Ephemera

[trysail]

Worldwide evidence of the Medieval Warm Period:

http://pages.science-skeptical.de/MWP/MedievalWarmPeriod.html

 

[trysail]

Subprime Securities Market Began as `Group of 5' Over Chinese
By Mark Pittman

Dec. 17 (Bloomberg) -- Representatives of five of Wall Street's dominant investment banks gathered around a blonde wood conference table on a February night almost three years ago. Their talks over take-out Chinese food led to the perfect formula for a U.S. housing collapse.

The host was Greg Lippmann, then 36, a fast-talking Deutsche Bank AG trader who aspired to make mortgage securities as big a cash cow for Wall Street as the $12 trillion corporate credit market.

His allies included 34-year-old Rajiv Kamilla, a trader at Goldman Sachs Group Inc. with a background in nuclear physics, and 32-year-old Todd Kushman, who led a contingent from Bear Stearns Cos. Representatives from Citigroup Inc. and JPMorgan Chase & Co. were also invited. Almost 50 traders and lawyers showed up for the first meeting at Deutsche Bank's Wall Street office to help set the trading rules and design the new product.

``To tell you the truth, it's not very glamorous,'' Lippmann says. ``Just a bunch of guys eating Chinese discussing legal arcana.''

Those meetings of the ``group of five,'' as the traders called themselves, became a turning point in the history of Wall Street and the global economy.

The new standardized contracts they created would allow firms to protect themselves from the risks of subprime mortgages, enable speculators to bet against the U.S. housing market, and help meet demand from institutional investors for the high yields of loans to homeowners with poor credit.

Boom Turns Bust
The tools also magnified losses so much that a small number of defaulting subprime borrowers could devastate securities held by banks and pension funds globally, freeze corporate lending, and bring the world's credit markets to a standstill.

For a while, the subprime boom enriched investment bankers, lenders, brokers, investors, realtors and credit-rating companies. It allowed hundreds of thousands of Americans to buy homes they never believed they could afford.

It later became clear that these homeowners couldn't keep up with their payments. Defaults on subprime mortgages have so far produced about $80 billion in losses on securities backed by them. The market for the instruments is so opaque that many firms still aren't sure how much they've lost.

Chief executives at Citigroup, Merrill Lynch & Co. and UBS AG were replaced. To forestall a housing-led recession, the Federal Reserve has cut its benchmark rate three times since August and is injecting as much as $40 billion into the credit system to encourage banks to lend to each other.

`You Can't Wait'
This is the story of how Wall Street transmitted the practices of southern California's go-go lending industry and the inflated U.S. real estate market to the global financial system:

-- In Orange County, California, a mortgage lender named Daniel Sadek was among those who took notice of the increase in Wall Street's appetite for subprime loans. He turned the staff at his firm, Quick Loan Funding, into a subprime mortgage factory. ``You can't wait,'' said his ads, aimed at high-risk borrowers. ``We won't let you.''

-- In Dallas, a hedge-fund manager named Kyle Bass taught himself to use the contracts pioneered by Lippmann's group, then went looking for mortgage-backed securities to bet against. He found them in instruments based on loans Sadek made.

-- In New York, the ratings companies Standard & Poor's, Moody's Investors Service and Fitch Ratings put their stamp of approval on securities backed by loans to people who couldn't afford them. They used historical data to grade the securities and didn't adjust quickly enough for the widespread weakening of criteria used to qualify high-risk borrowers. Among the securities on which they bestowed investment-grade ratings: those backed by Sadek's loans.

`Robert Parker of Raw Fish'
Lippmann was a Wall Street renaissance man, with a strong appetite for sushi and an online restaurant guide so comprehensive one blogger labeled him ``the Robert Parker of raw fish.'' He opened the kitchen of the $2.3-million Manhattan loft he lived in then, complete with six burners, two grills and 20- foot island, to an Italian cooking class.

The goal of Lippmann's group on that winter evening in 2005: to design a new financial product that would standardize mortgage-backed securities, including those based on high-yield subprime loans, paving the way for their rapid growth. Of the firms participating that night, Lippmann's Deutsche Bank is based in Frankfurt, UBS in Zurich and the others in New York.

In February 2005, pension funds, banks and hedge funds owned fixed-income securities that were earning returns close to historic lows. AAA-rated securities based on home loans offered yields averaging a full percentage point higher than 10-year Treasuries at the time, according to Merrill.

Lure of Subprime
The trouble was that most creditworthy borrowers had already refinanced their houses at 2003's record-low mortgage rates. To meet demand for mortgage-backed securities, Wall Street had to find a new source of loans. Those still available mainly involved subprime borrowers, who paid higher rates because they were seen as credit risks.

While the group of five banks had packaged billions of dollars in subprime-based securities, in February 2005 none was among the leaders in the home-equity bond business. Countrywide Securities, RBS Greenwich Capital Markets, Lehman Brothers Holdings Inc., Credit Suisse Group and Morgan Stanley dominated the industry.

The banks wanted more mortgage-backed securities to sell to clients. Creating a standardized ``synthetic'' instrument, or derivative, would leverage small numbers of subprime mortgages into bigger securities. In this way, the firms could produce enough to meet global demand.

Building the Rocket
``We called up the guys we felt like we knew and could work with,'' Lippmann says.

Deutsche Bank sprang for the take-out food, and traders and lawyers sat down to design a new product and create what would soon become one of the hottest capital markets in the world.

The meetings were monthly, beginning at 5 p.m., after the trading day, and lasted more than three hours each.

``In the beginning, everybody brought their lawyer,'' says Lippmann.

Eventually, the Chinese food was replaced with deli fare because some participants complained it wasn't kosher.

The group sought to bring ``transparency,'' or openness, and ``liquidity,'' or trading volume sufficient to ensure ease of buying and selling, to the mortgage market.

The most important issues centered on how to account for the eccentricities of mortgage bonds, perhaps the most difficult-to-value securities on Wall Street. Unlike corporate bonds, home loans can be paid back at any time.

`Pay as You Go'
Traditionally, the best mortgage traders have been those who can read macro-economic trends to guess when homeowners will pre-pay their loans. Until recently, early repayment was perceived as the biggest risk faced by Wall Street's mortgage desks.

One concern with creating a standardized contract for mortgage-backed securities was that it was difficult to agree on a simple method of determining how market-changing events affected the values of the complicated, layered instruments.

To deal with the complexity, the group of five decided to install a ``pay-as-you-go'' system. When something happened affecting the cash flows underlying the security, the seller would have to make cash payments to the buyer immediately, and vice versa.

ISDA Steps In
As the group nailed down the details, the International Swaps and Derivatives Association, which sets trading terms for dealers, arranged conference calls including more of Wall Street.

To this point, some of the biggest mortgage underwriters -- Lehman Brothers, Merrill, Bank of America Corp. and Morgan Stanley -- hadn't been included in the negotiations. These firms heard about the talks and demanded to be let in.

On the conference calls, which included the market leaders, things got testy. One point in dispute was whether the contract should be traded on the basis of price or yield.

``Some of those points of detail were getting a little heated on the calls, and it was just thought it would be better to have a meeting face to face to move beyond those points,'' says Edward Murray, a London-based partner of the international law firm of Allen & Overy who was the chairman of the meeting and the outside counsel for ISDA. ``To be frank, the dealers that were not in the group of five were not that happy that there was a group of five.''

ISDA sought to resolve the differences by calling a sit- down meeting at its New York headquarters. Over coffee and pastries, Murray faced a crowd of dozens of traders and lawyers. Kamilla and Kushman acted as discussion leaders.

`Talk Was Very Firm'
``Rajiv would say something, and I'd be absolutely convinced about what he said,'' Murray says. ``And then Todd would say, `Well, I don't agree.' And I would be absolutely convinced about what Todd said. And then Rajiv would say `Well, the reason you're wrong is' and so on, et cetera.'' Kamilla and Kushman declined to discuss the negotiations.

Michael Edman, one of Morgan Stanley's representatives at the ISDA conference, was less chipper, Murray says.

``Arms folded, frown on his face, I'm not sure that's exactly true, but he wasn't in a happy-go-lucky mood,'' Murray says. ``There wasn't any shouting or anything, but the talk was very firm.'' Edman, who no longer works for Morgan Stanley, declined to comment.

By June, the differences were sorted out, the new contract was endorsed, and banks that hadn't been party to the group of five negotiations signed on. The banks would go on to create similar derivative contracts to trade securities backed by loans for commercial buildings and collateralized debt obligations, or CDOs, which are securities backed by various kinds of debt.

Creation of Index
Another necessary step was to create an index to represent the market and help hedge general market exposure. It was called the ABX-HE and would be similar to the indexes traders use for baskets of stocks. This, participants believed, would add to the market's liquidity, or depth, by attracting more trading.

By September 2005, some within Deutsche Bank were beginning to worry about defaults on subprime mortgages and how that might affect the securities based on them. A team of Deutsche Bank analysts that month warned of growing subprime market risks.

The ABX-HE index started trading on Jan. 19, 2006. At 8 a.m. on the first day, John Kane of Sorin Capital started phoning dealers. Kane, then 27, was a trader at Sorin, which runs hedge funds that invest in mortgages and other securities.

His auto mechanic, in describing the debt burden he was carrying to own a home, had planted the idea in Kane's mind that the housing market might be in trouble. Kane thought it through, ran an analysis on available data, and decided to wager against, or ``short,'' subprime. To do that, he turned to the portion of the ABX index dealing with the lowest investment-grade subprime securities.

Investors Go Short
The trouble was that quotes from brokers selling the ABX were already dropping, an indication that a number of investors wanted to do the same thing.

``All the other dealers were already scared'' and dropping their bids, Kane said while on a panel at a November industry conference. ``All but Goldman. So I bought from them.''

On its first day, the index traded more than $5 billion. The cost of wagering against the securities was rising, a sign that traders saw an increased chance of default. An early warning was visible to anyone who knew where to look.

The new derivatives were a hit among the group of five's customers -- the banks and other institutional investors that bought them to lock in high yields.

In the months to come, Deutsche Bank and at least one other member of the group of five, Goldman Sachs, began using subprime derivative contracts to bet the other way and guard against the possibility that subprime mortgages might default.

Lippmann Explains
For Lippmann's part, he says, it wasn't that he had ``any secret knowledge'' of the damaging events that were about to unfold in the U.S housing market. Rather, he says, he thought the risks of a downturn were significant enough to justify the millions of dollars it would cost to ``short,'' or wager against, subprime securities.

He says he told his bosses: ``If we're right, we're looking at a sixfold gain. And since a housing market slowdown is not as big a long shot as that, we should take the risk.''

Lippman disputes that the derivatives the group of five helped create -- which banks packaged into CDOs -- caused the subprime crisis.

``The problems in subprime are what they are and derivatives did not cause them,'' Lippmann says. ``Derivatives enabled more CDOs to be created and the stakes to be bigger. But the transparency made people realize the problem faster.''

Others see things differently. Derivatives, or ``synthetics,'' are ``like wearing a seatbelt that allows you to drive faster,'' says Rod Dubitsky, director of asset-backed research for Credit Suisse. ``The total dollar amount of losses, all these losses you're seeing, are from synthetics. No question, it changed the game dramatically.''

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aA6YC1xKUoek

 

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The Climate Science Isn't Settled
Confident predictions of catastrophe are unwarranted

By RICHARD S. LINDZEN, Ph.D.
Alfred P. Sloan Professor of Meteorology
Massachusetts Institute of Technology
Fellow, American Academy of Arts and Sciences, AGU, AAAS, and AMS
Member Norwegian Academy of Science and Letters
Member National Academy of Sciences


Is there a reason to be alarmed by the prospect of global warming? Consider that the measurement used, the globally averaged temperature anomaly (GATA), is always changing. Sometimes it goes up, sometimes down, and occasionally—such as for the last dozen years or so—it does little that can be discerned.


Claims that climate change is accelerating are bizarre. There is general support for the assertion that GATA has increased about 1.5 degrees Fahrenheit since the middle of the 19th century. The quality of the data is poor, though, and because the changes are small, it is easy to nudge such data a few tenths of a degree in any direction. Several of the emails from the University of East Anglia's Climate Research Unit (CRU) that have caused such a public ruckus dealt with how to do this so as to maximize apparent changes.


The general support for warming is based not so much on the quality of the data, but rather on the fact that there was a little ice age from about the 15th to the 19th century. Thus it is not surprising that temperatures should increase as we emerged from this episode. At the same time that we were emerging from the little ice age, the industrial era began, and this was accompanied by increasing emissions of greenhouse gases such as CO2, methane and nitrous oxide. CO2 is the most prominent of these, and it is again generally accepted that it has increased by about 30%.


The defining characteristic of a greenhouse gas is that it is relatively transparent to visible light from the sun but can absorb portions of thermal radiation. In general, the earth balances the incoming solar radiation by emitting thermal radiation, and the presence of greenhouse substances inhibits cooling by thermal radiation and leads to some warming.


That said, the main greenhouse substances in the earth's atmosphere are water vapor and high clouds. Let's refer to these as major greenhouse substances to distinguish them from the anthropogenic minor substances. Even a doubling of CO2 would only upset the original balance between incoming and outgoing radiation by about 2%. This is essentially what is called "climate forcing."


There is general agreement on the above findings. At this point there is no basis for alarm regardless of whether any relation between the observed warming and the observed increase in minor greenhouse gases can be established. Nevertheless, the most publicized claims of the U.N.'s Intergovernmental Panel on Climate Change (IPCC) deal exactly with whether any relation can be discerned. The failure of the attempts to link the two over the past 20 years bespeaks the weakness of any case for concern.


The IPCC's Scientific Assessments generally consist of about 1,000 pages of text. The Summary for Policymakers is 20 pages. It is, of course, impossible to accurately summarize the 1,000-page assessment in just 20 pages; at the very least, nuances and caveats have to be omitted. However, it has been my experience that even the summary is hardly ever looked at. Rather, the whole report tends to be characterized by a single iconic claim.


The main statement publicized after the last IPCC Scientific Assessment two years ago was that it was likely that most of the warming since 1957 (a point of anomalous cold) was due to man. This claim was based on the weak argument that the current models used by the IPCC couldn't reproduce the warming from about 1978 to 1998 without some forcing, and that the only forcing that they could think of was man. Even this argument assumes that these models adequately deal with natural internal variability—that is, such naturally occurring cycles as El Nino, the Pacific Decadal Oscillation, the Atlantic Multidecadal Oscillation, etc.


Yet articles from major modeling centers acknowledged that the failure of these models to anticipate the absence of warming for the past dozen years was due to the failure of these models to account for this natural internal variability. Thus even the basis for the weak IPCC argument for anthropogenic climate change was shown to be false.


Of course, none of the articles stressed this. Rather they emphasized that according to models modified to account for the natural internal variability, warming would resume—in 2009, 2013 and 2030, respectively.


But even if the IPCC's iconic statement were correct, it still would not be cause for alarm. After all we are still talking about tenths of a degree for over 75% of the climate forcing associated with a doubling of CO2. The potential (and only the potential) for alarm enters with the issue of climate sensitivity—which refers to the change that a doubling of CO2 will produce in GATA. It is generally accepted that a doubling of CO2 will only produce a change of about two degrees Fahrenheit if all else is held constant. This is unlikely to be much to worry about.


Yet current climate models predict much higher sensitivities. They do so because in these models, the main greenhouse substances (water vapor and clouds) act to amplify anything that CO2 does. This is referred to as positive feedback. But as the IPCC notes, clouds continue to be a source of major uncertainty in current models. Since clouds and water vapor are intimately related, the IPCC claim that they are more confident about water vapor is quite implausible.


There is some evidence of a positive feedback effect for water vapor in cloud-free regions, but a major part of any water-vapor feedback would have to acknowledge that cloud-free areas are always changing, and this remains an unknown. At this point, few scientists would argue that the science is settled. In particular, the question remains as to whether water vapor and clouds have positive or negative feedbacks.


The notion that the earth's climate is dominated by positive feedbacks is intuitively implausible, and the history of the earth's climate offers some guidance on this matter. About 2.5 billion years ago, the sun was 20%-30% less bright than now (compare this with the 2% perturbation that a doubling of CO2 would produce), and yet the evidence is that the oceans were unfrozen at the time, and that temperatures might not have been very different from today's. Carl Sagan in the 1970s referred to this as the "Early Faint Sun Paradox."


For more than 30 years there have been attempts to resolve the paradox with greenhouse gases. Some have suggested CO2—but the amount needed was thousands of times greater than present levels and incompatible with geological evidence. Methane also proved unlikely. It turns out that increased thin cirrus cloud coverage in the tropics readily resolves the paradox—but only if the clouds constitute a negative feedback. In present terms this means that they would diminish rather than enhance the impact of CO2.


There are quite a few papers in the literature that also point to the absence of positive feedbacks. The implied low sensitivity is entirely compatible with the small warming that has been observed. So how do models with high sensitivity manage to simulate the currently small response to a forcing that is almost as large as a doubling of CO2? Jeff Kiehl notes in a 2007 article from the National Center for Atmospheric Research, the models use another quantity that the IPCC lists as poorly known (namely aerosols) to arbitrarily cancel as much greenhouse warming as needed to match the data, with each model choosing a different degree of cancellation according to the sensitivity of that model.


What does all this have to do with climate catastrophe? The answer brings us to a scandal that is, in my opinion, considerably greater than that implied in the hacked emails from the Climate Research Unit (though perhaps not as bad as their destruction of raw data): namely the suggestion that the very existence of warming or of the greenhouse effect is tantamount to catastrophe. This is the grossest of "bait and switch" scams. It is only such a scam that lends importance to the machinations in the emails designed to nudge temperatures a few tenths of a degree.


The notion that complex climate "catastrophes" are simply a matter of the response of a single number, GATA, to a single forcing, CO2 (or solar forcing for that matter), represents a gigantic step backward in the science of climate. Many disasters associated with warming are simply normal occurrences whose existence is falsely claimed to be evidence of warming. And all these examples involve phenomena that are dependent on the confluence of many factors.


Our perceptions of nature are similarly dragged back centuries so that the normal occasional occurrences of open water in summer over the North Pole, droughts, floods, hurricanes, sea-level variations, etc. are all taken as omens, portending doom due to our sinful ways (as epitomized by our carbon footprint). All of these phenomena depend on the confluence of multiple factors as well.


