration of the 1990’s. The American financial institutions were literally given a carte blanche to make money by any means necessary. The concept of “Reverse Red Lining” first gained its first tentative steps. By providing risky or subprime mortgage loans to cultural minorities or to anyone with subprime or shaky credit ratings, equity loan providers could now actually pretend on how caring they are by providing these very high interest loans. The loan providers could easily feign corporate social responsibility sine they are providing loans to a group of people whose loan application were denied or rejected by other equity loan providers. These subprime mortgage loan providers even went public by raising money via IPO s or initial public offerings. Almost everyone, Wall Street even bought into it lock stock and barrel. Even including investors outside America joined the subprime bandwagon. A remote town in Iceland even bought into this “subprime loan gold rush” by investing a sizeable part of their town’s fiscal reserves. Lucrative loans with inherently high risks gained as much allure as casino gambling. Thus explaining why when the subprime bubble collapsed, its effects were felt throughout the entire world.

When the painful pinch of reality set in, it’s the ones with marginal financial resources i.e. the subprime mortgages target customers – namely African-Americans, Hispanics and other minorities – who suffered the most. Refinancing companies are doing a very poor job of consolidating the debts of homeowners affected by the subprime mortgage crisis. Some financial analysts even questioned the wisdom of debt consolidation in alleviating the affected homeowner’s problems.

Many are now starting to question whether the subprime mortgage’s original core mission is to recoup the profits lost by American financial institutions. Is it to recoup lost profits due to the Savings & Loan scandal of the 1980’s, the “dot com” bubble of the late 1990’s and the interest rates in which the former Federal Reserve chairman Alan Greenspan decided to set for far to low for far too long. With the questionable wisdom of predatory lending’s ability to kick-start the ailing American economy is a matter of lengthy conjecture. Shouldn’t all of us gain some form of wisdom by avoiding as much as possible very risky investment strategies or maybe we should stop treating our houses as mere financial instruments / tradable commodities and more as homes were our heart truly belongs.

Hedge Funds: Financial Cloak and Dagger?

First made famous as a financial instrument that made spectacular hostile takeovers possible during the 1980’s “Decade of Greed”. Now used by speculators to drive up oil and food prices, will stricter regulation tame hedge funds’ unbridled avarice?

By: Vanessa Uy

Okay I’ll admit it – and so do maybe a large number of people – that the financial world’s bereft of any semblance of corporate social responsibility is what probably makes it interesting to outsiders. If ever corporate social responsibility or ethical business governance existed during the “Decade of Greed”, the movie “Wall Street” surely would have never been made. Part of the financial world’s “cash cow” that tore the financial world into two camps when it comes to the widespread adoption of corporate social responsibility are hedge funds. But before we proceed further, let us discuss first the arcane and rigmarole – infested world of hedge funds.

A hedge fund is a private investment fund that charges a performance fee and usually offered only to a limited range of qualified accredited investors. Unlike true blue Initial Public Offerings or IPO s, in which anyone with money or other requisite funds can qualify to invest. Alfred Winslow Jones was credited for inventing hedge funds back in 1949. While there is no legal definition of hedge funds under the US securities laws and regulations, the term hedge fund usually pertain to funds invested in more complex and risky investments ignored by most – if not all - public funds. As a hedge fund’s investment activities are limited only by contracts governing the particular fund, it can make greater use of complex investment strategies such as short selling, entering into the futures markets, swaps and other derivative contracts and leverage.

As the nomenclature implies, hedge funds usually avoid potential losses in the principal markets they are invested to by hedging it by any number of available methods. But a number of long-term investments had been inappropriately named as hedge funds, especially absolute-return funds. Even though these so-called “pseudo hedge funds” do not actually hedge their investments.

Hedge funds had always acquired a reputation of secrecy, a financial cloak and dagger if you will. This could cause serious headaches in its attempt to comply the transparency proviso of corporate social responsibility and / or ethical business governance. Unlike open-to-the-public “retail” funds - like US mutual funds - which are marketed freely to the public, in most countries, hedge funds are specifically prohibited from being marketed to investors who have no professional accreditation or to individuals with sufficient private funds. Sadly, this limits the information a hedge fund is legally required to release because divulging a hedge fund’s methods could unreasonably compromise their business interests. Thus limiting the pertinent information that a hedge fund is allowed legally to release.

Since a typical hedge fund’s assets can run into many billions of dollars and is always be multiplied by leverage, their sway over markets, whether they succeed or fail, is potentially substantial. There is even a continuing debate over whether hedge funds should be more thoroughly regulated. Given their current sway in the commodities markets, especially to crude oil and staple foods like rice, corn and soybeans, a more thorough regulation is indeed a long time coming. The bad news is that a more thorough regulation could be viewed by the majority in the financial world as a move from an already over regulated Keynesian style economics into a Soviet-era “Socialist Command Economy”. A move that would prove to be an anathema to an overwhelming majority in the financial world who had clung on to their Protestant / Calvinist Work Ethic like their lives depended on it.

