Thursday, January 29, 2009 2 comments ++[ CLICK TO COMMENT ]++

World Economic Forum at Davos turning into a joke

(This is sort of a political post)

Well, I guess it is only fitting that the World Economic Forum at Davos, attended mainly by senior bankers and senior government officials, marks the current malaise the world economy when fighting words and denials erupts into the public sphere.

The forum seems to have gotten off to a rough start even before it started when several key players in the current financial crisis were nowhere to be found. It seems that only one senior American banker, Jamie Dimond of JP Morgan, showed up, while the CEOs of other banks don't seem to have made an effort to trek over there, although John Thain of Merrill Lynch was planning to attend before being shown the door. Not to be outdone, the Brazilian president, Luiz Inacio Lula, skipped the WEF for the competing, some claim anti-capitalist, activist-driven World Social Forum in the Amazon:

Brazilian President Luiz Inacio Lula da Silva is shunning the World Economic Forum in Davos this week and the chance to hobnob with business leaders and 41 heads of state. Instead, he’ll join more than 100,000 activists from around the world at an anti-capitalist jamboree in the Amazon.

Going back to the Davos forum, we have some public fighting between the Turkish Prime Minister and Israeli President over the invasion of Gaza by Israel recently:

The packed audience, which included U.S. President Barack Obama's close adviser Valerie Jarrett, appeared stunned as Turkish Prime Minister Recep Tayyip Erdogan and Israeli President Shimon Peres raised their voices and traded accusations.

Peres was passionate in his defence of Israel's three-week offensive against Hamas militants, launched in reaction to eight years of rocket fire aimed at Israeli territory. As he spoke, Peres often turned toward Erdogan, who in his remarks had criticized the Israeli blockade of Gaza, saying it was an "open air prison, isolated from the rest of the world" and referred to the Palestinian death toll of about 1,300, more than half of those civilians. Thirteen Israelis also died.

"Why did they fire rockets? There was no siege against Gaza," Peres said, his voice rising in emotion. "Why did they fight us, what did they want? There was never a day of starvation in Gaza."

The heated debate with Israel and Turkey at the centre was significant because of the key role Turkey has played as a moderator between Israel and Syria. Erdogan appeared to express a sense of disappointment when he recounted how he had met with the Israeli Prime Minister Ehud Olmert days before the offensive, and believed they were close to reaching terms for a face-to-face meeting with Syrian leaders.

Obama's new Mideast envoy, George Mitchell, will be in Turkey for talks Sunday.

Obama administration has to somehow keep the Isreali-Palestinian problem from getting out of control. Given the collapsing US economy, the last thing American officials probably want to hear is word of escalating problems in the Middle East.

Not to be outdone, Vladimir Putin, the Russian Prime Minister, puts down Michael Dell, the CEO and founder of Dell, the computer company (Thanks to Crossing Wall Street for original mention):

At the official opening ceremony of the World Economic Forum in Davos, Putin, now Russian Prime Minister, delivered a 40-minute speech touching on everything from why the dollar should not be the sole reserve currency to how the world needed to enter into a smart energy partnership with Russia. Then it was time for questions. First up: Dell. He praised Russia's technical and scientific prowess, and then asked: "How can we help" you to expand IT in Russia.

Big mistake. Russia has been allergic to offers of aid from the West ever since hundreds of overpaid consultants arrived in Moscow after the collapse of Communism, in 1991, and proceeded to hand out an array of advice that proved, at times, useless or dangerous.

Putin's withering reply to Dell: "We don't need help. We are not invalids. We don't have limited mental capacity." The slapdown took many of the people in the audience by surprise. Putin then went on to outline some of the steps the Russian government has taken to wire up the country, including remote villages in Siberia. And, in a final dig at Dell, he talked about how Russian scientists were rightly respected not for their hardware, but for their software. The implication: Any old fool can build a PC outfit.

I was initially thinking that there might have been a translation erro but I think Putin is fluent in Russian, English, and German, so I doubt he misunderstood the question. Maybe the economic crisis is getting to Putin; or maybe not. Maybe Russians and Americans will never get along.

And finally, it seems that the only bank CEO that seems to have shown up is partly blaming regulators for the problems. Yes, Jamie Dimon, seems to think regulators are at fault, although he may have a hard time pulling that excuse on any bank shareholder, nearly all of them with massive losses:

At a panel on leadership yesterday morning before hosting a reception with champagne and canap├ęs at the Hotel Europe Piano Bar, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon expressed frustration at those who seek to pin all the blame on bankers.

“I take full blame for all the American banks and all the things they did,” said Dimon, 52, the only CEO of a major U.S. financial institution to attend the conference this year, adding that he knows that’s what people want to hear.

Regulators, he said, should share some of the blame.

“God knows, some really stupid things were done by American banks,” Dimon said. “To policy makers, I say where were they? They approved all these banks.”

Stephen Green, chairman of London-based HSBC Holdings Plc, also criticized regulators at a panel about capitalism on Wednesday. Green, 60, a Church of England lay minister who has written a book about reconciling a life in banking with his belief in God, called for “an overhaul of the regulatory environment.” He also talked about the need for self-regulation, saying that “no amount of rules is going to enforce good behavior.”

At a press conference on Jan. 28, he dodged the question of personal responsibility, saying only that “the banking industry” has “something to apologize for.”

HSBC and JP Morgan have not suffered grave losses--at least so far--so they have a greater case for blaming the regulators. But it still goes to show how bankers still don't realize the monumental mistakes they have made, and are unwilling to accept some serious responsibility. Perhaps the greatest arrogance is this private equity fellow from Carlyle:

One Davos regular, Washington-based Carlyle Group’s managing director David Rubenstein, said he thinks a key issues at this year’s gathering is “who is at fault.” Yet Rubenstein, who was saying at Davos two years ago that the outlook for leveraged buyouts was “very robust,” says responsibility shouldn’t be tied only to him or his industry.

“There are six billion people on the face of the earth, and probably about five billion participated in what went on,” Rubenstein said in an interview. “Everybody participated in some way or shape or form.”

The difference that seems to have escaped David Rubenstein, of course, is that the 5 billion people weren't responsible for the trillions of losses. Most of the losses are attributable to a few individuals and a few financial institutions. Trying to blame the average homebuyer or the average low-level banker is nothing more than pure arrogance and a blame-shifting exercise.

I suspect that David Rubenstein will be a bit more humble in an year or two. I think it was Jeremy Grantham (or maybe George Soros?) who said that the losses in private equity haven't shown up yet but will in a few years. Private equity has long lockup periods and will only start showing losses over several years. Unlike hedge funds, mutual funds, and investors like you and me, the assets owned by private equity are illiquid and don't generally have a daily price. It is possible that many private equity buyouts in the last 3 to 5 years will be worth exactly zero in 2 years. I am not predicting it but it is quite possible that Carlyle will be among those groups posting massive losses within a few years (as a side note, I would avoid investing in private equity unless you are making a distress investment or know that the assets the firm has are good.)


2 Response to World Economic Forum at Davos turning into a joke

February 3, 2009 at 4:03 PM

I'm hearing for endowments like Harvard to exit private funds... they are getting 50c on the dollar... not sure what "the dollar" is based on.. but there will be pain absolutely.

February 3, 2009 at 8:38 PM

The question is, how much of this is actual loss and how much is just irrational pricing? Since the endowments are theoretically super-long-term investors, they can literally hold forever. But, clearly a whole bunch of PE buyouts between 2005 and 2007 were questionable, at high prices and too much debt.

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