Consider the following example. Suppose that I leave a box on the floor, and my wife trips on it, falling against my son, who is carrying a carton of eggs, which then fall and break. Our present approach to emissions would be analogous to deciding that the best way to prevent the breakage of eggs would be to outlaw leaving boxes on the floor. The chief difference is that in the case of atmospheric CO2 and climate catastrophe, the chain of inference is longer and less plausible than in my example.


http://online.wsj.com/article/SB10001424052748703939404574567423917025400.html

 

[trysail]

A Cherry-Picker’s Guide to Temperature Trends
(down, flat–even up)
by Chip Knappenberger
October 12, 2009

Accusations of cherry-picking—that is, carefully choosing data to support a particular point—are constantly being hurled around by all sides of the climate change debate. Most recently, accusations of cherry-picking have been levied at analyses describing the recent behavior of global average temperature. Primarily, because claims about what the temperature record says run the gamut from accelerating warming to rapid cooling and everything in between—depending on who you ask and what point they are trying to make.

I am often asked as to what is the “right” answer is. What I can say for certain, is that the recent behavior of global temperatures demonstrates that global warming is occurring at a much slower rate than that projected by the ensemble of climate models, and that global warming is most definitely not accelerating.

Choice of Cherries

But as to questions concerning just how far beneath climate model predictions the rate of warming is, or for just how long the average temperature of the world has not warmed at all, the answers depend on several things, among them the dataset you want to use and the time period over which you examine—i.e., which cherries you wish to pick.

Figure 1 illustrates the various cherry varieties that you have to choose from. It shows the global temperature history during the past 20 years as compiled in five different datasets (three representing surface temperatures, and two representing the temperatures in the lower atmosphere as measured by satellites—the latter being relatively immune form the data handling issues which plague the surface records).

http://icecap.us/images/uploads/cherry-pick_fig1.jpg
Figure 1. Global temperature anomalies from September 1989 through August 2009 as contained in five different data compilations. The GISS (Goddard Institute for Space Studies), NCDC (National Climate Data Center), and CRU (Climate Research Unit) data are all compiled from surface records, while the RSS (Remote Sensing Systems) and UAH (University of Alabama-Huntsville) data are compiled from satellite observations of the lower atmosphere.



To give you some guidance as to which cherries to use to make which ever point you want, I have constructed a Cherry-Pickers Guide to Global Temperature Trends (Figure 2).
http://icecap.us/images/uploads/cherry-pick_fig2.jpg
Figure 2. Cherry-Pickers Guide to Global Temperature Trends. Each point on the chart represents the trend beginning in September of the year indicated along the x-axis and ending in August 2009. The trends which are statistically significant (p<0.05) are indicated by filled circles. The zero line (no trend) is indicated by the thin black horizontal line, and the climate model average projected trend is indicated by the thick red horizontal line.


It shows the current value (though August 2009) of trends of various lengths from all of the five commonly used global temperature compilations. I compute the trends as simple linear least-squares fits through the monthly global average temperature anomalies for each dataset (from Figure 1). Each point in Figure 2 (for each dataset) represents the trend value for a different length period, beginning in September in the year indicated along the horizontal axis and ending in August 2009.

Starting in September of particular year and ending in August of this year produces a trend with a length expressed in units of whole years. For example, a trend starting in September 1999 and ending in August 2009 include 120 months, or 10 complete years. The values for the 10-yr trend for each dataset are plotted on the chart directly above the value on the horizontal axis labeled 1999. If the trend value is statistically significant at the 1 in 20 level (p<0.05), I indicate that by filling in the appropriate marker on the chart.

I also include several other items of potential interest to the cherry harvesters; first is the dotted horizontal line representing a trend of zero—i.e., no change in global temperature, and second, the thick red horizontal lines which generally indicates the average trend projected to be occurring by the ensemble of climate models. Bear in mind that red line only represents the average model expectation, not the range of model variability. So it shouldn’t be used to rule out whether or not a particular observed value is consistent with model expectations, but does give you some guidance as to just how far from the average model expectation the current trend lies (a cherry picker is not usually worried about the finer details of the former, but, instead, the coarser picture presented by the latter).

General Conclusions

Here are a few general statements that can be supported with using my Cherry-Pickers Guide:

• For the past 8 years (96 months), no global warming is indicated by any of the five datasets.

• For the past 5 years (60 months), there is a statistically significant global cooling in all datasets.

• For the past 15 years, global warming has been occurring at a rate that is below the average climate model expected warming

And here are a few more specific examples that the seasoned cherry-picker could tease out:

• There has been no (statistically significant) warming for the past 13 years. [Using the satellite records of the lower atmosphere].

• The globe has been cooling rapidly for the past 8 years. [Using the CRU and satellite records]

Or on the other side of the coin:

• Global warming did not ‘stop’ 10 years ago, in fact, it was pretty close to model projections. [Using the GISS and NCDC records beginning in 1998 and 1999]

• Global warming is proceeding faster than expected. [Using the GISS record staring in 1991 or 1992—the cool years just after the volcanic eruption of Mt. Pinatubo]

I am sure the more creative of you can probably think of many others.

Judging the Cherry Pickers

Another use of my Cherry-Pickers Guide besides choosing your own analysis, is to check and see what level of cherry-picking was required to support some statement of the behavior of global temperatures that you saw somewhere.

For instance, in a recent post over at RealClimate.org, Stefan Rahmstorf used about 10-yr to 11-yr trend in the GISS dataset to support the idea that global warming was proceeding pretty much according to plan, concluding “the observed warming over the last decade is 100% consistent with the expected anthropogenic warming trend of 0.2 ºC per decade, superimposed with short-term natural variability.”

A quick check of my Guide would show how carefully Rahmsdorf’s selection was made. Trends a few years longer or a few years shorter that the period selected by Rahmstorf would not have borne out his conclusion with as much conviction.

Another example of careful data selection can be found in recent claims made by Richard Lindzen who is fond of stating that “there has been no statistically significant net global warming for the last fourteen years.” A quick check of my Cherry-Pickers Guide shows Lindzen to be particularly crafty because there is no support for such a statement in any of the five datasets. So how did he arrive at that conclusion? By using annual data values instead of monthly data. Using fewer data points (14 annual values instead of 168 monthly ones) doesn’t affect the actual trend value so much, but it does affect the statistical significance of the trend. The fewer data points you use, the less significant the trend is. So by using annual data (from the CRU or satellite datasets), Lindzen is able to cite a 14-yr temperature trend that is not statistically significant.

The statements by Rahmstorf and Lindzen are not wrong, per se, but neither are they particularly robust.

So next time you encounter some claims about what recent temperatures tell us about global warming, or want to make one yourself, check my Cherry-Pickers Guide to get a full appreciation for the degree of grounding that such statements enjoy. And for those folks who want to push the envelope a bit, you’ve got to hope that your audience doesn’t have access to my Guide—otherwise, someone, somewhere, is sure to call you on it!



http://masterresource.org/?p=5240


Trysail note:
Thus, we have the modern temperature record ( which is not statistically significant and, in many cases, may not be accurate— see http://www.surfacestations.org ) and we have the historic temperature record ( the precise details of which are never going to be settled though there does appear to be agreement of historic temperature variability, the existence of various ice ages and the Medieval Warm Period ).

It appears to me that the reliability of the very data underlying the whole controversy is, at best, doubtful and, at worst, non-existent. I don't know about you, but as far as I'm concerned that doesn't inspire a great deal of faith in any theory based on that data.

 

[trysail]

[ Emphasis mine ]

Many of the proposed solutions (transparency, better peer review, etc) are probably unable to make much of a difference.

The real problem for society is that most of the key players (climatologists, news reporters, politicians) have already staked their entire reputations on the most gloomy doomsday scenarios coming to fruition (IF radical Copenhagen-like treaties are not immediately implemented).

Therefore, their REPUTATIONS, EGOS and CAREERS now DEPEND upon the most dire predictions of man-made global warming coming to fruition (or at least being proven true to some degree).

We all heard Phil Jones say that he honestly hopes climate change REALLY HAPPENS regardless of the consequences to humankind (in order to vindicate his extreme climate alarmism, for his own selfish reasons).

These were his words, not mine.

Oh, isn't that just great... The world's leading climatologist has an ego SO BIG that he'd rather see the end of the world than be proven wrong. Thanks Phil, you're my new hero dude.

...But Phil Jones isn't the only tribal member whose entire reputation and career (and ego) is riding on the most dire form of man-made global warming being proven correct in the future.

Other influential people like Gavin Schmidt, Trenberth, Hansen, Briffa, Ammann and Mr. Hockey Stick all have vested interests in the most dire doomsday scenario being proven true.

These people have wagered their very heart and soul (ego and credibility) on this doomsday scenario, and that's the real problem since their chips are now ALL IN.

...and the many mainstream news reporters (who cover the environment) have also staked their own career credibility (and egos) on this same doomsday scenario being proven correct.

BTW -- I'm not referring to Mr. Revkin, since in my opinion Mr. Revkin tries to be a bit more balanced than other mainstream reporters who often show no attempt at being balanced.

Can you imagine what would happen to the REPUTATIONS and CAREERS of these many people IF they all turned out to be on the wrong side of history?

The reporters? The scientists? The UN officials? The politicians?

All of these powerful people would be shown to be LAUGHINGSTOCKS ---- with their reputations in tatters and their career credibility over.

That's why even IF the current cooling trend continues until the year 2030, these same people will continue to scream that a doomsday is rapidly approaching. They'll simply say that our planet has entered a temporary "30 year cooling stage" which will soon be over. (LOL)

They have no choice at this stage --- since they've already wagered all their CHIPS on a doomsday scenario and thus have no other path to redemption.

This creates an insurmountable problem to overcome for climate science, since the collective interests of the key players (and news reporting institutions) have already been wagered.

I don't have many answers on how to clean up this rancid, wretched and contaminated world of climate science as it currently stands.

Unfortunately, simply getting rid of the known climate scoundrels wouldn't solve anything -- since the institutions standing behind these rancid scientists would simply seek out new scoundrels willing to sacrifice their morals for the institutions' pre-determined agenda.

There are simply too many second-string scientists waiting in the minor leagues for their chance to play in the majors (and the idea of selling their souls for this chance in the limelight probably sounds like a bargain to many of them).

We often look back at the ancient world and wonder how they could have foolishly worshipped a Sun God or a War God with such blind passion.

We wonder how the Catholic Church could have conducted the Inquisition and severely punished people merely for having the wrong thoughts.

However, just look at the state of climate science today.

The many academics who wish to study the OTHER side of climate science (the unpopular side) are ostracized and demonized. They are refused grants and funding. They are refused publication of their work much of the time. They are ridiculed and called childish sounding names. They can even lose their jobs at prestigious institutions if they voice the wrong opinions.

It's like a grown up version of a child's playground environment.

...and even the head of NASA's Goddard Institute is taking part in this child like behavior.

When the head of NASA's Goddard Institute (a supposedly scientific and non political organization) publicly states that certain skeptics of global warming should be put on trial for "crimes against humanity" (the same crime which Nazis were tried for) -- then clearly we've got an insidious problem in climate science.

As for me, I'm at least hoping that a few heads will be offered up on a silver platter after the smoke clears.

It won't solve the problem, but it also wouldn't hurt anything.

-"Mike Jenn"
Southern California
( I do not know if "Mike Jenn" is an internet nom de plume )

http://community.nytimes.com/commen...iles-and-climate-trends/?sort=oldest&offset=4

 

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Treasury Nominee Miller May Get $15 Million on T. Rowe Options
By Robert Schmidt

Dec. 1 (Bloomberg) -- U.S. Treasury Department nominee Mary Miller stands to get about $15 million exercising stock options earned during a 26-year career at T. Rowe Price Group Inc. if she’s confirmed by the Senate, according to her federal financial disclosure.

Miller, director of the fixed income division at T. Rowe, pledged to cash in and then divest more than 585,000 options after she becomes assistant secretary for financial markets. That income would come on top of $3.2 million in pay and $5.1 million from exercising other T. Rowe stock options, both earned in 2008 and 2009 through September, the form shows.

Miller would be one of three multimillionaires from the financial services industry nominated for a top Treasury post this year. While the payout dwarfs the earnings of the average American household, it reflects her tenure at the Baltimore- based asset management firm and isn’t the type of Wall Street windfall criticized in Congress and by President Barack Obama himself, executive pay experts said.

“That’s real money,” Richard V. Smith, head of the executive compensation practice at Sibson Consulting, a division of the New York-based human-resources firm Segal Co., said of Miller’s potential options income. “But a lot of the guys in the big investment banks, they get that every year.”

Historically, the Treasury has drawn talent from Wall Street, hiring bankers and others who’ve made millions. Treasury Secretary Timothy Geithner’s predecessor, Henry Paulson, amassed a fortune of more than $500 million in a career at Goldman Sachs Group Inc. and installed several others from the firm at the department, including Undersecretary for Domestic Finance Robert Steel.

Academics, Lawyers
As the $700 billion bailout soured many lawmakers and voters on the banking industry, Geithner turned more to academics and lawyers to fill his upper ranks of Senate- confirmed appointees.

Miller declined to comment, said T. Rowe spokesman Edward Giltenan. A Treasury spokeswoman also declined to comment.

Miller had a confirmation hearing on Nov. 20. She would be Geithner’s point person on managing the country’s finances, coordinating policy with debt markets, and overseeing federal, state and local finance. The Treasury plans to sell as much as $2 trillion in government debt in the fiscal year that ends Sept. 30.

Retaining Talent
Options, which companies use to attract and retain talent, let workers make future purchases of stock at a set price. Once an option vests, or matures, the employee can buy the underlying share at that exercise price, pocketing any gain in the stock since the grant date.

Over the past few years, stock options have faded as a preferred method of compensation, replaced by many companies with restricted stock. Unlike options, which only have value if a stock goes up, restricted shares are given to an employee after a vesting period so they are worth whatever the company’s share price is at that time.

Giltenan said T. Rowe uses a combination of stock options and restricted stock to compensate its employees.

Miller, 54, rose through the ranks since 1983 at T. Rowe, where she started as a municipal credit analyst.

Shares of T. Rowe, which has $366 billion under management as of Sept. 30, are down 20 percent since the start of 2008. The Standard & Poor’s 15-member index of asset managers and custody banks is down 40 percent over the same period.

Miller’s disclosure, required for top U.S. officials, also shows that she holds $25 million to $50 million in the firm’s common stock. She signed the form Sept. 28 and it was approved by the U.S. Office of Government Ethics in October.

Stock-Option Awards
Miller has 19 different option awards under the T. Rowe plan, the form shows. Eleven of those have shares that are vested and are in the money. The rest are either above the company’s current stock price or won’t vest for some time.

Miller indicated on her disclosure that she plans to exercise the shares that are worth money and then divest all of her T. Rowe stock within 90 days of her Senate confirmation. She will forfeit any options that aren’t yet vested.

If Miller cashes in the unexercised, vested options -- on more than 585,000 shares -- she would make a $14.9 million profit, according to calculations using yesterday’s closing share price of $48.93.

She’s also leaving about $1.8 million of options that are already in the money, but not yet vested, on the table. Miller would give up additional options that are priced above the current share price.

T. Rowe is slated to pay Miller an annual bonus, pro-rated for the months she has worked in 2009, the disclosure document said. She estimates that payment to be between $1 million and $5 million.

The Senate Finance Committee hasn’t yet scheduled a vote on Miller’s nomination, which also needs to be approved by the full Senate.


http://www.bloomberg.com/apps/news?pid=20601110&sid=aSeqIlhSquKI

 

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This is exactly, precisely the kind of "rinky dink" shenanigans and chicanery that warms the cockles of swindler's hearts— the future Bernie Madoffs of the world can't wait for "Cap and Trade" to be implemented.

Even the so-called "honest" ( with a wink and a smile ) folk at places like Goldman Sachs, Morgan Stanley, Merrill, World Wildlife Fund, Conservation International et al are drooling at the prospect of engaging in lots and lots of "fine print" deals that won't have much oversight.





Brazil Wants Limits on Use of Tropical Trees for Carbon Credits
By Jeremy van Loon and Adriana Brasileiro

Dec. 2 (Bloomberg) -- Brazil, whose Amazonia rainforest is the biggest in the world, wants a new climate agreement to limit the use of forests to slow global warming, putting a crimp on investors hoping to create carbon credits from trees.

South America’s largest economy will make the forestry proposal at next week’s climate summit in Copenhagen, where about 190 countries are trying to establish new reductions in greenhouse-gas emissions, Environment Minister Carlos Minc said.

Brazil will support a United Nations plan to save trees provided industrialized nations agree to use a maximum of 10 percent of their emissions targets to invest in forest projects, Minc told reporters. Otherwise, richer countries may overuse the program at the expense of making carbon cuts at their own factories and power plants, he said.

“After five rounds of negotiations with the governors from the Amazon, we decided to incorporate REDD in our national proposal but under certain conditions,” the minister said yesterday in Brasilia, using the initials for the UN’s “reducing emissions from deforestation and degradation” plan.

Brazilian leaders may even wind up keeping Latin America’s most populous nation largely out of the carbon market.

Ecuador, Bolivia and Costa Rica -- and not Brazil -- may generate the most carbon credits for participants, carbon market analyst Aimie Parpia said yesterday in an interview from London.

“Even though Brazil has the highest physical potential, it always looked unlikely that it will see much project activity,” Parpia said. That’s because the nation didn’t want to join a forest-protection market for credits. “Today’s announcement suggests that that they may be softening their stance.”

Amazon Deforestation
Brazil, with one-third of the world’s tropical forest cover, said last month it would offer to reduce its emissions by 38 percent to 42 percent from current projections for 2020. Slowing deforestation in the Amazon would generate about half of that reduction, it said.

Trees absorb carbon dioxide, the main man-made gas scientists blame for global warming. Removing forests to create pasture or room for mining projects or homes adds to the greenhouse effect that helps warm the planet.

Without Brazil, fewer credits will be offered to utilities such as American Electric Power Co. and PacifiCorp, owned by Warren Buffett’sBerkshire Hathaway Inc., under the plan being negotiated at the climate summit in Copenhagen this month.

Credits from preserving forests are going to be an important “transition” for economies including the U.S. that will likely need to meet CO2 targets without the technology ready in the near-term to do so, said Mark Tercek, a former Goldman, Sachs & Co. partner who heads The Nature Conservancy, which established a REDD project in Bolivia.

California to Bolivia
The Nature Conservancy has worked for a decade with American Electric, BP Plc and PacifiCorp, which owns seven hydroelectric dams on the Klamath River in Oregon and California, to create credits from forests in Bolivia.

The group spent about $11 million to buy out logging concessions, pay for monitoring and enforcement of the ban on logging, and help Bolivians to adapt their use of the forest.