Thursday, April 17, 2008

Corporate Social Responsibility: The Latest Praxis of Greed?

As the latest buzzword in the world of business and finance that’s a few steps away from economic recession, is corporate social responsibility just a ploy used by companies to make them appear way less greedy?

By: Vanessa Uy

Sometimes I ask myself weather the current coverage by the mainstream media regarding corporate social responsibility is actually confusing the general public’s already distorted perception on why companies embraces corporate social responsibility in the first place. From the lighthearted “there just buying into the latest must have fashion accessory” perception of corporate social responsibility. To the press’s overly simplistic painting a picture that start-up companies that embraced corporate social responsibility for “idealistic” reasons are actually holding back a tidal wave of greed and corruption doesn’t help matters either. Even though I see the overall good in corporate social responsibility especially when it comes to the environmental side of things. The truth of the mater - like the one used to be tackled by agents Mulder and Scully in the TV series The X-Files – is not what it seams to be.

More than just a “look how caring we are” public relations ploy of big corporations, corporate social responsibility can serve also as a company’s unique selling point especially in today’s slowing down markets. Anything that helps your company will be tried in these somewhat desperate times I’m told, but what’s the point? Why adopt a policy that would wind up your company to lose money just to avoid the general public’s “resentment” of the financially successful i.e. rich from being directed at your company? Before we get overly philosophical, let’s first explore this concept of corporate social responsibility.

Corporate social responsibility is now currently made up of three broad layers. The most basic is the traditional corporate philanthropy which many view only big companies with relatively long history can afford. Like Google’s 25 million-dollar philanthropy, which the company announced in January 2008 to be awarded to social projects that tackle poverty and climate change. The second layer of corporate social responsibility can be thought of as a branch of risk management. This is when companies talk to Non Government Organizations and to governments regarding the current pressing problems like the cost of living, the environment, and also create codes of conduct that allow them to be more transparent in their day to day operations. Companies also talk with their competitors regarding these things as to form a collective risk management scheme and in keeping their workers “happy”. In other words “enlightened self-policing”. The third of which is how corporate social responsibility makes a company appear “caring” to the rest of the world which creates value to the company in which can also be used as a unique selling point.

For whatever its worth, companies that had adopted corporate social responsibility since the 1990’s have been aiming to improve our two most pressing problems namely environmental protection and poverty alleviation. It seems like programs that address pre-existing environmental problems can also serve to improve local economic conditions. Concepts like organic farming, which crops and animals are produced without the use of harmful chemicals and animals are kept in free range as opposed to being kept in inhumane conditions. Fair trade, which farmers / producers are paid a fair price for their products as opposed to the lowest price allowed by law. Also sustainable utilization of natural resources like the Marine Stewardship Council or MSC which help keep fish stocks at a sustainable level while providing job security for the fishing industry.

Critics of corporate social responsibility say that it is just a cover used by companies who are performing badly and want rich treehuggers to purchase their initial public offerings with a perception that their clients are making a difference. But the results speak for themselves. Even though the mainstream press seems to over hype the political correctness of corporate social responsibility, embracing the idea for environmental reasons have not only improved the immediate environment of the companies that chose to, but the social conditions also improved. Companies that refurbish pre-loved / pre-owned computers to be either donated or to be sold at a bargain to impoverished communities are not only helping the environment by reducing the amount of e-wastes going into our overloaded landfills. They’re also creating new jobs and even future employment due to the computer literacy that results from donated computers.

Friday, March 14, 2008

Did Keynesian Economics Kill the Business Cycle?

Not so long ago, economists resigned themselves to the fact that recession is just a part of the economic cycle. Then came John Maynard Keynes who shattered that dogma and revolutionized the science of economics. Will “Keynesian Economics” save us from the harmful effects of the business cycle?

By: Ringo Bones and Vanessa Uy

Despite the problems affecting our global economy like sub prime mortgage exposure and the worrying trend of economic recession, we often tend to forget the fact that business conditions have always been fluid and dynamic. One year, the markets are booming and bullish with jobs aplenty. Another year, the stock market goes into a free fall, and bankruptcy courts become more crowded than the Tokyo Subway at rush hour. As chronicled in our economic history books: recession, expansion, then recession follows a sequential saga. And in the memory of the bad old days of ruthless capitalism that brought us Black Tuesday – October 29, 1929 – the day the stock market crashed. Tales chronicling the “Great Depression” even mentioned about banks failing by the thousands and a very drastic slowdown of the US economy that weeds started to grow on the materialistic self-complacent provincialism of Main Street.

America’s post-World War II economy which is largely – if not totally – governed by the principles laid out by John Maynard Keynes in the hopes of making the 1929 “Black Tuesday” incident just an ugly footnote of the American economic history. Thus in the United States, pure capitalism has gradually given way to a mixed economy, in which the government shapes the tax and fiscal policies to stabilize the ups and downs of business. “Keynesian Economics” which is viewed by “conservative” Americans with disdain because it tends to undermine the Protestant / Calvinist work ethic that helped built the American nation, which in turn downgrades productivity. Government “over regulation” of industries like the savings and loans has resulted only in disaster. Despite of it’s detractors, the economic policies laid out by John Maynard Keynes gain widespread praise by economists for keeping a full-blown economic depression from ever happening again. But as the Federal Reserve Board acts to control the money supply and counteract the business cycle, can we really conclude that recessions are a thing of the past?

But economists tend to forget that economics – in general – is primarily greed driven. The promise of rich rewards / gains despite atrocious levels of risks is what makes traders take foolhardy decisions at the expense of their representative investors’ funds. And yet we can take real comfort in the fact that economic recessions are milder in the “Keynesian Mixed Economy” environment than they where under the pre - New Deal capitalism. And if they occur, post – World War II economic recessions are also shorter in duration and much rarer in occurrence. Let’s just hope that our current post – sub prime mortgage / credit crunch 2008 will follow this trend. Maybe the “worries” that made our grandparents and great grandparents gray and wrinkled is something that the under 25s will scarcely know.

Monday, March 10, 2008

The Flavors of Recession

As we ring in 2008 with apprehension over the sub prime mortgage crisis and credit crunch that plagued the US economy during the latter half of 2007, the question remains: Is the US economy already in recession?

By: Ringo Bones and Vanessa Uy

One time honored wisdom states that if America sneezes, the rest of the world catches a cold. A colorful phrase used to describe economic recession and the primary reason why the rest of the world lives in fear – especially countries who exports most of their products to the US - every time the US economy heads into a downturn. But come 2008, the question on everyone’s minds still remains: Is the US economy already in recession?

But what is an economic recession? Who decides? For years, the press and the Las Vegas odds-makers had adopted this simple pragmatic definition: When the real Gross National Product (total value of all goods and services, corrected for inflationary price rises) declines for two quarters (6 months) in a row – that is an economic recession. This rough definition is adequate for most purposes, and surely more “refined” than its "blue collar" counterpart which states: When your neighbor looses his job, its only economic slowdown, when you loose your job, it’s a full blown economic recession.

Another definition of economic recession that is formulated by The National Bureau of Economic Research, a prestigious nonprofit organization that has kept the official score on the US economy’s business cycles. The “bureau’s” definition is based on more refined tests and measurements. Yet, for the most part, The National Bureau of Economic Research arrives at the same conclusions as the press and Las Vegas odds-makers did when it applies it’s own definition. Which states: “An economic recession is a recurring period of decline in total output, income, employment, and trade usually lasting six months to a year and marked by widespread fluctuations in the economy.”

As time went on, economist these days had discovered and defined a new species of economic recession called a “mini” or “growth-recession” which the current Bush Administration says best describes on what is happening to the US economy right now. Even though most Americans – especially those under the age of 30 – think that the credit crunch is a new and recent phenomena that only came to life near the end of July 2007. But the credit crunch did happen way before, back in 1966 to 1967, when the American people had to live with a “growth-recession” when a credit crunch curtailed housing starts and shaved 20% off stock prices. A mini or growth-recession is defined as follows: When output and employment grow for half a year or more at significantly less than their average trend rate of growth, an economy is in a “growth-recession”, even if actual growth rates never turn negative.

Even though American billionaire and now the world’s richest man Warren Buffett and the financial firm Merrill Lynch both said that the US economy is already experiencing recession at the start of 2008. The Bush Administration still insists that the US economy is only undergoing a slow down and can be easily cured with an Economic Stimulus Package. Does the Bush Administration dread the use of the “R” word (recession) because they think it will cause widespread panic? But the US economy is indeed now experiencing full blown recession because 2008 jobless rates are at a five year high, home repossessions are on the rise, Wall Street shaky as world markets watch. Plus the price of crude oil and basic foods now at a record high is not helping matters either.

As the US Federal Reserve Chairman Ben Bernanke slash interest rates further and the Economic Stimulus Package planned to be increased to 200 billion US dollars - the latest ones in the form of "auctions" that could well undermine a financial firm's credit rating, will all of these measures be able to turn around the ailing US economy from sliding further into a deep recession? It’s a bit iffy, because as the US Federal Reserve makes cheaper still the cost of borrowing money, the “financially inept” – sorry to say – will be driven further into debt. This is so because its primarily due to greed driven foolhardy decisions that drove these people to concoct get rich quick schemes that started all this mess in the first place. Unless an epidemic of “financial enlightenment” sweeps across the United States, bankruptcy courts will be standing room only beginning 2008.