“Forestry is going to be a very important tool in reducing carbon emissions because you can get very significant reductions fairly quickly,” said Melissa McHenry, a spokeswoman for AEP. She said the company aims to use the least expensive option for cutting emissions, including credits from forest protection.

Nations with tropical forests will need $10 billion to $40 billion in annual incentives not to turn their forests over to timber and agriculture industries, New Zealand said in a proposal to the UN Framework Convention on Climate Change, the Bonn-based supervisor of climate-protection treaties.

Under the Brazilian plan, only one-tenth of the gas reductions assigned to a developed country under any new climate accord could be covered by preserving trees,.

“If the target is a 30 percent emissions reduction, we propose a limit of 3 percent for the purchase of compensatory REDD credits,” Minc said.


http://www.bloomberg.com/apps/news?pid=20601087&sid=a14f6p4WUo9U&pos=9

 

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From The Sunday Times ( London )
November 29, 2009

Taking the private jet to Copenhagen

Any celebrity flying the green flag needs glittering eco-credentials. But how do they justify the fleet of customised planes, the luxury homes and the posse of servants?


Hypocrisy is the vice we find hardest to forgive, but it’s also the one we most enjoy discovering in others. And nothing piques our interest more than eco-hypocrisy as practised by the “green” celebrities who have been spouting green virtue but spewing out hundreds of tons of carbon from their private jets or multiple holiday homes around the globe.

There was Sheryl Crow, who had called upon the public to refrain from using more than one square of toilet paper per visit (“except on those pesky occasions when two or three are required”) and who was leading a Stop Global Warming concert tour across America. It was revealed that while Crow travelled in a biodiesel tour bus, her 30-person entourage followed in a fleet of 13 gas-guzzling vehicles.


John Travolta notoriously encouraged the British public to do its bit to fight global warming — after flying into London on one of his five, yes, five private jets (one of which is a Boeing 707). In 2006 his piloting hobby produced an estimated 800 tons of carbon emissions, more than a hundred times the output of the average Briton, according to the Carbon Trust.


It is less well known that Tom Cruise — who has campaigned for the LA-based environmental group Earth Communications Office — also has an air fleet and a licence to pilot his five planes, including a top-of-the-line customised Gulfstream jet he bought for his wife, Katie Holmes.


Harrison Ford, who is vice-chairman on the board of Conservation International, voices public-service messages for an environmental federation called EarthShare, and once shaved his chest hair to illustrate the effects of deforestation, is another hobby pilot. He once owned a Gulfstream but now makes do with a smaller Cessna Citation Sovereign eight-seater jet, four propeller planes and a helicopter.


Oprah Winfrey, who preaches eco-virtue from her TV pulpit, travelled in a 13-seat Gulfstream IV private jet for years — the preferred model for celebrities and the super-rich. (She has replaced it with a faster Bombardier Global Express.) The public first became aware of her private-jet habit when her plane had to make a forced landing in California in 2005; it was reminded of it this year after one of her stewardesses was fired for allegedly having sex with the pilot while Oprah and other passengers were asleep.


Jennifer Aniston told reporters that to save the Earth’s precious water resources she brushes her teeth while in the shower. But she also flew a hairdresser to Europe to accompany her on a recent publicity tour for the film Marley & Me.


Perhaps more egregious, because she is a much more in-your-face global-warming campaigner, is Dame Trudie Styler, film financier and wife of Sting. Not only do she and her husband run seven homes and travel between them in private jets and a fleet of cars, but in 2007 an employment tribunal revealed Styler was furious when her pregnant chef refused to travel 100 miles to prepare some soup and salad. (The chef had regularly made the trip in the past, travelling by train and taxi.) And Sting recently had to contend with accusations that the Police were “the dirtiest band in the world” because of the scale of their last tour and the carbon footprint of the fans who went to see them.


This spring Styler was accused of hiring a private jet to take her and an eight-person entourage from New York to Washington, DC, for the White House correspondents’ dinner, even though there are dozens of scheduled shuttle flights she could have taken, not to mention fast trains. Strangely, Sting flew commercial to the same dinner. When challenged, Styler reportedly defended herself by saying: “Yes, I do take planes. My life is to travel and to speak out about the horrors of an environment that is being abused at the hands of oil companies.”


U2’s latest world tour features three stages and a giant claw that ensures as many spectators as possible get a decent view. Alas, transporting the whole shebang around the world is estimated by carbonfootprint.com to produce the carbon equivalent of the annual emissions of 6,500 British homes — or a rocket trip to Mars and back.


Coldplay’s Chris Martin has been fingered as one of music’s biggest eco-hypocrites. George Monbiot, a writer and environmental campaigner, noted on his blog that Martin flew thousands of miles on his private jet, including brief trips between LA and nearby Palm Springs. Monbiot calculated that Martin’s trips back and forth to see his family produced 250 times the carbon emissions of an average Briton.


Monbiot also cited an interview Martin gave in which he discussed his angry global-warming song, then boasted about his family’s profligate private jet use, saying of his daughter: “As she gets older, hopefully she’ll come and see us when she wants. I always thought it’d be cool to be in school and say, ‘I’m not coming in today — I’m off to Costa Rica to see my dad play.’ I do think that wins you a few points.” Martin replied to criticism by pointing out that he paid for the planting of mango trees to offset the carbon emissions of his tours and flights home.


There are endless other examples of hypocrisy by green politicos. David Cameron was once photographed virtuously riding his bike to the House of Commons, with his official car behind him, carrying his suit and briefcase. Ken Livingstone, who swore he would make London the world’s greenest city when he was mayor, made scores of arguably unnecessary flights to foreign destinations. The supposedly green Barack Obama had a St Louis chef flown 850 miles just to make pizza at the White House.


At the end of the film An Inconvenient Truth, the unbearably earnest former presidential candidate Al Gore asked his audience: “Are you ready to change the way you live?” His own huge Nashville mansion consumed over 20 times the electricity of an average American home. Indeed, according to the Tennessee Center for Policy Research, it burnt twice as much power in the month of August 2006 than most American homes do in an entire year. Another inconvenient truth revealed that the former senator spent $500 a month just to heat the indoor swimming pool in his lavish domestic establishment. The 100ft houseboat he bought in 2008, on the other hand, was said to be powered by biodiesel.


Gore gave the usual response of the green celebrity caught not practising what they preach. He said he made up for his consumption of electricity and production of carbon dioxide by buying carbon offsets — some from his own offset company.


SUVs and four-wheel-drive cars are another eco-sin green celebs find hard to resist. Those who have harangued the public against driving these wicked vehicles — but who turn out to have recently owned at least one themselves — include Barbra Streisand, Gwyneth Paltrow and Cameron Diaz.


Of course, the SUV is often parked next to a virtuous Toyota Prius hybrid electric car, but the former doesn’t exactly cancel out the latter. However, as one Hollywood agent told me, the real reason so many people in Tinseltown drive a Prius is because “it’s the only car you can drive which costs under $35,000 which doesn’t make everyone think that your career has gone down the toilet”.


It was just as green activists began worrying about eco-fatigue — the green equivalent of compassion fatigue — two years ago that the first wave of celebrity eco-hypocrisy stories hit. The first thing these stories did was make us feel better about our own relatively minor eco-failings. They also allowed us to vent the irritation we feel about being lectured by actors, rock stars and lesser species of celebrity.


There is something annoying about the way “ordinary” people are being told they must give up their “addiction” to cheap travel, when no leading Hollywood star — not even Leonardo DiCaprio, who often flies commercial — can bring themselves to relinquish the private jet.


Yet there is something absurd about criticising celebrity eco-hypocrites. People who become film stars and rock gods usually do so because they want to join the jet set, and the jet-set life is inherently wasteful. It’s the profligacy that makes it fun and gives it its status. They are unable to give up their private jets because celebrity status is connected to travelling in the most exclusive way possible. Hence, just about all the things celebrities do to get away from “civilians” are unsustainable in green terms.


There are notable exceptions to the rule of green-celebrity hypocrisy. Ed Begley Jr from St Elsewhere and Best in Show became a vegan in 1970, bought one of the first electric cars, and has lived for years in a self-sufficient house that uses not just solar and wind energy but a toaster powered by a stationary bicycle. And unlike so many green celebrities, Begley Jr has a sense of humour about his crusade: on an episode of The Simpsons in which he plays himself, he is shown driving a vehicle powered entirely “by my own sense of self-satisfaction”.


The famous neo-hippie Woody Harrelson lives in a sustainable community in Hawaii, grows most of his food, uses only solar power, wears hemp clothes, eschews animal products, and fuels his car with biodiesel. Brad Pitt has done more than tell other people how to change the planet. His charity Make It Right New Orleans has built 13 ultra-energy-efficient greenhouses in an area devastated by Hurricane Katrina.


The Copenhagen summit next week will generate vast quantities of hot air. It will see 16,500 people coming in from 192 countries. That amounts to 41,000 tons of carbon dioxide, roughly the same as the carbon emissions of Morocco in 2006. Also, the organisers will lay 900 kilometres of computer cable and 50,000 square metres of carpet. More than 200,000 meals will be served and visitors will drink 200,000 cups of coffee — at least that will be organic.


When asked if the carbon footprint might have been reduced by turning Copenhagen into a video conference, a spokesman for the event said: “For such a major agreement, people need to meet together and negotiate face to face. We have delegates from all over the world. Video-conferencing systems are extremely useful, but they don’t match the personal touch. This is one of the main factors in having a good conference.”


Some of the charges laid against celebrities who are allegedly hypocritical about their green commitments are either unfair or don’t really stand up when examined closely. In 2008, Sting took a lot of flak when a US watchdog organisation, Charity Navigator, rated his Rainforest Foundation as one of New York’s worst charities. This was because only 41% of almost $2.2m raised at a Rainforest Foundation concert made its way to projects on the ground.


But while many leading charities spend at least 75% of their income on projects rather than fundraising and salaries, it is normal for charity concerts and balls to cost almost as much as they raise. Many of the better-known mega-charities spend a shockingly large amount of what they get from the public on fundraising, image advertising and swanky offices, but are not subject to the same scrutiny as organisations set up by a superstar.


It is also worth looking at the agenda of the green critics who slam celebrities for their eco-hypocrisy. They believe anything short of the immediate adoption of a pre-industrial way of life akin to that of peasant villages in the Middle Ages is a sellout. For them, Sting’s Rainforest Foundation is unforgivably capitalist.


Perhaps it is better that public figures say the right thing, even if they are not doing it themselves. Does it really matter that much that those who ask us to behave better are imperfect in their own behaviour? You could argue that if Trudie Styler believes that GM food, which she fiercely campaigns about, is a bigger threat than global warming, she is entitled to do so, and to fly her organic non-GM products from her Tuscan estate to the counters of Selfridges.


After all, it seems fairly clear that celebrity advocacy of green lifestyles does actually work, at least in the sense that it has made green concerns extremely fashionable.


Some of the nastiest accusations of hypocrisy have been thrown at the Prince of Wales. The “Green Prince” has been mocked for, among other alleged crimes, chartering a plane to South America to raise eco-awareness. Prince Charles’s spokespeople responded saying it would have been impossible to make 48 appointments across three countries in 10 days by regularly scheduled flights.


Unlike the common run of “green celebrities”, at least the Prince of Wales publishes annually an exhaustive green audit of all his homes and activities. Its content includes the paper usage of his household, the fact that his thirsty Aston Martin runs on bio-ethanol from wine wastage, and that his emissions for non-official travel are less than half of what they were two years ago.


If film stars and rock stars followed his lead by publishing their own eco-audits, the public might be more likely to listen to their exhortations.

http://women.timesonline.co.uk/tol/life_and_style/women/celebrity/article6931572.ece

 

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If you're rich, dying in 2010 makes a lot of sense.


Estate Trust Strategy May Save Taxes for Wealthy on Asset Gains
By Margaret Collins and Alexis Leondis

Dec. 2 (Bloomberg) -- Wealthy individuals who would rather give money to their children than the government may have a limited opportunity to put some assets in trusts that let them transfer wealth tax-free.

Grantor-retained annuity trusts, known as GRATs, or irrevocable, intentionally defective grantor trusts allow the appreciation of certain assets to pass to heirs free of estate and gift taxes, said Brittney Saks, a partner in New York-based PriceWaterhouseCoopers’s Private Company Services.

Stock and real estate values “have taken a pounding,” interest rates are low and Congress may soon change tax laws, said Stan Miller, senior shareholder at Miller & Schrader, a law firm based in Little Rock, Arkansas. “Those three factors combined have created what we think is the perfect storm for estate planning,” Miller said.

Current federal law taxes estates exceeding $3.5 million for an individual or $7 million for a married couple, at as much as 45 percent. Any gift to an individual above $13,000 this year may also be taxed as much as 45 percent with a $1 million lifetime limit per donor, according to the Internal Revenue Service.

Next year the estate tax is scheduled to disappear under a phase-out Congress approved in 2001. It’s due to reappear in 2011, taxing estates valued at more than $1 million at 55 percent.

Wealthy taxpayers are anticipating higher taxes and worrying that their children will have less opportunity to accumulate money, said Roy Ballentine, president and chief executive officer of Ballentine Finn, a wealth management firm with offices in Wolfeboro, New Hampshire and Waltham, Massachusetts. That’s created a sense of urgency to take advantage of opportunities now to transfer a lot of money with minimal tax consequences.

How GRATs Work
Here’s how a GRAT works. Taxpayers transfer assets such as stock to the trust and the value of the assets are repaid to them over a set period of time through a fixed annuity. Appreciation of the initial contribution above an interest rate set by the IRS transfers to beneficiaries tax-free.

As an example, an employee with a stake in social- networking site Facebook Inc. could transfer $200,000 -- 10,000 shares valued at $20 -- to a two-year GRAT, with his children as beneficiaries, said Jonathan Mintz, chief executive officer of WealthCounsel, an organization based in Madison, Wisconsin that advises estate planning attorneys. If the company went public and the shares rose to $100 by the end of the two-year term, the value transferred to the GRAT would total $1 million.

10-Year Term
The shareholder would get back the initial $200,000 plus 3.2 percent interest in annuity payments over the two years. The interest rate for a GRAT created in December is 3.2 percent, according to the IRS. The IRS rates are low because they are tied to the federal funds rate, which is near zero.

The remaining appreciation of about $800,000 would transfer to his children estate and gift tax-free, said Mintz.

Those who want to dictate how the appreciated assets are spent can keep them in the trust instead of distributing them when the GRAT’s term ends, said Mintz. They can specify the conditions for how the money can be used, such as for college or a first home, he said.

President Barack Obama’s 2010 revenue proposals include requiring a minimum 10-year term for GRATs. That limit may make these wealth-transfer tools less beneficial, said Scott Ditman, a tax partner specializing in trust and estates at New York- based Berdon LLP.

That’s because a longer-term GRAT means a better chance of the trust’s creator dying before the term’s end, Ditman said. If the person who created the trust dies before the term ends, assets revert back to the estate.

$10,000 Cost
GRATs may be inappropriate for investors who have a net worth less than $10 million because of the $10,000 or more cost associated with setting them up, according to Deborah L. Jacobs, author of “Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide,” which comes out in December. The trusts are irrevocable and creators should only set up GRATs if they don’t need to use the money locked up in the trust immediately and can afford to give away the appreciation on the assets in the trust, she said.

An irrevocable, intentionally defective grantor trust may appeal to taxpayers with family businesses or depreciated assets such as real estate, said Miller, of the Arkansas law firm whose clients range from Wal-Mart investors to family business owners.

“You’re taking an asset value at a time when it’s depressed and shifting that asset to a trust for a family member so that when the value rebounds, all of that upswing in value is not included in the client’s estate when the client dies,” he said.

Sell Asset
These trusts are more flexible than GRATs on the timing of the original investment repayment and may avoid another tax the IRS levies on wealth transfers to grandchildren, said Ballentine of Ballentine Finn.

With this strategy you may sell an asset to a trust, unlike with a GRAT, so it’s important to consider the consequences if the assets don’t appreciate, said Ballentine, whose clients have on average $66 million in assets.

“If assets in a GRAT fail to appreciate as expected, the GRAT automatically unwinds and you simply start over,” he said. With a defective trust, which is often financed by taking on debt, if the assets don’t appreciate, additional money put in the trust may be subject to the gift tax, Ballentine said.

Tax proceeds from estates this year will generate an estimated $11.8 billion, according to the Joint Committee on Taxation, a Washington-based, nonpartisan congressional committee. The House Ways and Means Committee said on Nov. 19 it may pass a permanent estate tax to prevent the current rules from expiring.

“I can’t imagine they’ll go a year without” reinstating the estate tax, said Dan Yu, a director at Eisner LLP, a New York-based accounting and advisory firm.

http://www.bloomberg.com/apps/news?pid=20603037&sid=a9gE8M2l88rM

 

[trysail]

http://www.bloomberg.com/apps/news?pid=20601103&sid=arQ0N_KviWz0

Sarbanes-Oxley Law May Be Reshaped by U.S. Supreme Court Clash
By Greg Stohr and Ian Katz

Dec. 4 (Bloomberg) -- A U.S. Supreme Court case may prompt Congress to scale back the 2002 Sarbanes-Oxley law, the measure that tightened oversight of financial disclosure after the Enron Corp. and WorldCom Inc. collapses.

The justices on Dec. 7 will consider a challenge to one of the law’s central features: creation of the Public Company Accounting Oversight Board as the auditing industry’s watchdog. A Nevada accounting firm and a small-government advocacy group say the board lacks the presidential control that the Constitution requires for executive branch agencies.

A decision striking down the PCAOB would leave it to Congress to re-establish the board with more oversight, setting up a legislative fight that might sweep in other aspects of Sarbanes-Oxley.

“When Congress enacts legislation to fix the board, that will provide a vehicle for opponents of the current Sarbanes- Oxley to propose amendments,” said Michael Carvin, a lawyer who will argue the case against the board for Beckstead and Watts LLP and the Free Enterprise Fund.

Lawmakers might propose amendments to shield banks from fair value accounting requirements, which require assets to be marked down to reflect market prices, or even to cut board members’ pay. Congress already is considering exempting small companies from audit requirements.

The PCAOB, which replaced a system of self-regulation by the accounting profession, is a private organization that performs government-type functions. The board has issued a series of accounting standards and taken 25 enforcement actions, imposing a $1 million fine on Deloitte & Touche LLP. The PCAOB draws up its own budget, sets board member salaries and funds its work by imposing fees on public companies.

SEC Oversight
Although all those actions are subject to Securities and Exchange Commission oversight, challengers say that isn’t enough. Board members are appointed by the SEC, not the president, and are removable only “for cause.” The SEC is an independent agency whose members the president can’t remove without cause.