Friday, March 7, 2008

Who’s Afraid of Stagflation?

Fast becoming an economic doomsayer’s buzzword in our post sub prime mortgage financial environment, will stagflation rear’s it’s ugly head again this 2008?

By: Ringo Bones and Vanessa Uy

Despite American economist, especially those in the pay of the Bush Administration, saying that the US economy is not yet in recession when we ring in 2008. But in our post - New Deal economic system that’s supposedly designed to keep economic recession a thing of the past, a form of economic malaise is now poised to threaten the on-going recovery process to lessen the impact of the sub prime mortgage crisis – namely stagflation.

Most of us living today – especially those under the age of 25 – has probably many questions to ask about stagflation, like: What is stagflation? Did stagflation happen before? Before we proceed, lets briefly discuss on what is stagflation and it’s primary causes.

When the post – World War II Keynesian Mixed Economy has alleviated the curse of old-fashioned economic depression and recession, it created the economic conditions that engendered the newfangled specter of stagflation. Stagflation is caused by a combination of stagnation in the production and employment sector with the inflation in the cost of living.

In 2008, stagflation now threatens China, Australia, and especially New Zealand whose individual Central Banks choose to raise the cost of borrowing money – i.e. raised interest rates – at a time when crude oil prices and food prices are at an all time high. The Las Vegas odds-makers say it’s a definite certainty that stagflation will definitely return in 2008, but let’s examine the economic conditions that made stagflation happen.

Back in 1979 during the Carter Administration, the economic slowdown of that year was primarily blamed on the artificially induced scarcity of the crude oil supply due to OPEC unable to respond the on-going geopolitical instability of the Middle East. This caused soaring food prices that contributed to the two-digit inflation that plagued America’s economy at the end of the 1970’s.

Then US President Jimmy Carter with the help of then Treasury Secretary G. William Miller, and then Federal Reserve Board Chairman Paul Volcker choose to cure the “inflation” part of stagflation back in 1979 by increasing the cost of borrowing money – i.e. raising interest rates. High interest rates on loans – 15% for large companies, 20% for less credit - worthy borrowers – were intended to combat inflation. The bad news is high interest rates adds to the cost in running a company and thereby leads to inflated prices. Some companies kept costs down by downsizing – i.e. laying off more “expendable” employees to keep their bottom line healthy. The poor and the unskilled members of the American society bore the brunt of the corporate downsizing during the latter days of the Carter Administration.

The fiscal oversight in tackling the 1979 stagflation documented on how President Carter and his financial advisers choose to reign in on the inflation part of stagflation because of their trust on “off the shelf” methods (or was it their trust of prevailing “off the shelf wisdom”) of tackling inflation are already tried and true. But at the expense of economic stagnation that prevailed well into the 1980’s. Let’s just hope that the Bush Administration’s “Economic Stimulus Package” has provisos for preventing the repeat of the 1979 stagflation because of the damage it could inflict on the already ailing global economy. A lot is now riding on the current US Federal Reserve Chairman Ben Bernanke’s decisions because it’s not just the American Economy that is on the line. The export - oriented economies of the Asian Far East will surely be affected.

Friday, February 22, 2008

Sovereign Wealth Funds: Altruism’s Road to Hell?

Touted as the primary means of revitalizing an ailing “economic system”. Do Sovereign Wealth Funds really help more than they inevitably hurt?

By: Vanessa Uy

Billionaire investor George Soros is one of those people who really have a high praise for Sovereign Wealth Funds. But how many of us have the investment savvy of George Soros? And most of all; will Sovereign Wealth Funds – if properly (and ethically?) used – help alleviate our current (2008) global economic slowdown? But first, a brief primer on what is a Sovereign Wealth Fund.

A Sovereign Wealth Fund is a fund that is owned by a sovereign state. These are usually composed of financial assets such as stocks, bonds, property or other financial instruments. Sovereign Wealth Funds are broadly defined entities that can manage the national savings for the purposes of investment. These pooled funds may have their origins in, or may represent foreign currency deposits, gold, Special Drawing Rights and International Monetary Fund (IMF) reserve position held by central holdings. In other words, Sovereign Wealth Funds are assets of sovereign nations, which are typically (but not necessarily) held in domestic and different reserve currencies such as the dollar, euro, and yen. The names attributed to the respective management entities may include central banks, official investment companies, state pension funds, sovereign oil funds and so on.

Even though it’s really beyond reproach that Sovereign Wealth Funds can save an ailing company or an “economic system”. But the problem of evil rearing it’s ugly head comes along when investors who are controlling a typical Sovereign Wealth Fund can now dictate the company’s policy – which they now own by the way and they can fire / replace the company CEO if he or she doesn't fall in line. Never mind the ensuing massive layoffs that typically occur if the “new management” thinks that this move will “streamline” the company.

This is why some countries are staunchly “Protectionists” when faced with the prospects and / or threats of Sovereign Wealth Funds. Imagine if The People’s Republic of China’s Sovereign Wealth Funds allowing the Beijing Government access to Lockheed Martin’s “Proprietary Trade Secrets”. And what about the Sovereign Wealth Funds of “Despotic Arab States”, are we ready to face another “New World Order”?

And then there’s the issue of corporate ethics and the latest corporate buzzword “Corporate Social Responsibility”. I’ll bet a number of us are wondering if their pension funds are used by the US Central Intelligence Agency to underwrite their “Extraordinary Renditions” program which sadly existing Sharia Banking Laws didn’t mention (preach?) about the sins of investing one’s money in the “Military – Industrial Complex”. Those of us who are weary of the evils of Capitalism should take a stand now.

Monday, January 28, 2008

In Banks We Trust

Ever since the news of the Société Générale bank fraud spread around the world, bank depositors and the general public are now wondering whether banks are part of the solution – or cause of the problem – of our current global financial crisis?

By: Vanessa Uy

As the French bank Société Générale prepares to close its offices for the weekend last January 25, 2008. A 31 – year – old Junior Executive Trader named Jerome Kerviel now dubbed as the “rogue trader” managed to loose a little over 7 billion US dollars worth of Société Générale’s funds by trading on the European Equities Market. An amount equivalent to 15% of the bank’s total assets or the amount the bank earns in an average fiscal year. The Junior Executive’s questionable action was defined as a fraud under established trading laws. Now under custody, investigators have doubts whether Jerome Kerviel acted alone. If found guilty, Jerome Kerviel may face a 5 - year prison sentence and hefty fines. Since the incident happened, ordinary bank depositors around the world – i.e. you and me – now doubt whether commercial banks and related financial institutions can do their part in solving the current “financial turbulence”.

For as long as I can remember, banks are seen as “agents of economic progress.” This is so because in school our teachers had instilled in us that if we save our money in banks - as opposed to stashing it in our “secret cookie jar” - we will be contributing to the economic progress and welfare of our nation. But recent events, like the Société Générale bank “fraud” case introduced a worm of doubt on everyone’s perceived trust between their money and their bank.

As of late, top economists had been pointing their fingers on the culture of “savings disparity” as the primary cause of the US credit crisis that is now threatening the global economy. These economists point out that on average, typical Americans save an equivalent of about 10% of their annual income, while in China its 50%. The prevailing wisdom about the role of banks on a nation’s / state’s economy lead the economists to conclude that the phenomenon of “savings disparity” is the overwhelming reason why – at present – the US Economy is weakening. While China’s remained strong despite the “bad decisions” made by US banks and related financial institutions that lead to the credit crunch and sub prime mortgage crisis. But since – taken as a whole – the global economy is a relatively complex dynamic system that’s continuously in flux, only time will tell if the Federal Reserve chairman Ben Bernanke and the Bush Administration’s resort to John Maynard Keynes – style economics. Like the 145 - billion dollar “Economic Stimulus” package that will supposedly prevent the US Economy from sliding into a recession. Or should everyone of us prepare for a repeat of the “Banking Panic of 1857”, or the draconian credit control measures of the Roosevelt Administration that lead to the “Bank Holiday” of March 4, 1933. Just remember what John Maynard Keynes wrote early in his career: “In the long run we are all dead.”

Wednesday, January 16, 2008

Structured Settlements: A Barrier to Social Justice?

Now more than ever, governments worldwide are forced to choose between the welfare of their citizens or in maintaining the “bottom line” of corporate entities.

By: Ringo Bones and Vanessa Uy

American social justice crusader Michael Moore had criticized structured settlements in his documentary “Bowling for Columbine” citing that -in practice- it is pro-corporation and anti-corporate victim. In the recent Heiligendamm G8, ATTAC-the anti G8 pressure group-are very clear on where they stand on the issue of structured settlements with their motto that states: “The world is not for sale.” But what is a “structured settlement”? A structured settlement is a financial or insurance arrangement- including periodic payments- that a claimant accepts to resolve a personal injury tort claim or to compromise a statutory periodic payment obligation. Structured settlements were first utilized in the US and Canada during the 1970’s as an alternative to lump sum settlements. Structured settlement payments are sometimes called “periodic payments.” A structured settlement that is incorporated into a trial judgment is called “periodic payment judgment.” Almost instantly after being instituted by the major economic powers in their judicial system, structured settlements were later adopted by London, Australia and the rest of the “Industrialized West.” If this form of settlement is being widely adopted by the Western World, then conventional wisdom dictates that this is a good thing – right?