“Anyone exercising significant regulatory authority needs to be ultimately controlled by the president,” said Carvin, a partner at Jones Day in Washington.

The Supreme Court said in 1935 that independent agencies are constitutional even if the president has only limited power to fire their leaders. That ruling spawned what has become known as the fourth branch of government.

Carvin called the PCAOB a fifth branch, even more removed from presidential control than other agencies.

Self-Regulatory Organizations
Supporters of the board say it fits into a 70-year SEC practice of using private self-regulatory organizations, such as the New York Stock Exchange and the Financial Industry Regulatory Authority, to help oversee companies and markets. Like the PCAOB, those organizations are supervised by the SEC.

“The board is not an independent agency,” said Richard Pildes, a New York University law professor who filed a brief for seven former SEC commissioners supporting the board. “It’s not an autonomous body. It’s an entity that functions under the complete and total control of the SEC.”

At the same time, the board has a desirable level of insulation from political forces, said Jeffrey Mahoney, general counsel of the Council of Institutional Investors in Washington.

“When accounting or auditing becomes a big issue here in Washington, generally on particular issues, the push usually is in a direction that is in direct conflict with investors’ needs,” said Mahoney, whose group supports the board.

Unfettered Authority
In an April ruling involving the Federal Communications Commission, four justices alluded to concerns about unfettered agency authority, referring to the “separation-of-powers dilemma posed by the Headless Fourth Branch.” That opinion, written by Justice Antonin Scalia, said Congress had wrested power from “the unitary executive.”

A fifth justice, Anthony Kennedy, declined to join that section, even though he endorsed the rest of Scalia’s opinion.

A federal appeals court in Washington concluded 2-1 that the PCAOB was constitutional. The dissenter, Judge Brett Kavanaugh, is a former law clerk to Kennedy, who may emerge as the swing vote.

Even if the justices find a constitutional problem, they could stop short of striking down the PCAOB and instead could simply increase the SEC’s power to remove members.

Congressional Action
Should the justices force congressional action, lawmakers already are contemplating other changes to Sarbanes-Oxley. Representative Scott Garrett of New Jersey, the top Republican on the subcommittee that oversees the SEC, said he would look into the requirement that top company officials sign off on financial statements.

Lawmakers also might question PCAOB salaries, now $672,676 a year for the chairman and $546,891 for other board members, compared with $400,000 for President Barack Obama and $174,000 for members of Congress. The board salaries are designed to make the jobs competitive with the private sector.

SEC Chairman Mary Schapiro makes $162,900, after receiving $3.26 million in total compensation last year as chief executive officer at the Financial Industry Regulatory Authority.

The uncertainty may already be taking a toll on PCAOB recruitment. Three of the five board seats need to be filled, and the regulator has lacked a permanent chairman since July. The SEC is poised to name Kurt Schacht, a managing director of CFA Institute in Virginia, as chairman, according to people familiar with the deliberations.

 

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If Barney Frank or Bernie Sanders or Chris Dodd or their ilk ever get their hands on the Fed, it's all over. They'll have the U.S. looking like Weimar Germany or Zimbabwe before you can say "banana republic."

~~~~~~~~~~~~~~~~~~~~~


Congress Is the Drunk at the Fed’s Punch Bowl
by Roger Lowenstein

Dec. 7 (Bloomberg) -- The U.S. Congress wants to ride herd over the Federal Reserve. It wants the power to scrutinize the Fed’s interest-rate decisions. It wants to look into how the Fed decides to lend to individual banks.

Like a lot of their constituents, legislators are angry at the Fed’s handling of the financial crisis. They want to know why the Fed permitted such a huge financial bubble to develop -- and why, when it burst, it bailed out so many banks.

Many of the criticisms of the Fed are valid. Former Fed chief Alan Greenspan, who oversaw the economy during the boom years, has admitted he placed too much faith in the ability of bankers to monitor their risks. Ben Bernanke, the current chairman, has been overhauling regulatory policy in the hope of preventing a repeat.

But here’s the thing. The changes that Congress is urging would make things worse. If anything, the Fed has been too sensitive to public opinion. And in the recent past, it was too eager to satisfy the public with an easy-interest-rate and easy- mortgage policy.

Last week, when Bernanke testified before the Senate Banking Committee, which is deliberating whether to confirm him for a second term, senators let him have it. Jim Bunning of Kentucky, more famous for throwing a perfect game in his baseball career than for his central banking expertise, called Bernanke “the definition of a moral hazard.” Bernard Sanders of Vermont, a state with fewer bankers than cows, is vowing to block Bernanke’s reconfirmation.

Serious Threat
Bernanke will surely be approved. But the threat to rein in the Fed’s power is serious. The Fed was created as an independent agency precisely so it could make politically unpopular decisions. A Bernie Sanders is unlikely to push for higher interest rates when they are needed. And history shows that political meddling in the Fed has led to serious problems for the nation’s economy.

William McChesney Martin Jr., who headed the Fed longer than anyone else, famously declared that the role of the chairman is “to take away the punch bowl just as the party gets going.”

Appointed by President Harry Truman, Martin served from 1951 to 1970. Even he succumbed to pressure. Toward the end of his tenure, he knuckled under to Lyndon B. Johnson and failed to raise interest rates as inflation was heating up. Johnson wanted cheap money to finance his domestic agenda as well as the war in Vietnam.

Cheap at a Price
And cheap money is what the country got. In the ‘70s, the U.S. experienced runaway inflation. Martin’s successors at the Fed were even weaker than he was. It wasn’t until Paul Volcker took over, in 1979, that the Fed showed the necessary toughness. By 1980 -- an election year -- Volcker had jacked the fed funds rate up to 20 percent. The U.S. suffered a terrible recession.

Volcker held firm even when congressional leaders demanded relief. Inflation was licked and hasn’t been a serious problem since.

Greenspan, Volcker’s successor, was just as independent. But he made major mistakes. His first big error was in tolerating the dot-com bubble. Then, in the 2000s, he kept interest rates very low, even as the housing market was soaring. In 2003, the fed funds rate was only 1 percent, and as late as 2005, the housing bubble’s peak, the rate was only 2.5 percent.

Even worse, the Fed failed to crack down on speculative mortgages, including subprimes, no-docs and full-purchase loans.

Congress is now proposing various changes. The House Financial Services Committee has approved a measure to direct Congress to, for the first time, audit the Fed’s interest-rate and lending decisions. That would increase pressure on the Fed to keep rates low and perhaps fuel the next bubble.

Feeling Pressure
Bernanke has already felt a hint of such pressure. Early in his tenure, he proposed that the Fed announce its inflation target publicly. Representative Barney Frank opposed him. Frank feared that if the Fed was committed to a specific inflation target, it would result in higher interest rates. The Fed backed off.

Meanwhile, the Senate Banking Committee is debating legislation that would transfer much of the Fed’s regulatory authority to a new consumer financial protection agency. This, too, would be counter-productive. Consumers naturally want all the credit they can get, and Congress and agencies under its control tend to think they are protecting consumers by pushing for maximum credit availability.

This is what occurred during the ‘00s. Congress repeatedly leaned on Fannie Mae and Freddie Mac to provide more mortgage financing and to loosen restrictions on people with poor credit. But policies that expose millions of people to foreclosure don’t truly “protect” either borrowers or society. The Fed, along with other regulators, let the housing bubble go on too long because it was wary of denying people mortgages.

More Latitude
Removing the punch bowl is never easy. Imagine how much more difficult the task would be if the Fed, or some new agency, were making its decisions under the hot breath of Congress.

In the future, the Fed will need more -- not less -- supervisory latitude. Preventing inflation won’t be enough. It will also have to monitor asset bubbles, as it failed to do with housing, and as may be required with the price of gold now.

Bernanke testified that the Fed has been “actively engaged in identifying and implementing improvements” in supervising financial firms, as well as in consumer regulation. He also said that the Fed, and others, made mistakes. It could do better next time. But putting elected representatives in charge of monetary policy isn’t the way to do it.

http://www.bloomberg.com/apps/news?pid=20601110&sid=asvyl3kHiJpQ

 

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A letter to one of the media's true believers:

Apparently, Richard Harris ( and NPR ) simply cannot stand the fact that there is no scientific proof of the hypothesis of anthropogenic global warming. How else can one explain Harris' repeated reports ascribing the public's disinterest in AGW to every possible explanation EXCEPT the fact that the public has become aware of that there is no proof of the hypothesis? The public is increasingly aware that the entire case for the AGW hypothesis rests on a shaky base of dubious data and A CONSTELLATION OF NON-LINEAR DIFFERENTIAL EQUATIONS with no demonstrable predictive capacity. Richard Harris has been duped into becoming a true believer of the hypothesis by a false patina of science. Unfortunately ( for NPR listeners ), he is incapable of admitting it. The non-scientific promoters of the AGW hypothesis allowed their rhetoric to get WAY AHEAD of the actual science and find themselves stuck in an intellectually untenable position.

Jethro ( known as Dragonlithp or Dragging Lips back in the Ozarks whence he and Jed Clampett hail ) is a gifted fabricator. We all know that Jed was a great success while Jethro/Dragonlithp is a n'er-do-well. His repeated failings are attributable to a faulty, naive and childlike belief in Holy Scripture authored by Grade D educational institutions, William Jefferson Blythe and the biggest charlatan-Pied Piper of them all, Kaiser Roosevelt II.

Government regulation and intervention have NEVER prevented bubbles and the operation of the business cycle. The collapse of economic bubbles has always been followed by false prophets and manipulative opportunists promoting painless quack remedies. The mountebanks never fail to claim the efficacy of their solutions when recoveries occur— as free market economies inevitably do— after the excesses that created the bubbles are purged naturally by operation of markets. The promoters of the simple fixes are as dishonest as the first set of schemers— merely another set in a long line of charlatans, foolish dreamers and would-be dictators.

In the latest episode, demagogues railed and browbeat and threatened and harangued and strong-armed and bullied— anybody with a pulse has a god-given right to a mortgage. Bankers lost their minds and "bought" their own pitches. Greenspan lowered rates to irresponsible and unconscionably absurd levels— all in the name of a quick and pain-free solution to the tech-bubble-insanity and 9/11. The media whooped and hollared about how everybody was getting rich flipping houses. Gurus proclaimed that residential real estate prices never decline. Result: the lemmings drank the Kool-Aid and produced another old-fashioned bubble— just like the tech stock insanity of 1997-2000, just like the commercial real estate madness of 1986-1989, just like the Nifty Fifty of 1966-1972, just like the conglomerate madness of 1966-1968, just like the South Seas bubble of the 1720s, just like the Tulip Bulb insanity of 1636.

The business cycle is and always will be. If you believe otherwise, I've got a bridge I'd like to sell you. Jethro/Dragging Lips is, of course, excepted because he/she/it suffers from severe cognitive and intellectual impairment and it would be beneath my dignity to take advantage of that fact.

http://en.wikipedia.org/wiki/Recession_of_2008
http://en.wikipedia.org/wiki/Recession_of_2001
http://en.wikipedia.org/wiki/1973–1974_stock_market_crash
http://en.wikipedia.org/wiki/Recession_of_1958
http://en.wikipedia.org/wiki/Recession_of_1953
http://en.wikipedia.org/wiki/Recession_of_1937
http://en.wikipedia.org/wiki/1929_Depression
http://en.wikipedia.org/wiki/The_Panic_of_1907
http://en.wikipedia.org/wiki/Panic_of_1893
http://en.wikipedia.org/wiki/Panic_of_1890
http://en.wikipedia.org/wiki/Panic_of_1884
http://en.wikipedia.org/wiki/Panic_of_1873
http://en.wikipedia.org/wiki/Panic_of_1866
http://en.wikipedia.org/wiki/Panic_of_1857
http://en.wikipedia.org/wiki/Panic_of_1847
http://en.wikipedia.org/wiki/Panic_of_1837
http://en.wikipedia.org/wiki/Panic_of_1825
http://en.wikipedia.org/wiki/The_Panic_of_1819
http://en.wikipedia.org/wiki/South_seas_bubble
http://en.wikipedia.org/wiki/Mississippi_Scheme
http://en.wikipedia.org/wiki/Tulip_bubble

http://en.wikipedia.org/wiki/Austrian_Business_Cycle_Theory
http://en.wikipedia.org/wiki/Business_cycle
http://en.wikipedia.org/wiki/Extraordinary_Popular_Delusions_and_the_Madness_of_Crowds




See:
Recession of 2008
Recession of 2001 (and The Great Internet Bubble of 1997-1999)
The Stock Market Crash of 1973
Recession of 1958
Recession of 1953
Recession of 1937
1929 Depression
Panic of 1907
Panic of 1893
Panic of 1890
Panic of 1884
Panic of 1873
Panic of 1866
Panic of 1857
Panic of 1847
Panic of 1837
Panic of 1825
The Panic of 1819
South _seas bubble
Mississippi Scheme (and John Law)
The Tulip bulb bubble


BusinessCycle

 

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Lithium Reserves for Electric Cars Let Bolivia Disrupt Markets
By Michael Smith and Matthew Craze

Dec. 7 (Bloomberg) -- The wind whips across a 3,900-square- mile expanse of salt on a desert plateau in Bolivia’s Andes Mountains. Plastic washtubs filled with an emerald-colored liquid rich in lithium dot the Uyuni Salt Flat, all the way to the volcanoes on the horizon.

Waist-high slabs of salt are piled around a pond that’s shimmering in the sun. Francisco Quisbert, an Indian peasant leader known as Comrade Lithium, sits inside a crumbling adobe building on the edge of the desert. He’s explaining how Bolivia, South America’s second-poorest country, will supply the world with lithium, which will be used in batteries that power electric cars.

“We have this dream,” Quisbert, 65, says. “Lithium could bring us prosperity.”

The world’s largest untapped lithium reserve -- containing enough of the lightest metal to make batteries for more than 4.8 billion electric cars -- sits just below Quisbert’s feet, according to the U.S. Geological Survey.

The automobile industry plans to introduce dozens of electric models with lithium batteries in the next three years. Bolivian President Evo Morales says his country can become one of the world’s biggest suppliers of lithium, making the nation of 10 million people a major player in the drive to cut the use of fossil fuels.

Even with its massive reserves, Bolivia has never built a lithium mine.

‘Lithium Is the Hope’
“Lithium is the hope not only for Bolivia but for all the people on the planet,” says Morales, who, according to polls, was probably elected to a second term in elections yesterday.

If Morales gets his way, he will upset a market now controlled by two publicly traded companies: Princeton, New Jersey-based Rockwood Holdings Inc., which is 29 percent owned by Henry Kravis’s KKR & Co., and Santiago-based Sociedad Quimica y Minera de Chile SA, or Soquimich.

These two companies produce about 70 percent of the world’s low-cost lithium from a salt flat in Chile, just across the Andes from Bolivia.

Investors are wooing President Morales to be partners in building a Bolivian mine. French billionaire Vincent Bollore, South Korea’s LG Corp. and Japan’s Mitsubishi Corp. and Sumitomo Corp. offered to join with Morales in the project. They’re already helping the government at no cost to design the mine.

So far, Morales has rebuffed outside investment, saying he wants to keep lithium in government hands to provide local Indians with jobs. Morales says he may change his mind if Bolivia can’t raise the $800 million it would cost for construction of a mine and processing plants.

‘Like Saudi Arabia’
“If the Bolivian state had the money, it would invest it,” he says. “If the state doesn’t have cash, then we’re going to look for investment.”

Quisbert, the orphaned son of a llama herder, helped persuade Morales in 2007 to pledge $6 million to start work on what could be the largest lithium mine in the world by 2014, says Saul Villegas, who oversees lithium reserves at state-owned mining company Corporacion Minera de Bolivia. Bolivia has 35 percent of the world’s lithium resources, according to the USGS.

“Bolivia could become like Saudi Arabia,” says Gabriel Torres, an economist for Moody’s Investors *Service Inc. in New York. “It has a huge amount of the world’s reserves.”

Carmakers are betting that electric vehicles built to run on lithium batteries will help the industry recover from its worst crisis in three decades. U.S. President Barack Obama’s administration is providing $11 billion in loans and grants to car and battery makers to reduce the country’s dependence on foreign oil.

42 New Models
The world’s auto companies plan 42 new electric models by 2012, according to an October study by PricewaterhouseCoopers LLP. Instead of running on gasoline, these vehicles will be powered by lithium batteries that are charged with electricity made in plants fueled by coal, natural gas, nuclear power, solar power and wind.

General Motors Co. says electric cars are critical for the once-mighty carmaker to restore its technical edge after it filed for bankruptcy in 2009. Electric models, such as the Volt, will help GM meet U.S. standards requiring automakers to increase the average mileage of their fleets as much as 40 percent by 2020.

“The Volt remains our top priority as far as advanced technology goes,” GM Vice Chairman Bob Lutz says. The company expects the Volt to get the equivalent of 230 miles (370 kilometers) per gallon (3.8 liters) of gasoline.

Treating Depression
By 2020, one in 10 cars manufactured -- or more than 6 million vehicles -- may be powered by lithium batteries, says Carlos Ghosn, chief executive officer of Nissan Motor Co. Car battery sales could jump to $103 billion a year in the next two decades, up from $100 million a year as of October 2009, according to a report by Credit Suisse Group AG. Ventures backed by A123 Systems Inc., Dow Chemical Co. and Johnson Controls Inc. are planning to ramp up production of lithium car batteries or cells.

About 75 percent of commercial lithium is still used for other things: It helps make glass and ceramics heat resistant, it’s a lubricant and it’s used in a drug to treat depression.

No other metal is better at holding a charge and dissipating heat with as little weight, making lithium the best ingredient known to make batteries for electric cars. Such batteries use a derivative called lithium carbonate to hold electricity they get when plugged into an outlet to be charged.

“Lithium is a very important commodity for the battery,” Ghosn says. “Obviously, we’re going to need to import a lot of it. Countries that have reserves of lithium are going to benefit.”

‘Could be a Rush’
Companies such as Apple Inc., Hewlett-Packard Co. and Nokia Oyj started using rechargeable lithium ion batteries a decade ago, and today they are in millions of iPods, computers and mobile phones.

“There could be a rush to grab up supplies of lithium,” says Alex Molinaroli, president of Johnson Controls Power Solutions, part of the world’s biggest car battery maker. “You’ll see different folks positioning themselves to secure rights to lithium in the future.”

Still, electric cars are a gamble. No one knows how many consumers will buy them, and they’re a long way from performing like gasoline-powered vehicles. GM’s Volt, planned for production in 2010, can go only 40 miles before its battery is drained. Then, a gasoline-powered generator kicks in. An owner can recharge the battery by plugging it into an electrical outlet at home.

Starting the Mine
Bolivia’s desolate salt flats are at the center of a global rush for lithium. Villegas, the state mining company executive, says a processing plant will start making lithium carbonate in 2010.

By 2014, the mine will produce 30,000 metric tons of lithium carbonate, more than Rockwood’s mine in Chile, which is the world’s second largest. Bolivian scientists say there are about 95 million tons of lithium under the Uyuni Salt Flat, more than 12 times Chile’s reserves. Car and battery companies want a piece of the action. Bollore and his friend, French President Nicolas Sarkozy, have met with Morales to discuss lithium. Bollore, who controls a multibillion-dollar banking, media and shipping empire, owns a lithium battery plant in France and plans to build electric cars.

In February 2009, Morales, during a state visit to France, test-drove Bollore’s Bluecar. Bollore then told Morales they would fund a $5 million study for a mine and help finance construction of a lithium-processing plant.

‘The 21st and 22nd Century’
“It’s you who controls the raw materials for the 21st and 22nd centuries,” Bollore told Morales, according to a videotape of the meeting. “You are like Saudi Arabia.”

Bolivia is up against big odds, says Eduardo Morales, manager of Rockwood’s mine in Chile’s Atacama Salt Flat. Bolivia’s salt flat has few paved roads, and most communities don’t have electricity. The country is landlocked; the nearest port is across the Andes, hundreds of miles away in Chile. And Bolivia has no experience mining lithium.

“They will need outside investors,” says Morales, a Chilean national unrelated to Bolivia’s president.

Rockwood and Soquimich can sell lithium for about three times what it costs to produce because, until now, production hasn’t been able to keep up with demand, says Brian Jaskula, a lithium specialist at the USGS in Reston, Virginia.

Evaporating Pools
On Chile’s Atacama Salt Flat in the driest desert on Earth, Rockwood and Soquimich produce lithium from evaporating pools that stretch for miles across a sea of formations made of salt. They create those ponds by pumping out lithium-rich water, and then wait 18 months for most of it to evaporate.

Then, they process the remaining liquid into powdered lithium carbonate. It costs about $1 to produce a pound (454 grams), Rockwood’s Morales says. Rockwood and Soquimich sell the powder for about $3 a pound.

“This is a good business, and here’s the money, right here,” says Eduardo Morales, standing at a 1,000-foot-wide (300-meter-wide) pool filled with lithium-bearing water that looks and feels like olive oil at Rockwood’s mine in Chile.

Rockwood and Soquimich have big sway over prices because they have few competitors.

“That’s what this market is,” Jaskula says. “It’s dominated by one or two big players.”

Lithium Carbonate Prices Jump
Kravis’s KKR created Rockwood in 2000 with the acquisition of U.K.-based Laporte Plc’s specialty chemical business, and four years later acquired the lithium mine by purchasing Chemetall Plc. Under CEO Seifi Ghasemi, Rockwood boosted annual revenue fourfold, to $3.4 billion in 2008.

KKR took Rockwood public in 2005 and reduced its 100 percent stake to 29 percent. KKR co-founder Kravis declined to comment.

In 2009, lithium carbonate prices jumped to $6,500 a metric ton, almost tripling 2006 values, because of surging demand for batteries, Jaskula says.

Swedish pharmaceutical researcher Johan August Arfvedson discovered lithium in 1817. It wasn’t until 1923 that German steelmaker Metallgesellschaft AG began producing lithium on an industrial scale. Bolivia’s government and USGS geologists discovered lithium beneath the Uyuni Salt Flat in 1976.

Quisbert inspired Bolivia to move to the center stage of the market. The orphan took off on his own at the age of 12 to dig minerals by hand from the salt flats of South America’s Andes Mountains.

Generating Jobs
By the time he was in his 20s, in the 1960s, Quisbert was organizing farmers to pressure for jobs and better living conditions.

Quisbert says he became convinced that Uyuni’s lithium, if mined by the government, would generate jobs and revenue that could bring prosperity to the impoverished Indian families who live in mud huts amid the desolation of the salt flat.

Quisbert envisions lithium bringing power to a place where electricity is a luxury. He grew up around Uyuni, which is one of Bolivia’s poorest regions. It’s inhabited by subsistence farmers and llama herders who tend small farms with no electricity. Towns around the salt flat have frequent power outages.

“Roads and electricity come with a lithium mine,” says Quisbert, whose face is tanned and wrinkled from a life in the intense sun of Uyuni. “We still live with candles, with oil lamps.”

Lobbying Government
In the 1980s, Quisbert lobbied the government, unsuccessfully, to construct a mine. In 1991, he organized street protests to successfully block plans by Philadelphia- based FMC Corp. and Soquimich to build a lithium mine in Uyuni. FMC gave up and opened a mine across the border in Argentina.

In 2005, Quisbert’s friend, Morales, was elected as the first Indian president of Bolivia. Morales had grown up poor, like Quisbert, in Bolivia’s Andes, working on farms since the age of 6.

The two men first met in the 1980s, when Morales led Bolivia’s biggest coca farmers union.

As Quisbert pushed for a government-run lithium mine, Morales organized protests that helped to force two presidents from office because they had allowed oil companies to exploit Bolivia’s natural gas reserves.

Both men believed that foreigners had looted Bolivia’s riches, starting with Spanish conquistadors five centuries before, leaving its Indian majority in poverty.

Presidential Palace
Today, Bolivians have an annual per-capita income of $1,716, according to the International Monetary Fund. Bolivia is the second-poorest nation in South America, after Guyana.

“He was fighting for coca; I was fighting for lithium,” Quisbert says.

In November 2007, Quisbert walked into the presidential palace in La Paz, past guards dressed in red uniforms. It was 5 a.m., when the president routinely starts his workday, and Quisbert sat down in the palace’s Room of Mirrors to propose that the government mine lithium.

Morales, who calls Quisbert Comrade Lithium, agreed within minutes, saying the project would provide jobs.

“The president was very enthusiastic,” says Quisbert, who in turn calls Morales Comrade Coca.

The president chose two of Quisbert’s friends and advisers to lead the lithium program. One was Villegas, a tattooed, 34- year-old union leader who’d worked for years with Quisbert, to oversee lithium mining.

Planning the Project
Belgian physicist Guillaume Roelants, who had spent 28 years mining southwest Bolivia and teaching Indians how to farm and mine, was charged with planning the project.

On the Uyuni Salt Flat, engineers fill metal and plastic containers with brine to test how quickly it will evaporate. Workers are building a small plant to test how to process lithium carbonate.

Roelants, the mine planner, is working with car and battery makers who could become investors to solve the challenges of building a lithium mine from scratch.

He set up a committee that includes French mining company Eramet SA; state-owned Japan Oil, Gas & Metals Corp.; South Korea’s LG Chem and state-owned mining company Korea Resources Corp.; Brazil’s Ministry of Science and Technology; and Bollore. University researchers in Brazil and South Korea, working with the committee, are studying how to process the lithium.

Thierry Marraud, Bollore’s chief financial officer, has technicians testing brine samples. Researchers at Paris-based Eramet are seeking ways to separate magnesium impurities from the brine.

‘Huge Potential’
“We are going to try to evaluate the total potential, which is huge,” Roelants says.

Bolivia is looking, for the first time in its history, to take over bragging rights from Chile. Quisbert is convinced Bolivia can succeed. He sits in his office in a dusty desert town, backed by a portrait of President Morales and the checkered flag of Bolivia’s Indians.

For decades since geologists discovered the Bolivian reserve, political opposition and a lack of funds have gotten in the way of developing it. Quisbert says that will change.

“We want a different Bolivia,” he says. “We want development in our country.”

Battery and car companies around the world are hungry to tap into Bolivia’s massive reserves of lithium. The country is betting that lithium can turn it into a global force in the auto industry.

The odds are stacked against it because of its poverty, politics and lack of know-how. If Bolivia chooses to partner with investors from around the world, it may yet become the Saudi Arabia of lithium.

http://www.bloomberg.com/apps/news?pid=20601090&sid=a.rQD7FZ3D58

 