In practice, the equitability of structured settlements break down when the claimant has became terminally ill and doesn’t have much time to live. This works in favor of the corporation responsible for the said injury/damage to the health and well being of the plaintiff. Back in June 2007, the BBC reported on a court appeal in the US to pay compensation to Vietnamese citizens affected by the defoliant “Agent Orange” then in use during the Vietnam War. The claimants lost on the first round of court hearings, but they vow to persevere.

Basing on what we currently know about the “Agent Orange” issue, the Vietnamese victims of the said defoliant face an uphill battle. Since the manufacturers of the “Agent Orange” used during the Vietnam War – DOW Chemical Corporation and Monsanto Corporation – have close ties to the powers-that-be on the Pentagon and Capitol Hill. Even though -at present- DOW and Monsanto are currently involved with structured settlements with American Troops who became chronically ill and developed cancer while being exposed to “Agent Orange” during their “Tour of Duty” in Vietnam during the 1960’s.

DOW and Monsanto’s “delay tactics” will only do the company favors since their yet-to-be-recognized claimants are slowly dying out. This might not pass as justice to most of us civilized folks, but it’s the law!

Thursday, January 3, 2008

Should We Be Investing in Gold

For the last 30 years or so, it’s a well-known fact that as the value of the US dollar decreases, the price of gold increases. In today’s post-US sub-prime mortgage economic climate, does it still make good fiscal sense to invest in gold?

By: Ringo Bones and Vanessa Uy

As the price of oil draws ever closer to the 100 US dollar-per-barrel mark, is our present (fiscal year 2007) global economy fast becoming into the economic climate that existed in 1980? Even though there are similarities like the Federal Reserve reigning in on credit and interest rates, the tumultuous political situations in the Middle East. The US$100 in 1980 is still higher in value after FTC algorithm-inflation-adjustments compared to US$100 circa-2007. Armed with this data, will the price of gold do a 1980 era repeat of reaching over the US$800 per-ounce price range?

With an aspect of Sharia Banking Laws fast becoming into vogue in Western financial sectors like the idea of financial institutions should only honor “concrete” or “tangible” forms of collateral, the lure of investing into precious metals –like gold- had recently become the hottest trend in high-yield investments. But the precious metals market is by no means strictly infallible and not immune from unlawful market manipulation. If anyone still remembers-or cares- about the “Hunt-silver debacle” will surely attest to this. At the beginning of the 1970’s the Hunt brothers – heir to the multi-billion dollar fortune of Texas oil/petroleum tycoon H.L. Hunt used their billions to purchase and hoard silver in an attempt to increase the price of silver to be comparable to that of gold. But near the end of March 1980, the Hunt brothers, along with a major Wall Street firm and U.S. securities and commodities markets came almost to the brink of financial disaster. Even though those were different times back then, if most of today’s current billionaires will do a “stunt” similar to what the Hunt brothers did -but to gold- the price of gold could reach US$10,000 per-ounce.

Our current allure of gold and its related retinue of precious metals, stemmed from the US sub-prime mortgage crisis that became news by the end of July 2007. During the succeeding months, the fallout of the US sub-prime mortgage crisis affected the global currency market – with their anchor – the US dollar weakened by inflation due to the Bush administrations current quagmire in Iraq. (At an average cost of US$1billion-per-week, it does seem like Uncle Sam is setting up a colony on a distant earth-like planet orbiting the star Alpha Centauri). Bonds and conventional bank savings accounts quickly lost their appeal as inflation drained their purchasing power. So investors and their dogs everywhere quickly began to turn to the oldest stores of value they can find – gold and related precious metals.

The novice investor may ask: “Why invest in gold?” Well, since the time paper money gained widespread appeal. These “paper money” –by common sense- should be worth just about or lesser than the paper on which it is printed on, unless the paper money’s value is backed-up by “tangible” or “concrete” assets namely gold, silver or the other related precious metals. But it is mainly the “gold standard” i.e. a monetary standard under which the basic unit of currency is defined via a stated quantity of gold circulating freely into the international financial system, hence the term “bank notes”. The reason we expend an almost excessive amounts of our mining expertise in obtaining this rare but almost useless metal, which even in “gold rush” days involves the “processing” of a ton of ore just to get 17 grams of gold. At present, even “processing” a ton of ore just to get 3 grams of gold is considered very economically viable. And also, it is because gold is what makes our paper money able to buy things i.e. purchasing power. The other uses of gold is in the jewelry industry, dental “bridgework” and electroplating electrical / electronic components to make them corrosion resistant.