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The Harvard Business School recently concluded that consumers’ energy costs using cap and trade (one of the current proposals for reducing CO2) will increase the energy costs of a family of four by $6,800 US per year by 2025.

http://wattsupwiththat.files.wordpress.com/2009/12/billbell.pdf



The proponents of the hypothesis of anthropogenic global warming have a very simple problem: NO SCIENCE.

What have the proponents of the hypothesis of AGW brought to the table thus far? They have asserted that current temperatures are "unprecedented." That simply isn't true. They have asserted a positive feedback between levels of carbon dioxide and GATA but have not demonstrated any such relationship. In fact, the historic record ( to the extent one accepts the proxy temperatures and CO2 levels from the Vostok ice cores ) show precisely the opposite: global temperatures appear to lead/cause/determine CO2 levels.

You ask the world to accept computer models incorporating the simultaneous solution of multiple dozens of non-linear differential equations as "proof" of humanity's comprehension of an impossibly complex climate system— the same models that have no demonstrable record of accuracy.

That's it; that's the sum total of the "proof" offered up by the proponents of the hypothesis. The problem remains; it is quite simple— there is NO OBSERVABLE, REPEATABLE, VERIFIABLE, REPRODUCIBLE SCIENCE behind the hypothesis.

 

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http://www.timesonline.co.uk/tol/news/environment/article6951029.ece

December 10, 2009
Top scientists rally to the defence of the Met Office

The Met Office has embarked on an urgent exercise to bolster the reputation of climate-change science after the furore over stolen e-mails.

More than 1,700 scientists have agreed to sign a statement defending the “professional integrity” of global warming research. They were responding to a round-robin request from the Met Office, which has spent four days collecting signatures. The initiative is a sign of how worried it is that e-mails stolen from the University of East Anglia are fuelling scepticism about man-made global warming at a critical moment in talks on carbon emissions.

One scientist said that he felt under pressure to sign the circular or risk losing work. The Met Office admitted that many of the signatories did not work on climate change.

John Hirst, the Met Office chief executive, and Julia Slingo, its chief scientist, wrote to 70 colleagues on Sunday asking them to sign “to defend our profession against this unprecedented attack to discredit us and the science of climate change”. They asked them to forward the petition to colleagues to generate support “for a simple statement that we . . . have the utmost confidence in the science base that underpins the evidence for global warming”.

Met Office reports on temperature changes draw on the work of the University of East Anglia’s Climatic Research Unit, from which the e-mails were hacked. Phil Jones, unit director, has agreed to stand down while an investigation takes place into claims that he manipulated data to exaggerate the warming trend and tried to block publication of alternative views.

One scientist told The Times he felt under pressure to sign. “The Met Office is a major employer of scientists and has long had a policy of only appointing and working with those who subscribe to their views on man-made global warming,” he said.

Professor Slingo denied that the Met Office had put anyone under pressure. “The response has been absolutely spontaneous. As a scientist you sign things you agree with, not because you are worried about what the Met Office might think of you,” she said.

The 1,700 signatories, a fraction of the research scientists working in Britain, include Sir John Houghton, former chairman of the science working group of the Intergovernmental Panel on Climate Change, Sir Brian Hoskins, head of the Grantham Institute at Imperial College, and Professor Lord Hunt of Chesterton, a climate scientist at University College London.

Professor Slingo said the statement was carefully worded to avoid claiming all climate scientists were beyond reproach. It says the evidence for man-made global warming is “deep and extensive” and comes from “decades of painstaking and meticulous research by many thousands of scientists across the world who adhere to the highest levels of professional integrity”.

Benny Peiser, of the Global Warming Policy Foundation, which claims man-made climate change has been exaggerated, said the petition showed that the Met Office was rattled.

 

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Global Warming Skepticism 101

December 9th, 2009
by Roy W. Spencer, Ph. D.

I get so many questions from readers about a variety of global warming issues that I thought I would whip up some Q&A for those who want to understand the views of skeptics a little better. I will try to update these with links and additional answers as time permits.

Climate science is complex and the study of it is highly specialized. Nevertheless, there is a common theme that runs through the claims of the global warming establishment, from Al Gore’s movie An Inconvenient Truth, to the UN’s Intergovernmental Panel on Climate Change (IPCC): Weather and climate events that happen naturally are being increasingly blamed on the activities of humans. So, causation is at the root of most beliefs about global warming and climate change.

As one digs further into the science, the direction of causation also emerges as a key theme, and it is one that can totally change the degree to which it appears humans affect the climate system. In my own area of research I have found that mixing up cause and effect when examining how cloud cover varies with temperature has greatly misled the scientific establishment regarding how sensitive the climate system is to our addition of greenhouse gases to the atmosphere.

Not all skeptics believe the same things, though, so some skeptics will object to some of what I have listed below. These represent my opinions, not all of which are necessarily ascribed to by other skeptics. Additional details on many of these issues can be found throughout this website, including a Q&A list I published on April 19, 2009.

The following list, in no particular order, are my responses to common claims and accusations about global warming skeptics. If other scientists or laypersons want me to add to the list, or want to argue for changes, email me and I will update it as appropriate. Please be sure to check back for the latest update (posted above).

1. Skeptics deny global warming. No, we deny that warming has been mostly human-caused.

2. Skeptics are paid by big oil. The vast majority of skeptics have never been paid anything by Big Oil (me included).

3. Skeptics don’t publish in the peer reviewed literature. Wrong…but it is true we do not have nearly as many publications as the other side does. But it only takes one scientific study to destroy a scientific hypothesis, which is what anthropogenic global warming theory is.

4. Skeptics are not unified with an alternative explanation for global warming. Well, that’s the way science works in a field as immature as climate change science. The biggest problem is that we really don’t understand what causes natural climate variability. Kevin Trenberth has now famously admitted as much in one of the Climategate emails, where said it’s a “travesty” that we don’t know why warming has stopped in the last 7 to 10 years. For century-time-scale changes, some believe it is cloud cover being modulated by cosmic ray activity, which is in turn affected by sunspot activity. A few others think it is changes in the total energy output of the sun (possible, but I personally doubt it). In my opinion, it is internal, chaotic variability in the ocean and atmosphere circulation causing small changes in cloud cover. Since clouds are a natural sunshade, changing their coverage of the Earth will cause warming or cooling. The IPCC simply assumes this does not happen. If they did, they would have to admit that natural climate change happens, which means they would have to address the possibility that most of the warming in the last 50 has been largely natural in origin.

5. But the glaciers are melting! Many glaciers which have been monitored around the world for a long time have been retreating since the 1800’s, before humans could have been responsible. A few retreating glaciers are even revealing old tree stumps…how did those get there? Planted by skeptics?

6. But the sea ice is melting! Well, the same thing happened back in the 1920’s and 1930’s, with the Northwest Passage opening up in 1940. It was just as warm, or nearly as warm, in the Arctic in the 1930’s. Again, this is before humans could be blamed. There were very low water levels in the Great Lakes in the 1920’s too, just as has happened recently. We have accurate measurements of sea ice cover from satellites only since 1979, so there is no way to really know whether sea ice cover is less than it was before.

7. But we just had the warmest decade in recorded history! Well, if thermometer measurements had started in, say 200, AD (rather than in the 1800’s), and it was now 850 AD, the same thing might well have been said back then. The climate system is always warming or cooling, and the Industrial Revolution (and thus our carbon dioxide emissions) just happened to occur while we were still emerging from the Little Ice Age…a warming period.

8. But the Antarctic ice shelves are collapsing! Well, sea ice around Antarctica has been expanding since we started monitoring by satellite in 1979….so which do we use as evidence? There is no convincing evidence of warming in Antarctica, except in the relatively small Antarctic Peninsula, which juts out into the ocean. Just as glaciers naturally flow to the sea, ice shelves must eventually break off. It is very uncertain how often this happens through the centuries, and what has been observed in recent years might be entirely normal. Similarly, it was warmer in Greenland in the 1930’s than it has been more recently.

9. But the sea levels are rising! Yes, and from what we can tell, they have been rising since the end of the last Ice Age. Again, the more recent rise might be just a consequence of our emergence from the Little Ice Age, which bottomed out in the 1600’s.

10. But we keep emitting carbon dioxide, which we know is a greenhouse gas! Yes, I agree. But the direct warming effect of moré CO2 is agreed by all to be small…and I predict that when we better understand how clouds change in response to that small warming influence, the net warming in response to more CO2 will be smaller still. This is the “feedback” issue, which determines “climate sensitivity”, the area of research I spend most of my time on. I and a minority of other scientists believe the net feedbacks in the climate system are negative, probably driven by negative cloud feedback. In contrast, all twenty-something IPCC climate models now exhibit positive cloud feedback.

11. But we can’t keep pumping CO2 into the atmosphere forever! No, and we won’t. Assuming fossil fuels will be increasingly difficult to find and access in the coming decades, the continuing demand for energy ensures that new energy technologies will be developed. It’s what humans do…adapt.

12. But we shouldn’t be interfering with nature! Actually, it would be impossible to NOT interfere with nature. Chaos theory tells us that everything that happens, naturally or anthropogenically, forever alters the future state of the climate system. I predict that science will eventually understand that more CO2 is good for life on Earth. This doesn’t mean it will be good for every single species…but when Mother Nature changes the climate system, there are always winners and losers anyway. In the end, this is a religious issue, not a scientific one. Interestingly I have found that the vast majority of scientists also have the religious belief that we should not be impacting nature. I believe this has negatively affected their scientific objectivity.


http://www.drroyspencer.com/2009/12/global-warming-skepticism-101/

 

[trysail]

"Unprecedented" global warming. Uh, huh. Right. Sure. You bet.

http://wattsupwiththat.files.wordpress.com/2009/12/noaa_gisp2_icecore_anim_hi-def3.gif

 

[trysail]

http://science.nasa.gov/headlines/y2009/images/geminids2009/skymap_north.gif

 

[trysail]

Shell, Lukoil to Join Iraqi Top Producers Based on Winning Bids
By Anthony DiPaola

Dec. 13 (Bloomberg) -- Royal Dutch Shell Plc and OAO Lukoil will join BP Plc and Exxon Mobil Corp. among Iraq’s top oil producers based on their pledges in winning bids this weekend as the country auctioned 28 percent of its crude assets.

Russia’s Lukoil and partner Statoil ASA of Norway won rights yesterday to develop the second phase of Iraq’s “super giant” West Qurna deposit, agreeing to pump 1.8 million barrels of oil a day from the field within six years. Shell and Malaysian partner Petroliam Nasional Bhd., or Petronas, committed on Dec. 11 in Baghdad to extract the same amount of crude from Iraq’s Majnoon field.

China National Petroleum Corp., Russia’s OAO Gazprom, and Angola’s Sonangol SA also won contracts in the two-day auction. The government in Iraq, which holds the world’s third-largest oil reserves, aims to boost production capacity to more than 12 million barrels a day, Oil Minister Hussain al-Shahristani said.

“When you have such huge reserves in a few fields, it’s only the giant oil companies that can win and afford to do the work,” said Tariq Shafiq, an adviser with London-based Petrolog & Associates and a former Oil Ministry official.

Iraq offered almost a third of its reserves in 10 blocs in the second round of oil licensing yesterday and Dec. 11. A first round in June assigned a similar amount of crude, with BP and China National Petroleum Corp. agreeing to develop Rumaila, the largest field awarded, with 17 billion barrels of reserves.

The Persian Gulf state is trying to attract investors to rebuild its economy after almost a decade of conflict and prior sanctions destroyed infrastructure. Iraq pumps about 2.4 million barrels a day and hasn’t exceeded 3 million since late 2000.

$200 Billion
Iraq will get about $200 billion a year from the development contracts awarded to international companies in the two rounds. The winning bidders will spend about $100 billion developing the deposits, al-Shahristani said after the auction ended in Baghdad yesterday. The work is scheduled to start about six months from the signing of the deals.

He called the second round a “success” after Iraq awarded seven contracts and got no bids for three blocs. In the first auction in June, Iraq signed only one contract out of 10 offered. The government agreed last month to two other deals and is in talks on a fourth field from the first round.

London-based BP and China National agreed in June to produce 2.85 million barrels a day at Rumaila, the only field locked up in that round.

Security Concerns
Exxon, based in Irving, Texas, and Shell, based in The Hague, agreed last month to terms for the first phase of West Qurna and pledged to pump 2.33 million barrels of crude a day there. Eni SpA agreed to pump more that 1 million barrels a day from the Zubair field, and Shell is still in talks over Kirkuk, all of which were offered in the first auction.

The opening of Iraq’s reserves persuaded more than 35 international and state-run oil companies to set aside concerns that insurgent attacks or political instability may disrupt operations. Bombings in Baghdad last week left at least 101 people dead and hundreds injured as violence escalates before elections planned in March.

Al-Shahristani has said the government would approve bids awarded this weekend by the end of year and said final approval for Exxon and Eni’s deals is imminent.

Petronas was one of the most active bidders in the second round, having been involved in four winning bids and one losing offer for West Qurna-2.

Total SA may be disappointed in the results after it won a stake in the Halfaya field and lost on two others, said Samuel Ciszuk, an analyst at IHS Global Insight in London.

Return to Iraq
Paris-based Total, seeking to return to the country it first explored in 1927, was interested in Majnoon and West Qurna-2, exploration and production head Yves-Louis Darricarrere said Dec. 2. Majnoon holds 12.6 billion barrels of reserves and Halfaya holds 4.1 billion barrels, according to U.S. estimates.

“We are pleased to resume our operations in Iraq with our partners at Halfaya,” Total spokeswoman Phenelope Semavoine said by telephone yesterday.

Lukoil, the Russian producer with the most oil assets abroad, beat out teams headed by BP, Total and Petronas in the bidding for West Qurna-2.

The winning bidders for two of Iraq’s largest fields, West Qurna and Majnoon, offered their services at one-quarter to one- third of the best bids proposed at the first auction in June, according to Oil Ministry data. BP agreed in the first round to develop Rumaila for $2 a barrel, half the initial bid.

Price Is Right
“The round is a success in the sense that the prices given for the fields were right,” said Shafiq.

Shafiq said he doubts Iraq can achieve 12 million barrels a day of capacity in the six years without damaging the field reservoirs and hurting potential production.

Thamir Ghadhban, an adviser to Iraqi Prime Minister Nuri Kamil Al-Maliki and former oil minister, questioned on Dec. 7 whether production from Rumaila, West Qurna-1 and Zubair will reach the levels proposed by BP, Exxon and Eni.

West Qurna, described as a “super giant” by Iraq’s Oil Ministry, is being developed in two licenses. The 12.9 billion barrels of oil reserves in West Qurna’s phase two make that deposit the biggest on offer in the second bidding round, according to U.S. Energy Department data. The first phase has about 8.7 billion barrels of reserves.

Saddam Hussein
Lukoil received a contract to develop the deposit from former Iraqi dictator Saddam Hussein in 1997. He then annulled it in 2002. Lukoil’s CEO unsuccessfully lobbied Iraqi Prime Minister Nuri al-Maliki to reinstate it this April.

Petronas and Japan Petroleum Exploration Co., known as Japex, won the Garraf field yesterday, outbidding groups led by Turkish Petroleum Corp., known as TPAO, and PT Pertamina, Indonesia’s oil company.

Gazprom led the only group bidding for rights to develop the Badra oilfield. It won the contract after lowering its cost for the work.

Sonangol, Angola’s state-run oil company, lowered its initial bids for the Qaiyarah and Najmah crude deposits to meet Iraq’s conditions. Iraq received no bids for the Middle Furat, or Middle Euphrates, fields, the Eastern Fields and the East Baghdad deposit.

Iraq, the third-largest producer in the Organization of Petroleum Exporting Countries, is the only member not subject to a production quota. It is “too early” for OPEC to set a quota for Iraq’s crude production, Oil Ministry spokesman Asim Jihad said yesterday. Boosting capacity as planned would enable Iraq to rival Saudi Arabia’s 12.5 million barrels of daily capacity, OPEC’s largest.

Iraq will hold a 25 percent stake in all field development licenses, with the remainder split between companies winning the bid. Bidders must accept service contracts with a flat fee for each barrel extracted, rather than production-sharing agreements in which they gain a stake in the crude produced. This means they are not positioned to benefit from a rise in oil prices.

CNPC, Petronas and Total won the contract to boost production at Halfaya to 535,000 barrels a day, beating groups led by Statoil, Italy’s Eni SpA and India’s Oil & Natural Gas Corp.

http://www.bloomberg.com/apps/news?pid=20601207&sid=azQYxe._JmMU

 

[trysail]

...It has been said that regulating carbon dioxide emissions will make the United States the cleanest Third World country on Earth...

Atmospheric CO2 content:
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http://www.drroyspencer.com/2009/04/some-global-warming-qa-to-consider-in-light-of-the-epa-ruling/

 

[trysail]

America’s Cup Spending Spree Buys Speedier Boats for Everyone
By Aaron Kuriloff

Dec. 15 (Bloomberg) -- The America’s Cup boats that will race in February -- products of a technological showdown between billionaire sailors -- may bring wings, multiple hulls and computers to the next generation of sailboats.

The two-year legal battle between billionaires Larry Ellison and Ernesto Bertarelli has produced two racingyachts that are a decade ahead of any boat built previously, even as it has dogged and delayed the 158-year-old regatta, to be held off the coast of Spain. The innovations made as longstanding Cup rules were abandoned in the search for a settlement may one day benefit sailors on weekend jaunts.

Designers for both Ellison’s BMW-Oracle Racing and Bertarelli’s Alinghi syndicate said building and learning to sail these boats, each at least 90 feet long and among the fastest yachts ever built, has meant gains in everything from data collection to sail technology.

“We’re like kids in the candy shop,” said Dirk Kramers, chief engineer for the Cup-defending Alinghi catamaran. “During the last Cup, it was all about trying to squeeze another 1/100th of a knot out of the boat. Now we’re really in discovery mode, learning huge lessons every day. We get to work on boats that are just so much more exciting than anything that’s ever been done.”

Sailors, recreational boaters or other users of ultralight, aerodynamic technologies may benefit in coming years from equipment and data being assembled by both the Alinghi and BMW- Oracle racing syndicates, said Pete Melvin, a U.S. Olympic sailor and world champion.

Development Jump
“It’s been a hugely concentrated development, with all the best people in the industry, plus outside experts in every field, all focused on pushing the edge of the envelope,” said Melvin, co-founder of Morrelli & Melvin Design & Engineering Inc.. “It normally would have taken eight or 10 years to do what’s been done in just two short years.”

Morelli & Melvin has designed multihulls, including Steve Fossett’s record-setting Playstation, and has consulted for BMW- Oracle. Multihulls are much faster than monohull boats, because they are lighter and have less drag.

The America’s Cup has long featured yachting’s cutting edge. The 1983 victor, Australia II, used wings on its keel to reduce drag and increase performance. Such wings, so secret at the time that it took two undercover frogmen to spot them, are now common on sailboats worldwide.

Recent editions of the Cup required boats that were restrictive and boring, says Donnie Brennan, boatwright for the U.S. Olympic sailing team in Beijing and owner of Mobile, Alabama-based Diversified Marine Services Inc. Two years of lawsuits over the rules of the event have led to an anything- goes faceoff that “certainly opens the door to innovation and technology,” he said.

‘Kazilllions of Dollars’
“They’re charting new areas,” said Brennan. “It’s great that we’ve got someone like Larry Ellison out there dumping kazillions of dollars into this technology.”

Bertarelli spent about $90 million to capture the Cup from New Zealand in 2003. Grant Simmer, Alinghi’s design team coordinator, told Seahorse magazine that the team’s catamaran cost about five times as much as a typical Cup boat.

Representatives of both teams declined to discuss the details of their biggest advances, saying they wanted to hide them from each other. Alinghi said in a New York court filing that Ellison had hired spies to sneak looks at its catamaran.

Mike Drummond, design chief for the BMW-Oracle trimaran, said he can’t conceal the 190-foot wing that this month replaced a sail on his boat. The carbon-fiber foil is bigger than the wing of an Airbus A380, the world’s largest passenger jet. The 60-foot Stars & Stripes catamaran that defended the America’s Cup in 1988 used a wing that was about half the size. A wing is more efficient than a conventional sail, holding its shape better while generating increased lift and diminished drag.

High Risks
It’s also harder to control, Drummond said.

“It is an unknown risk for us,” he said. “We decided that the potential gains were enough that we would take that risk.”

Drummond called some recent small breakage “teething problems” and said that the team was working to solve them while processing “more e-mails than the moon landing” full of questions from excited sailors.

Alinghi also has considered wing technology, Kramers said in an interview. Designers also have worked on new kinds of line to handle the excess loads and, for the first time in the America’s Cup, onboard engines to power winches and other systems.

On-Board Cameras
Other likely spots for technological advancement include some of the most concentrated data collection in sailing history. Both teams use fiberoptic systems and on-board cameras to measure things like sail shape and stress.

Kramers said sailors would find uses for both the data and the collection systems. In the meantime, he cautioned against celebrating either design until the two boats meet off Valencia.

“It’s not a game about who comes up with the fanciest toys -- you’ve still got to win a boat race,” Kramers said. “You can shoot yourself in the foot quite easily. You can make it too light and have something break on you, or you come up with something so complex you don’t know how to sail it. So there’s a certain amount of restraint involved, too.”

http://www.bloomberg.com/apps/news?pid=20601079&sid=aMZEyt0kMsGY

 

[trysail]

Doctor Shortage in U.S. Won’t Be Aided by More Medical Students
By Pat Wechsler

Dec. 16 (Bloomberg) -- To combat a nationwide shortage of doctors, medical schools in the U.S. plan to add 3,000 first- year students by 2018. It won’t be enough.

The expansion, pushed for by the Association of American Medical Colleges, is being undercut by a U.S. health-care overhaul designed to supply medical insurance to an additional 31 million Americans and a cap on government-funded physician training programs that’s been frozen in place for 12 years, said Steven Safyer, of Montefiore Medical Center.

Last year, there were 16,721 fewer primary-care doctors than needed in inner city and rural areas, according to the U.S. Health and Human Services Department. Residencies, the hospital based-training doctors undergo before they can practice medicine on their own, have been capped by Congress at about 90,000 since 1997 as a way to curb rising medical costs.

“Do the math,” said Safyer, president and chief executive officer at the New York hospital, in a telephone interview. “You give millions more people insurance, and it adds up to a much worse shortage.”

The doctor crunch is a result of an aging population and a rising demand for specialists, according to the federal health department. By 2025, the nation as a whole will confront a shortfall of as many as 159,300 doctors of all varieties, said Ed Salsberg, director of the Center for Workforce Studies at the Washington-based medical college association.

Tufts, Dartmouth
Medical colleges have added 1,500 seats since 2005 to address the doctor shortage, Salsberg said. Tufts University in Medford, Massachusetts, increased its first-year enrollment by 12 percent this year, according to data from the association. Dartmouth College in Hanover, New Hampshire, increased theirs by 7.7 percent, and the University of Tennessee in Memphis was up 10 percent, the data shows.

Still, “it takes years to produce doctors,” said Steven Lipstein, president and chief executive officer of the 13- hospital BJC HealthCare in St. Louis, that trains residents from Washington University. “It’s a very long pipeline and right now it doesn’t have enough in it to meet our needs.”

To reduce the shortfall, federal officials need to follow up on the commitment medical schools have made to growth and raise the number of residencies available to students, said Robert Feinstein, senior associate dean for education at the University of Colorado medical school in Denver. The cap, instituted to curb Medicare costs, affects all but about 20,000 of the 110,000 residencies at U.S. hospitals, according to the medical college association.

‘Nowhere Near’
“The number of residencies nowhere near meets the demand from the number of students who will be in the pipeline in the coming years, or the need the nation has for doctors,” Feinstein said.

Medicare, the federal insurance plan for those 65 and over and the disabled, pays about $100,000 a year for each residency, at a total cost to the program of about $9 billion, according to a report filed by the Medicare Payment Advisory Commission in June. Medicare reimbursements for service also take into account the number of residencies each institution maintains.

The funding mechanism was set up in 1965 when the U.S. was about to extend government health coverage to 19 million elderly Americans. As Medicare’s ranks grew -- to 45 million people as of the end of last year, according to the advisory commission -- the number of residencies was limited to contain spending.

The number, though, may change as a direct result of the health-system overhaul being debated in Congress.

Medicare Amendment
On Dec. 5, Democratic Majority Leader Harry Reid, along with Senators Charles Schumer of New York, Bill Nelson of Florida and other sponsors, submitted an amendment to the health-care legislation that would add 15,000 residencies at a cost to Medicare of about $1.5 billion, according to Atul Grover, a lobbyist with the medical college association.

Because Congress is looking to keep costs of the legislation down, that proposal may be cut or even eliminated during the debate, Grover said.

Even with the push for more residencies, about 1,500 have gone unused for the last three years, the medical school group’s Salsberg said. This is because some hospitals find they no longer can provide supervision or hands-on experience necessary to educate all the residents they’ve been allocated, he said.

The Senate and House health-care overhaul bills call for taking these unused residencies and redistributing a portion of them to other teaching hospitals to train primary care and general surgery residents. That translates into producing 243 to 400 more physicians a year, depending on which version of the legislation survives, Salsberg said.

Another Solution
Not all educators agree that more medical students, more residencies or even more doctors are the best solution for the doctor shortage.

Harvard Medical School in Boston, for instance, hasn’t added to its enrollment, choosing instead to train doctors to depend on advanced-practice nurses, physician assistants, nutritionists and pharmacologists to fill gaps in patient care, Jules Dienstag, dean for medical education, said in an e-mail.

“We need to focus on preparing our graduates for a future in which they will work on solutions to the doctor shortage,” he wrote.

Johns Hopkins University in Baltimore and Duke University in Durham, North Carolina, have chosen similar approaches where curriculum exposes medical students to community clinics and situations in hospitals where they work in teams.

“We are ending up with a population suffering from a variety of chronic diseases like diabetes and hypertension,” said Edward Buckley, vice dean for medical education at Duke. “But you don’t need doctors for much of this chronic health care. You need people who can talk with the patient and visit the patient in their home.”

http://www.bloomberg.com/apps/news?pid=20601103&sid=aMUUwixXaq_I

 

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Hello, California! This one's for you, Byron.
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California Bonds Fail on Advice Bill Lockyer Couldn’t Refuse
By Michael B. Marois

Dec. 17 (Bloomberg) -- For California Treasurer Bill Lockyer, the offer from Goldman Sachs Group Inc., JPMorgan Chase & Co. and Citigroup Inc. was too good to refuse.

If California was willing to forgo competitive bidding for a $4.5 billion bond offering, the banks promised more orders from individuals and a lower bill to the taxpayers. The firms insisted that by negotiating with them, the state would benefit from its special relationship with the Wall Street troika and wind up with what two underwriters called a salutary “buzz” to boost demand for the debt.

When the October offering failed to sell as planned, California was forced to accept 8 percent less money than it needed and to pay as much as $123 million more in interest than the banks said was sufficient for the market. And the threesome made $12.4 million on the deal, contributing to record bonuses in the securities industry a year after getting a total of $80 billion in a federal bailout.

“Just because someone earns a big wad of money doesn’t mean that they can do what they say they can do,” said Marilyn Cohen, who watched the sale unfold from Los Angeles as president of Envision Capital Management, which oversees $250 million in bonds for individuals. “And shame on the state if they were drinking that Kool-Aid.”

The California sale helped send the municipal-bond market to its worst month in a year. It ended a rally that had pushed borrowing costs for cities and states to a 42-year low, as measured by the Bond Buyer’s index of 20-year general obligation bonds.

Familiarity Over Price
California, with a bigger economy than Russia’s, seeks bids for everything from building roads and schools to buying portable toilets and fire extinguishers. When the state with the worst credit rating sells municipal bonds, it usually chooses bankers through a negotiation process that lets experience and familiarity trump price.

For the October deal, state Treasurer Lockyer picked the world’s most profitable investment bank and the nation’s two biggest bond underwriters, which together have sold $31 billion of debt for California since he took office in 2007. The U.S. municipal bond market’s largest borrower has sold tax-backed debt nine times this year, for a total of about $37 billion, more than four times second-place New York’s total, data compiled by Bloomberg show.

‘Conflicts’
The state’s former public finance director, Juan Fernandez, worked on the sale as JPMorgan’s executive director in San Francisco. Goldman’s bankers included Kathleen Brown, a former state treasurer. She’s the daughter of one past governor, Pat Brown, and the sister of another, current Attorney General Jerry Brown.

“The whole business is full of conflicts, and that’s a gigantic problem,” Cohen said.

Goldman, JPMorgan and Citigroup declined to comment, as did Fernandez. Kathleen Brown didn’t respond to phone and e-mail messages.

The $2.8 trillion market for state and local government bonds used to be more competitive. In 1970, 73 percent of municipal offerings were sold at auctions, the General Accounting Office said in a 1983 report. In such deals, the bank that offers the lowest interest cost via the highest bid, or price, buys the securities and tries to sell them for more.

This year, 16 percent of $368 billion in new fixed-rate issues were sold that way, Bloomberg data show. The rest were negotiated offerings, in which underwriters are selected before the sale based on assurances they’ll deliver cheaper rates by lining up investors.

‘Bad Week’
When the New York banks’ promises to California proved unreliable, Lockyer, 68, not his underwriters, tried to explain the miscalculation to taxpayers.

“It turned into a bad week for bonds,” the treasurer said in an Oct. 9 interview. “This seemed to be a very hard week with some headwinds for issuers.”

The underwriters left Lockyer “standing on the platform alone,” said Christopher Taylor, former executive director of the Municipal Securities Rulemaking Board in Alexandria, Virginia, a self-regulatory organization. Taxpayers “probably didn’t get their money’s worth because California only got someone taking orders,” he said. “They didn’t get somebody out there that had any really strong incentive to sell.”

Banks don’t want “any unsold bonds hanging around,” so they prefer to help states set rates and see if the bonds sell, as happens in negotiated deals, Taylor said. If demand falls short, the dealers say, “Listen, we can’t sell this” without higher yields, he said. “It’s a wonderful world that the dealer community has created -- just fees, no risk.”

Saving a ‘Boatload’
Lockyer has no regrets about using a no-bid process because an auction would have led to even higher interest costs, said Tom Dresslar, his spokesman. While auctions may be effective for smaller issues, multibillion-dollar sales of both taxable and tax-exempt bonds like this one require advance marketing that banks will deliver only if they are hired beforehand, he said.

“We have saved taxpayers a boatload of money through negotiated bond sales,” Dresslar said, citing an analysis in the winter 2008 issue of the Municipal Finance Journal that was funded by the Securities Industry and Financial Markets Association.

The authors concluded that competitive sales have “no general advantage” and criticized past studies that found interest costs on negotiated sales were as much as 70 basis points, or 0.7 percentage point, higher.

True Interest Cost
California’s estimate of the so-called true interest cost on the tax-exempt portion of the October sale indicates it spent more the last time it sold competitively.

Including fees, the $1.3 billion negotiated sale cost 33 basis points less than the national average for 20-year general- obligation bonds at the time, excluding a risk premium of almost 1 percentage point the state paid after approaching insolvency, Bloomberg data show. When the state sold $1.1 billion in tax- free securities at auction on Feb. 14, 2007, the cost was 13 basis points over the average.

“Even though they couldn’t sell as much as they wanted, and even though they sold at yields at higher levels than what they wanted,” the deal “went well from California’s point of view,” said Gary Pollack, who oversees $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “They were able to borrow $4.1 billion at relatively historically low yields.”

After the sale, several states scaled back borrowing plans as municipal bond yields climbed the most in two weeks since December.

‘Litmus Test’
Maryland sold $200 million of debt on Oct. 21, about 25 percent of what it had wanted to offer, Bloomberg data show. Minnesota issued $576 million of bonds, or 64 percent of its planned total. Hawaii and Washington took similar steps after rising yields erased projected savings from refinancing.

“California’s large offering proved to be a litmus test for investors’ tolerance for new supply at relatively low yields,” said Chris Holmes, a fixed-income strategist at JPMorgan in New York, in a note to clients after the sale. It “set a tepid tone for subsequent large offerings by other issuers,” he said.

Municipal yields rose almost half a percentage point from their 3.94 percent low following the sale and were a quarter- point above that mark as of Dec. 10, the weekly Bond Buyer index shows.

Unemployment
California is strapped for cash amid the worst global recession since World War II. The most-populous state’s personal income tax revenue fell 33.4 percent in the second quarter, compared with a 27.5 percent national average, according to the Nelson A. Rockefeller Institute of Government in Albany, New York. Unemployment in California was 12.5 percent in October, the worst since at least 1976. Nationwide joblessness was 10.2 percent in October, a 26-year high, and 10 percent in November.

The October sale was California’s first long-term debt offering since Republican Governor Arnold Schwarzenegger and the Democratic Legislature settled a three-month impasse over how to erase a $24 billion deficit in July.

The stalemate, which put the state on the brink of insolvency for the second time this year, ended with the approval of an $85 billion budget. California has cut spending by $32 billion, raised taxes by $12.5 billion and papered over $6 billion in shortages with borrowing and what Pacific Investment Management Co.’s Bill Gross has called “accounting tricks that couldn’t fool a grade-schooler.”

Imminent Downgrade
The July compromise prompted credit-rating companies to remove California from lists of borrowers facing imminent downgrades. The state’s general obligation bonds are graded BBB by Fitch Ratings, Baa1 by Moody’s Investors Service and A by Standard & Poor’s.

Public Resources Advisory Group, a financial consultant for the state since 1991, recommended a negotiated sale instead of a competitive one, a memo obtained through California’s Public Records Act shows. In past auctions, winning underwriters couldn’t line up enough buyers ahead of time, so “they bear more risk and the price they are willing to pay the state for the bonds will likely be lower,” increasing taxpayers’ interest costs, the New York firm wrote.

If the consultant “had not recommended a negotiated sale, had they recommended a competitive sale to get the best deal for taxpayers, that’s what we would have done,” said Dresslar, the treasurer’s spokesman.

Taylor, the former MSRB official, said financial advisers rarely recommend auctions.

‘Blackballed’
“The FA has no incentive to irritate the underwriter community by pushing the risk on them,” he said. “Any FA that pushes a competitive sale is going to get ‘blackballed.’”

Lockyer’s staff advised him on Aug. 24 to hire Goldman and JPMorgan to manage a $3.2 billion mix of taxable debt, including federally subsidized Build America Bonds, and Citigroup to lead the simultaneous sale $1.3 billion of tax-exempt securities.

Goldman, which accepted $10 billion in bailout money last year and repaid it eight months later, produced a $3.44 billion profit in the second quarter, a record for a U.S. investment bank. Its shares have almost doubled this year. JPMorgan, which has repaid its $25 billion bailout, is this year’s top U.S. bond underwriter, according to Bloomberg data that excludes municipal issues. Its shares are up 31 percent.

JPMorgan’s investment bank and Goldman will set aside an unprecedented $32.1 billion for compensation this year, according to an estimate by David Trone, a Macquarie Securities Group analyst. That will produce record bonuses totaling $19.3 billion, based on New York pay consultant Options Group’s estimate that year-end awards usually account for 60 percent of compensation costs.

‘Lowest Borrowing Costs’
Second-ranked underwriter Citigroup is repaying $20 billion of its $45 billion bailout to escape U.S. Treasury Department- imposed pay restrictions as the government prepares to sell its remaining stake in the company to recover the rest. The shares are down 49 percent this year.

The three banks were told by California in Sept. 21 engagement letters that they were expected to “perform at the highest level to assist this office in achieving a successful sale at the lowest borrowing costs.” The sales syndicate also included Bank of America Corp.’s Merrill Lynch & Co., Siebert Brandford Shank & Co., Wells Fargo & Co. and about 30 other banks and brokers that made $13.4 million on the deal, for a total of $25.8 million in fees.

Before selling the long-term bonds, Lockyer shored up the state’s finances by borrowing $8.8 billion through one-year cash-flow notes, a routine move used to pay expenses while awaiting anticipated tax revenue.

Record Demand
That Sept. 23 offering, run by JPMorgan, attracted twice as much demand from individual investors as from mutual funds and other institutions. So-called retail orders totaling $6.64 billion, about 75 percent of the sale, was the most ever for a municipal issue, Lockyer’s office said, citing underwriters’ data.

California paid as much as 1.5 percent on the debt, more than twice New Jersey’s cost for similar securities in August. The yield was in the low range of what had been advertised beforehand, and individual demand allowed the state to turn away $430 million in orders from institutions.

“Investors clearly know a good deal when they see one, and California taxpayers will benefit as a result,” Lockyer said after the sale.

That same day, Citigroup told Lockyer that the state would get a “vigorous pre-sale marketing effort” to “the broadest possible audience of potential investors” and “greater retail participation” for October’s long-term debt sale if he agreed to a negotiated deal, according to a letter from Chris Mukai, a director for the bank in Los Angeles.

‘Very Little Incentive’
When banks have to bid for bonds, they “have very little incentive” to find investors beforehand because they don’t know if they’ll “have the bonds to sell,” Mukai said. Underwriters in negotiated offerings “market the state’s transaction for at least a week in advance,” his letter said. “As a result of these efforts, Citi and the other underwriters will acquire accurate information as to the depth of buying interest, which is invaluable in the pricing of the issue and in securing the lowest possible borrowing costs.”

Mukai reminded Lockyer that Citigroup had helped JPMorgan sell September’s short-term debt to individuals, “saving the state millions of dollars,” and had implemented California’s “Enhanced Retail Marketing Plan” in June 2007.

“We believe all the retail marketing efforts in these past few negotiated sales have achieved tremendous success for the state,” leading to more than $8.1 billion in general-obligation bond sales to individuals, or 46 percent of new issues, Mukai wrote.

‘Buzz’ Memo
Goldman and JPMorgan offered Lockyer similar assurances in a joint Oct. 6 memo outlining how they would help draft an offering document, design a sales presentation and perform “pre-marketing and price-discovery activities” to help structure the issue at the cheapest yield.

“This process will generate a ‘buzz’ around the transaction, ultimately generating maximum investor participation in the sale, which we believe will translate into lower borrowing costs,” wrote Tim Romer, a Goldman managing director in Los Angeles, and JPMorgan’s Fernandez, who had been the state’s finance director from 2002 to 2006.

The two firms “strongly believe that proceeding with a negotiated sale” of the bonds “will result in a more cost- effective sale than a competitively bid transaction,” they wrote.

Lowest Since ‘67
Investors, including Envision Capital’s Cohen, predicted the October sale would go well, given the popularity of Build America Bonds, securities created by President Barack Obama’s economic stimulus package, which covers 35 percent of their interest costs.

As of Oct. 1, state and local governments had sold at least $36.9 billion of the debt, about 14 percent of year-to-date borrowing. The bonds attracted buyers to the municipal market and reduced tax-exempt supply, helping drive down average yields to 3.94 percent, the lowest since 1967, from 4.92 percent on April 2, the Bond Buyer’s index shows.

“There seems to be a voracious appetite for the BABs bonds no matter who the issuer is,” Cohen said in an interview the day before the sale. As for the $1.3 billion tax-exempt portion, “they should have a relatively easy time selling it because it’s not so huge,” she said.

Increasing Supply
In the weeks before the bond sale, Lockyer’s staff watched yields slide as state and local authorities kept issuing more debt to lock in low rates. Borrowers were benefiting from the recovery following the financial meltdown that had spurred a rush to the perceived safety of Treasuries after the collapse of Lehman Brothers Holdings Inc. a year earlier.

About $270 billion in new municipal bonds had been issued from Jan. 1 to early October, 16 percent more than at that point in 2008. California’s 2009 tax-backed bond and note sales totaled $23.4 billion by Sept. 30, up from $4.6 billion and $10.6 billion in the first three quarters of 2008 and 2007, respectively.

Demand might wane “because we are at lows in terms of absolute yield levels,” said Peter Hayes, who oversees $106 billion in municipal bonds for BlackRock Inc., on Oct. 6.

California officials said they knew the bonds would be a harder sell than the September notes. To keep debt payments low, Lockyer loaded the tax-exempt portion with maturities longer than what individual investors typically buy.

‘We Got Spoiled’
“We are so used to getting 50 percent, 60-plus percent, 80 percent retail,” said Dresslar, the Lockyer spokesman, referring to how much individuals bought of an offering. “We got spoiled,” he said. “We were fully cognizant that this was not going to be a walk in the park.”

Deputy Treasurer Katie Carroll and Public Finance Director Blake Fowler flew to New York to monitor the sale, accompanied by Dresslar.

Fowler, 43, has spent most of his career in municipal bonds. A year ago, Carroll, 53, gave a talk on “ways to maximize demand” from individuals to the National Association of State Treasurers. Then in Fowler’s job, Carroll emphasized the value of advertising on radio and giving retail buyers a two-day “priority period” for placing orders.

Day One
The bankers went into the sale telling investors California would pay tax-exempt yields from 2.87 percent for the 2015 maturity to 4.63 percent for bonds due in 2029. The 20-year was 23 basis points lower than indicated at the time by a Bloomberg index designed to gauge the fair value of similar bonds. The estimate for yields on taxable securities available to individuals ranged from 3.5 percent to 3.75 percent.

On Oct. 6, the first day of retail sales, the three California officials sat in a conference room in Barclays Capital’s New York headquarters on Seventh Avenue. As they talked to credit-rating companies about another bond issue, they monitored orders for the current one, which the London-based bank helped sell.

They phoned in updates to Lockyer. With Municipal Market Advisors data showing yields already starting to rise, individuals bought 28 percent of the tax-exempt bonds and 25 percent of the taxable debt, less than half the demand seen on the first day of the September sale.

The underwriters “told us before the deal not to expect the level of retail that we had been getting,” Dresslar said. By the time of the sale, they painted an even gloomier picture of concessions that investors wanted “to get the deal done at least close to the size” California wanted, he said. “Some of the numbers that were coming out were startling.”

Day Two
The following morning, the three officials and their financial advisers were ushered into a conference room in Goldman’s 85 Broad St. headquarters. Fueled by coffee, pastries and sandwiches over a 10-hour day, they decided to raise yields by as much as 4 basis points on tax-exempt bonds to attract more orders.

The market’s response “may reflect some anxieties with the retail investors in buying anything that’s longer” than one- year notes, Lockyer said on Bloomberg Television that day. “It may be pricing. It’s hard to tell.”

By the end of the second day, retail buyers had placed orders for $427.7 million, or 33 percent, of the $1.31 billion tax-exempt portion and $77.5 million of the $250 million of taxable bonds available to individuals. All together, retail sales amounted to 11 percent of the $4.5 billion the state wanted to borrow.

Day Three
The next morning, the California officials moved to Citigroup’s offices to finish the offering with sales to pension plans, hedge funds, nonprofit groups and other professional buyers.

“We’re depending on the institutional investors to make this work,” Lockyer had said on TV.

In a room off the trading floor, the officials decided to cut the sale to $4.14 billion -- $1.31 billion in tax-exempts, $1.75 billion in Build America Bonds and $1.07 billion in other taxable bonds.

They also increased some yields again as institutions grew more wary of the state’s finances. Tax-exempt rates ended up 8 to 37 basis points higher than estimated, including the 20-year, which was boosted to 5 percent from 4.66 percent. Debt due in 2025 went to 4.69 percent from 4.42 percent. Four taxable issues, including the Build America Bonds, cost the state 12.5 to 25 basis points more than the low end of estimated ranges. Two priced at the high end, and two were above it.

Extra Interest
The yields, averaging almost a quarter-point more than estimated, will result in California paying $8.1 million a year more in interest than it would have at the lower rates. If the bonds all are outstanding at maturity, the extra interest would total $123.5 million, data compiled by Bloomberg show.