While platinum is far more useful than gold and the gyroscopes of modern bombsights are made from it. Unlike gold or silver, platinum doesn’t occur in its native state in nature i.e. free elemental form. Platinum, and its related metal siblings on the Periodic Table namely rhodium, iridium and palladium are usually refined via proprietary chemical process that is a highly guarded trade secret. Usually a batch of beige - colored mud (ore concentrate) is added with a “secret” chemical mixture to obtain the pure metallic platinum and its metal siblings.

A lesser known metal that is more useful expensive, and rarer than gold is gallium. The main user of gallium is the electronics industry where it is used in making semiconductors with high switching speeds and “solid state” night-vision goggles. Without gallium, the green-tinged Paris Hilton Sex Video would not have been possible. Yet gallium plays no part in backing the value of our paper currency.

So what does this all mean? Being closeted –but fiscally challenged – philanthropists that we are. We do believe in charity –only during those times that we are practically overflowing with money. We’ve read “The Politically Incorrect Guide to American History” by Thomas E. Woods, Jr., Ph.D.. And the part of that book that really speaks to us is about how charitable giving grew at a faster rate during the 1980’s, described as “the decade of greed” (after the movie “Wall Street”?). Statistics had shown that charitable giving during the 1980”s really grew at a faster rate than it had during the previous 25 years. A really “scary” proof to the saying that: “greed is good”. Because of this, its now in the best interest of major charitable organizations like Oxfam and the UN Food Programme for us to “become rich”. With skyrocketing grain / staple crop prices due to the hastily set-up biofuel industry, the United Nations Food Programs food / grain purchasing power has been drastically reduced. So they need more money just to maintain their existing / basic programs.

The Dot Asia Domain Name: Kickstarting the Region’s Economy?

The age of Internet domain name real estate has finally arrived, will you be the next I.T. billionaire?

By: Ringo Bones

There’s a new domain name in our “Internet Town”, it’s called dot Asia (.asia). One of the latest lines of domain names that’s named after an actual geographic location. Looks like we used up all of those little Pacific Island nations as a source of domain names.

Interested customers to the auction have 6 months to register, so register as soon as humanly possible because these things go out fast. Registration for “dot asia” opened on Tuesday October 9, 2007. Protection wanted from cyber-squatters?

Back in August 9, 1995, nobody knew that the dot com boom that started then will eventually go bust five years later. Now, Internet entrepreneurs are more wary on the promise of easy money. Even experienced Internet domain name developers are forever mindful that their “South Sea” domains like Tuvalu’s dot tv and Tokelau’s dot tk might mimic the “South Sea Bubble Burst of 1720”.

To me, the IT / Internet / computer industry – after recovering from the dot com bust of 2000 - has done so much good to those fresh out of college looking for gainful employment, especially those living in the impoverished parts of the world. The industry could essentially fulfil the promise of the Clinton Global Initiative of keeping every batch of fresh graduates securely employed by creating new jobs – like domain name developers – every 5 to 8 years. If all goes well, this mission would be a piece of cake for the industry.

Lexington Law: Prosperity Tool or Needless Rigmarole

Now that on-line banking services are now as secure as their traditional equivalent, does the Lexington Law Firm’s service (promise?) of improving one’s credit score help or hinder our goal towards financial security?

By: Ringo Bones and Vanessa Uy

Since the advent of on-line banking, meeting ones financial needs like e-loans is now only a mouse click away. Some on-line banks have even adopted the concepts of Nobel laureate Professor Muhammad Yunus’ “Banking for the Poor.” You can now avail to a socially responsible investing by providing small business loans to the needy via the Internet. But as one’s on-line business keeps on growing, sooner or later, one will encounter “credit report” problems. Fortunately, there are service providers on-line whose business is to provide solutions to these kinds of problems.

As seen on their adverts, Lexington Law firm promises to improve your credit score and provide credit repair. Lexington Law firm has pioneered credit services over the Internet. Lexington Law firm has been providing credit repair services for many years and have a select group of experienced attorneys who specializes in credit repair. The law firm had helped over 90,000 Americans repair their credit by removing inaccurate, misleading or unverifiable items / information from their client’s credit reports. From bankruptcies to charge - off to tax liens, Lexington Law firm have challenged virtually every credit problem under the sun. They’re good at what they do because they believe in their work. Their attorneys enjoy what they do and are committed to their clients. This means they get you results that you –the client-can count on, results that can literally turn your life around.

Lexington Law firm ignited the consumer credit repair revolution in 1991 with their off-line credit repair services, and reinvented the consumer credit repair process in 1997 with it’s e-Client service. Lexington is committed to providing the best and most effective credit repair solutions to consumers through its innovative credit repair and Internet offerings. At present, Lexington has helped over 200,000 Americans repair their credit reports by removing inaccurate, misleading, or unverifiable information. The firm also promises 24 hour 7 days a week support, same day service, no hidden fees and their clients can cancel anytime.

Since their establishment in 1991, only a very small minority of Lexington Law firm’s clients experienced dissatisfaction of the services provided. Like the one client who voiced her opinion on, she said Lexington Law firm does “NOT” provide dispute letters to clients? Spam disputes only? While some of Lexington Law firms more extreme critics describe the firm as an “ENRON” waiting to happen.

From what I had observed so far, Lexington Law firm provides an invaluable service of improving one’s credit score especially in this age of on-line banking where prospective clients can only “meet” the bank manager in cyberspace. The service they provide could literally save your credit so that when the time comes when you need money in a hurry, there will be no problem asking your on-line bank for an e-loan i.e. to borrow money. I wonder if Lexington Law firm also includes credit counseling or a tip to reduce debt as part of their on-line service? Also, one can’t ignore the testimonials of thousands of their satisfied clients, which only serve to strengthen Lexington Law firm’s reputation.

Like all business related firms, only time will tell if Lexington Law firm will boom or bust in this new age of on-line banking where the primary goal of their clients is the acquisition of extra money. I just hope that they’ll survive the current July 2007 slowing down of America’s credit market.

Domain Names: The Internet’s Real Estate Bonanza?

From the 1990’s “Dot Com” boom to the bubble bursting in 2000, are domain names the magic bullet that will restore investor confidence on the Web?

By: Ringo Bones and Vanessa Uy

Touted as the “Real Estate Market of the Future” in the middle of the 1990’s, domain names are now a billion-dollar industry, not only for the major search operators like Google and Yahoo but also to a new breed of Internet real estate developers. Domain names have since become the “bread and butter” of the on line marketing and on line advertising business. Having outgrown the “dot com” slump of 2000, domain name – the real estate of the web – have been delivering far greater returns compared to it’s real world counterpart as reported on For those of you who have the resources to invest in the domain name development business yet don’t know what it is, here’s a primer.

Domain name refers to the first part of a URL - (URL stands for Uniform Resource Locator – the unique address of any Web document that can be keyed in a typical browser’s OPEN or LOCATION / GO TO box to retrieve a document) – on to the first / where the domain and name of the host or SERVER computer are listed. This is usually arranged in reverse i.e. name first, then domain. The domain name gives you the information on who (the origin of) “published” the page i.e. made it public by putting that page on the Web.

In the 1990’s – when the Internet evolved from a mere “academic curiosity” to a telecommunications medium with a promising economic viability – the exclusive right to use Internet domain names became a highly contested issue. Enterprising individuals knew that there’s money to be made in these unique sequences of letters that are divided – by convention – into segments separated by periods that correspond to the numerical Internet Protocol Addresses that identify each of the millions of computers connected to the Internet. Because domain name labels enable packets of information to be sent to their specific destinations across the Internet, the commercial implications are not lost to the world’s various advertising agencies.

Domain name development profits does not only fill the coffers of unscrupulous entrepreneurs, but can also benefit an impoverished country because all countries are designated a top-level domain name on the Internet usually as a suffix to that country’s Internet Address. For example .be for Belgium, .hk for Hong Kong, .ph for the Philippines, .za for South Africa and so on. A number of these domain names have been featured on stamps. During the last few years of the 20th Century, a relatively poor Pacific Island nation of Tuvalu hit the jackpot when it received the .tv domain name, although initially Tuvalu’s citizens didn’t realize that they owned the most recognizable suffix of all, .tv.

Back in 1999, the .tv domain name gained “humanitarian / philanthropic” status when Jason Chapnik – a Canadian businessman- walked into a Tuvalu parliament meeting and pleaded his intentions to buy their domain name. After further negotiations, by the year 2000 Tuvalu decided to sign up with Chapnik to form a new company called Dot TV that’s currently based in Pasadena, California. Tuvalu owns 20% of Dot TV and received US$50 million from the lucrative deal which the country – via structured settlement – receives quarterly payments of US$1 million each over a period of 10 years. Tuvalu recently received a payment of US$18 million that instantly doubled the country’s GDP.

This sudden windfall of revenue allowed Tuvalu to achieve an economically independent status. Ever since gaining independence in 1978, Tuvalu could hardly afford the US$20,000 UN membership fee. It wasn’t until September 5, 2000 where Tuvalu could finally afford being UN’s 189th member nation. The domain name revenue enabled the various islands of Tuvalu the ability to upgrade their public infrastructure like roads, schools and water purification facilities. The upgrading of Tuvalu’s main airport to accommodate larger planes has allowed the country to export food for the first time in history.

Despite of the recently found wealth, the global community is now wondering whether Tuvalu can cope with the challenges of sea level rise due to global warming and the increased typhoons brought about by climate change with “dot com” funds alone. Is Tuvalu now in the front line for the global community’s battle against sea level rise?