“It’s justified for Cal to be paying a little higher price in order to sell its debt, given its credit issues,” Deutsche Bank’s Pollack said in an interview that day. “Their budget was not as tight and strong as I think a lot of people would have liked it to be.”

The sale’s biggest maturity, $1.75 billion of 30-year Build America Bonds, was priced to yield 7.23 percent, 95 basis points more than comparable corporate bonds and 325 basis points more than Treasuries with similar maturities. With the subsidy, California’s net cost is about 4.7 percent. Ten-year Burlington Northern Santa Fe Corp. bonds with the same Moody’s ratings as California traded at 122 basis points more than Treasuries that same week.

‘Best Shot’
“They just got a little aggressive in where they wanted to price it,” said David Blair, a Pimco analyst in Newport Beach, California, the day after the sale. “Most people still recognize that there’s budget deficits the state is trying to deal with,” said Blair, whose company oversees $20 billion in municipal bonds.

Lockyer’s spokesman portrayed the sale as a success.

“To say that the market conditions were not as favorable as they had been doesn’t mean that you go in conceding hundreds of millions of dollars; you go in and give it your best shot because there’s a lot at stake,” Dresslar said.

“Given the cold market and the inhospitable attitude of investors, to pull off a $4.1 billion deal, we believe, is an impressive achievement,” Dresslar said. “We would have been derelict in our duty to taxpayers if we sold a bond of this size through a competitive sale. We would have gotten hosed.”

Highest Rate
By Oct. 15, 20-year yields had risen 0.38 percentage point to 4.32 percent from its previous low, the biggest two-week increase in 10 months, the Bond Buyer index shows. California has since sold $7.3 billion in debt. On Oct. 22, it paid 8.361 percent on $250 million of lower-rated Build America Bonds -- then the highest coupon rate for a $100 million-plus issue since the program began.

A week later, the state was able to cut estimated yields as much as 0.15 percentage point on $3.5 billion in better-rated tax-exempt bonds when individuals placed orders for almost 72 percent, including debt due in 2022 that cost the state 4.85 percent, up from 4.47 percent in the early October sale.

California sold $908 million in Build America Bonds on Nov. 3, pricing the 30-year securities to yield 7.26 percent, or 3 percentage points more than Treasuries, down from October’s 3.25-point spread.

Lockyer has said the state may issue more debt before the fiscal year ends on June 30 without specifying how much.

“Everybody thinks there’s still an appetite for California bonds,” the treasurer said in the Oct. 9 interview. “If the market is inhospitable, we won’t go,” he said. “We’ll just have to wait and see how the feelings are when we get ready to think about it again.”

Tom Dalpiaz, who helps Advisors Asset Management oversee $3.3 billion in Melville, New York, said California and its bankers had flooded a glutted municipal bond market with too much supply.

The sale gave investors “sticker-shock syndrome,” said Dalpiaz. “It was a very large bond issue to digest.”


http://www.bloomberg.com/apps/news?pid=20601109&sid=aWuY7slLZtoI&pos=10

 

[trysail]

Harvard Swaps Are So Toxic Even Summers Won’t Explain
By Michael McDonald, John Lauerman and Gillian Wee
December 18, 2009

(Bloomberg) -- Anne Phillips Ogilby, a bond attorney at one of Boston’s oldest law firms, on Oct. 31 last year relayed an urgent message from Harvard University, her client and alma mater, to the head of a Massachusetts state agency that sells bonds. The oldest and richest academic institution in America needed help getting a loan right away.

As vanishing credit spurred the government-led rescue of dozens of financial institutions, Harvard was so strapped for cash that it asked Massachusetts for fast-track approval to borrow $2.5 billion. Almost $500 million was used within days to exit agreements known as interest-rate swaps that Harvard had entered to finance expansion in Allston, across the Charles River from its main campus in Cambridge, Massachusetts.

The swaps, which assumed that interest rates would rise, proved so toxic that the 373-year-old institution agreed to pay banks a total of almost $1 billion to terminate them. Most of the wrong-way bets were made in 2004, when Lawrence Summers, now President Barack Obama’s economic adviser, led the university. Cranes were recently removed from the construction site of a $1 billion science center that was to be the expansion’s centerpiece, a reminder of Summers’s ambition. The school suspended work on the building last week.

“For nonprofits, this is going to be written up as a case study of what not to do,” said Mark Williams, a finance professor at Boston University, who specializes in risk management and has studied Harvard’s finances. “Harvard throws itself out as a beacon of what to do in higher learning. Clearly, there have been major missteps.”

Worst Time
Harvard panicked, paying a penalty to get out of the swaps at the worst possible time. While the university’s misfortunes were repeated across the country last year, with nonprofits, municipalities and school districts spending billions of dollars on money-losing swaps, Harvard’s losses dwarfed those of other borrowers because of the size of its bet and the length of time before all its bonds would be sold.

In December 2004, Harvard entered into agreements that locked in interest rates on $2.3 billion of bonds for future construction in Allston, with plans to borrow $1.8 billion in 2008 after they broke ground and the remaining $500 million through 2020. At the time, the benchmark overnight interest rate set by the U.S. Federal Reserve was 2.25 percent. The agreements backfired last year after central banks slashed lending rates to zero and the value of the contracts plunged, forcing the school to set aside cash.

‘Education Business’
Borrowers use swaps to match the type of interest rates on their debt with the rates on their income, which can help reduce borrowing costs. Lenders and speculators use swaps to profit from changes in the direction of interest rates. A bet on higher rates, for example, means paying fixed rates and receiving variable. At Harvard, nobody anticipated some interest rates going to zero, making the university’s financing a speculative disaster.

Harvard’s woes stemmed from misunderstanding its role, said Leon Botstein, president of Bard College in Annandale-on-Hudson, New York.

“We shouldn’t be in the banking business, we should be in the education business,” Botstein said in a telephone interview.

The financing plan using the swaps was developed by the university’s financial team and discussed with the Debt Asset Management Committee, an oversight group, according to James Rothenberg, a member of the President and Fellows of Harvard College, or Harvard Corp., and the school’s treasurer, a board position.

The swaps plan was then approved by Harvard Corp. and implemented and monitored by the financial team, Rothenberg said in an e-mail.

Making Sense
Summers, who left Harvard in 2006, declined to comment. As president and as a member of the Harvard Corp., the university’s seven-member ruling body, Summers approved the decision to use the swaps.

The strategy made sense in the economic climate of the time, Rothenberg said in another e-mail. Rothenberg is chairman of Capital Research & Management Co., the investment advisory unit of Capital Group Cos. in Los Angeles.

“Rates were at then-historic lows, and the university was contemplating a major, multibillion-dollar campus expansion,” Rothenberg said. “In that context, locking in our financing costs so that we would achieve some budgetary certainty had definite advantages.”

Demanding Cash
Harvard’s failed bet helped plunge the school into a liquidity crisis in late 2008. Concerned that its losses might worsen, the school borrowed money to terminate the swaps at the nadir of their value, only to see the market for such agreements begin to recover weeks later.

Harvard would have avoided paying the costs of its swap obligations by waiting. Its banks, including JPMorgan Chase & Co., headed by James Dimon, were demanding cash collateral payments -- ultimately totaling almost $1 billion -- that Harvard in 2004 had agreed to pay if the value of the swaps fell. At least $1.8 billion of the swaps the school held were with JPMorgan, said a person familiar with the agreements. Dimon, a 1982 Harvard Business School alumnus, declined to comment on the agreements through a spokeswoman, Jennifer Zuccarelli.

Drew Faust, Harvard’s president since 2007, said she experienced some of her darkest days as she watched the collapse of U.S. markets that deepened the school’s losses.

Swaps Foray
“Someone would say that this happened, that had happened, they were going to bail out AIG or Lehman is failing,” Faust recalled in an interview, referring to the September 2008 bankruptcy of Lehman Brothers Holdings Inc. in New York and the subsequent government bailout of American International Group Inc. in New York. “We were wondering what was going to happen tomorrow.”

Harvard speculated in the swap market as early as 1994, according to rating companies’ reports. Under Jack Meyer, former chief executive of Harvard Management Co., the school’s endowment used swaps to profit from interest-rate changes. The university also used them to fix borrowing costs for capital projects.

Summers became president in July 2001, after serving as U.S. Treasury Secretary. He earned a Ph.D. in economics from Harvard, and became a tenured professor there at age 28. He served from 1991 to 1993 as chief economist at the World Bank, which initiated the first interest-rate swap with International Business Machines Corp. in 1981.

Feeling Flush
In the 1990s, Harvard began amassing 220 acres (89 hectares) for construction near Harvard Business School and its football stadium, located in Allston. In June 2005, Summers unveiled his vision for a campus expansion replete with new laboratories, dormitories and classrooms, renovated bridges and a pedestrian tunnel beneath the water. The Allston project was to transform an industrial and working-class neighborhood of two-family wood homes and small shops by building two 500,000-square-foot (46,000-square-meter) science complexes and a redrawn street grid.

Harvard was flush at the time, with an endowment of $22.6 billion that had returned an average of 16 percent during the previous 10 fiscal years. Summers told Faculty of Arts & Sciences professors in May 2004 that he hoped they wouldn’t be “preoccupied with the constraints imposed by resources, for Harvard was fortunate to have many deeply loyal friends,” according to minutes of a faculty meeting.

“Harvard would be able to generate adequate resources,” according to the minutes. “The only real limitation faced by the Faculty was the limit of its imagination.”

Forward Swaps
When the plan was made public in 2005, Harvard’s financial team had been busy for more than a year behind the scenes, devising a financing strategy for the project using interest- rate swaps. These derivatives enable borrowers to exchange their periodic interest payments. They typically involve the exchange of variable-rate payments on a set amount of money for another borrower’s fixed-rate payments.

In 2004, Harvard used swaps for $2.3 billion it planned to start borrowing four years later. The AAA-rated school would have paid an annual average rate of 4.72 percent if it had borrowed all the money for 30 years in December 2004, according to data from Municipal Market Advisors. The swaps let it secure a similar rate for bonds it planned to sell as it constructed the campus expansion during the next two decades.

‘Relatively Rare’
The agreements were so-called forward swaps, providing a fixed rate before the bonds were actually sold. Harvard was betting in 2004 that interest rates would rise by the time it needed to borrow. The school was also assuming the expansion would proceed on the schedule set by Summers and his advisers.

While the university could have paid banks for options on the borrowing rates, the swaps required no money up front.

That time frame, along with the size of the position, was unusual, said Peter Shapiro, an adviser at Swap Financial Group Inc. in South Orange, New Jersey.

“There have been lots of forward swaps, but out longer than three years is relatively rare,” Shapiro said in a telephone interview. That duration increases the risk, because the longer the term of the contract, the more volatile the value of the swap, he said.

Columbia University is breaking ground on a $6.5 billion expansion in New York City, and last year used an interest-rate swap for its borrowing of $113 million of bonds sold seven months later. Yale University in New Haven, Connecticut, is also AAA-rated. It had 32 separate swap agreements totaling $975 million as of Oct. 31, hedging the school’s $1.4 billion variable rate debt and commercial paper, according to Moody’s Investors Service Inc.

Corporate Strategies
Corporations might use derivatives to lower their borrowing costs as many as four years before a bond sale, according to bankers who sell derivatives. Anadarko Petroleum Corp. used the swap market in December 2008 and January 2009 to secure rates for $3 billion it plans to refinance in October 2011 and October 2012, according to the Houston, Texas-based company’s third- quarter report from Nov. 3. Matt Carmichael, a company spokesman, declined to comment.

Rothenberg, a Harvard College and Harvard Business School graduate, said he was among the key players involved in developing the financing strategy. His Los Angeles-based company, Capital Group, operates American Funds, the second-biggest family of stock and bond mutual funds in the U.S. He had been Harvard’s treasurer for six months when the school arranged the Allston swaps in December 2004.

Berman’s Role
Ann Berman, Harvard’s chief financial officer at the time, also played a role in developing the plan, Rothenberg said. Berman declined to be interviewed. She stepped down in 2006 when she was named an adviser to the president, according to the school’s Web site. A certified public accountant, Berman got her master’s in business administration at the University of Pennsylvania’s Wharton School of Business in Philadelphia and had earlier served as a financial planner and adviser for Harvard’s dean of the Faculty of Arts & Sciences.

Other members of Harvard Corp. in 2004 and 2005, who served with Summers and Rothenberg, were former U.S. Treasury Secretary Robert Rubin, Summers’s previous boss and predecessor at the U.S. Treasury, who was an instrumental supporter of his bid for the Harvard presidency; Robert D. Reischauer, former director of the Congressional Budget Office, who was a colleague of Summers and Rubin’s in Washington; Conrad K. Harper, a lawyer at Simpson Thacher & Bartlett LLP in New York; Hanna Gray, former president of the University of Chicago; and James R. Houghton, chairman of Corning Inc., the world’s biggest maker of glass for flat-panel televisions, in Corning, New York.

All except Rothenberg declined to comment or didn’t return telephone calls.

JPMorgan’s Role
Harvard University’s finance staff worked with JPMorgan to develop the size and the length of the forward-swap agreements, said a person familiar with the contracts. Final negotiations to set the rates were left to Harvard Management, which oversees the endowment, because it had swap contracts in place with JPMorgan dating back to 1996 that set terms for the agreements, according to a copy of the agreement obtained by Bloomberg News.

The original swap contract between Harvard Management and JPMorgan was approved by Michael Pradko, the endowment’s risk manager, the copy shows. Pradko left Harvard Management in 2005, along with Jack Meyer, the endowment’s head, to join Convexity Capital Management LP in Boston, the hedge fund Meyer started. Pradko declined to comment.

Impeccable Timing?
When Harvard Management completed its swap contracts for the school, the timing was encouraging. U.S. Federal Reserve Chairman Alan Greenspan had just begun raising the overnight target rate as the economy rebounded from the bursting of the technology bubble. In the second half of 2004, he lifted it to 2.25 percent from 1 percent.

For more than 20 years, investment banks such as Goldman Sachs Group Inc., JPMorgan, and Citigroup Inc., all based in New York, have been selling swaps as a way for schools, towns and nonprofits to reduce interest costs and protect against rising interest payments on variable-rate debt. The swap agreements can be terminated if either the bank or the issuer is willing to pay a fee, which varies with interest rates.

“Swaps have become widely accepted by the rating agencies as an appropriate financial tool,” according to a slide entitled “Swaps Can Be Beneficial” that was used in a 2007 Citigroup presentation to the Florida Government Finance Officers Association. Debt issuers can “easily unwind the swap for a market-based termination payment/receipt,” the slide said.

Posting Collateral
Rothenberg said officials throughout Harvard were monitoring the school’s swap position, including members of the financial office, the budget office, the controller’s office and Harvard Management. Although the contracts required Harvard to post collateral, or set aside cash when the values reached certain thresholds, such provisions weren’t unusual, Rothenberg said in an e-mail.

“I think there are lots of swaps with collateral postings,” Rothenberg said. “From fiscal years 2005 through 2008, these swaps were in place and there were collateral postings. It was not a pressing concern for the University, even though you can look at the financial statements and see that there was at least an unrealized loss in certain years.

“I think the unusual nature of these swaps were two things,” Rothenberg said. “One, they were large, but the anticipated capital spending program was large; and two, they were longer-dated than most people are used to thinking about, because the capital spending program was expected to last over a number of years. The problem resulted from the rapid meltdown in the markets, which culminated in November when short-term interest rates and swaps rates collapsed.”

Insufficient Oversight
After credit markets seized up in 2007, central banks worldwide pushed some bank lending rates to zero in their effort to rescue the financial system.

While Harvard Corp. is ultimately responsible for the school’s financial decisions, the losses sustained by the school in almost every financial domain -- the endowment, cash account and swaps -- suggest that oversight was lax, said Harry Lewis, a Harvard alumnus, computer science professor and former dean of Harvard College.

Harvard not only lost money on the swaps last year. The value of its endowment tumbled a record 30 percent to $26 billion from its peak of $36.9 billion in June 2008, and its cash account lost $1.8 billion, according to Harvard’s most recent annual report.

“They have a structural problem,” Lewis said in a telephone interview. “There’s something systemically wrong with Harvard Corp. It’s too small, too secretive, too closed and not supported by enough eyeballs looking at the risks they are taking.”

Summers Resigns
Summers’s departure as president came in 2006, after he questioned women’s innate aptitude for math and science. Summers apologized formally and repeatedly for the remarks made in a speech, which he said were misconstrued, and the school said it would spend $50 million to help women succeed in science and engineering. He resigned after the faculty passed two no- confidence motions against him.

That left Faust, the Civil War historian and prize-winning author who succeeded Summers as president in July 2007, to manage the Allston plans. Faust committed to its first phase: beginning construction of a $1 billion science center that would house researchers from the Harvard Stem Cell Institute, the Harvard School of Public Health and the Wyss Institute for Biologically Inspired Engineering.

By June 2005, the value of the swaps tied to Harvard’s debt was negative $460.8 million, meaning that’s how much it would have to pay the banks to terminate the agreements, according to the school’s annual report that year.

Financial Burden
By 2008, Harvard had 19 swap contracts on $3.5 billion of debt with JPMorgan, Goldman Sachs, New York-based Morgan Stanley, and Charlotte, North Carolina-based Bank of America Corp., including the swaps for Allston, according to a bond-ratings report by Standard & Poor’s released on Jan. 18, 2008.

The swaps became a financial burden last year as their value fell and collateral postings rose. In a contract with Goldman Sachs, the school agreed to post cash if the swaps’ value fell below $5 million, according to a copy obtained by Bloomberg News. The collateral postings with the banks approached $1 billion late last year as central banks slashed their target rates, according to people familiar with the situation.

Michael Duvally, a spokesman for Goldman Sachs, Mary Claire Delaney, a spokeswoman for Morgan Stanley and Kerrie McHugh, a spokeswoman for Bank of America, all declined to comment.

Bigger Scale
Harvard wasn’t alone in being forced to set aside cash last year to meet such margin calls. The difference was the scale.

Cornell University in Ithaca, New York, posted $38 million of collateral on $1.5 billion of swaps, according to a Moody’s report on the Ivy League School. Hanover, New Hampshire-based Dartmouth College, also in the Ivy League, didn’t post collateral on their swaps because their investment banks agreed to waive the requirement to win the business, according to a person familiar with the contracts. The Ivy League is a group of eight elite schools in the northeast U.S., including Harvard.

After a year during which central banks provided an unprecedented amount of money to rescue financial institutions, the credit markets unraveled along with the stock market in September 2008. Lehman Brothers filed the largest bankruptcy in history on Sept. 15. Two weeks later, the House of Representatives rejected a $700 billion bailout plan, sending the Dow Jones Industrial Average down 778 points, its biggest point drop ever.

Plunging Value
The value of Harvard’s swaps plunged and its need for cash soared. Under contracts signed in 2004, Harvard had to post larger and larger amounts of collateral to cover the negative value of the swaps; the total amount would approach $1 billion.

At the same time, the usual sources the university relied on to generate cash -- the endowment and its operating cash account -- were hemorrhaging. The school’s endowment tumbled, losing 22 percent from July 2008 through October 2008.

The Harvard endowment had more than 50 percent of its assets allocated to private equity, hedge funds and other hard- to-sell assets. The university already had borrowed to amplify gains, with leverage targeted at 3 percent of assets as of last year. When Jane Mendillo took over as chief executive officer of Harvard Management on July 1 last year, one of her top priorities was to raise cash. The school couldn’t get acceptable prices from the $1.5 billion of private equity stakes Mendillo tried to sell.

Liquidity Crisis
Outside managers investing Harvard’s endowment were either performing poorly or preventing Harvard from withdrawing cash. Citigroup CEO Vikram Pandit shut down Old Lane Partners in June 2008. Ospraie Management, in New York, closed its biggest hedge fund in September and Farallon Capital Management, in San Francisco, put up a so-called gate, prohibiting clients from taking out cash.

Making matters worse, Harvard disclosed Oct. 16 that its checkbook fund, the general operating account, lost $1.8 billion in the year ended June 30. Lumping the cash account with the endowment was risky, said Louis Morrell, who managed the endowment for Radcliffe College, which is part of Harvard, until 1990.

“They put the operating funds in the endowment --it’s like the guy who has his retirement income in company stock,” said Morrell, who is also the former treasurer of Wake Forest University in Winston-Salem, North Carolina.

Borrowing Money
Rothenberg, Mendillo and Daniel Shore, Harvard’s chief financial officer, decided last year as the credit crisis deepened that the school needed to borrow money.

It was at this point, in October, that Harvard officials contacted Ogilby, their bond lawyer at Ropes & Gray LLP in Boston. A 1980 Harvard College graduate, Ogilby is head of the firm’s Public Finance Group. E-mails show that Craig McCurley, the director of Harvard’s treasury management office, and his associate director, Tom Balish, contacted Ogilby, who in turn reached out to the Massachusetts Health & Educational Facilities Authority, which sells bonds for the state’s nonprofits. Ogilby declined to comment.

Harvard needed cash to pay bills, refinance outstanding debt and break its money-losing swap agreements, according to a series of e-mails beginning on Oct. 31 last year between Ogilby and staff members of the state authority that were obtained by Bloomberg News. School officials asked whether the agency could omit from a public hearing that some of the bonds would finance swap termination payments.

‘Timely Information’
“There is some sensitivity at Harvard about not specifically flagging the swap interest unwind payments,” Ogilby wrote on Nov. 12 to Deborah Boyce, an analyst at the authority. “They still would like the ability to finance them, but would prefer to delete those references if they can do so.”

Benson Caswell, the bond authority’s executive director responded Nov. 13 that the swap agreements would have to be identified and that the authority needed “timely, accurate and unfiltered information, including a balanced presentation,” from issuers. Harvard disclosed the use of the bond proceeds, and only wanted to avoid telegraphing potential activity in the swap market, said Christine Heenan, a school spokeswoman.

“The spirit of our inquiry was whether prematurely disclosing plans for what are inherently market transactions would in any way jeopardize the execution of those transactions,” she said in an e-mail.

Not Special
At its Nov. 13 monthly meeting in Boston’s financial district, the agency’s seven-member board approved a Harvard bond issue of up to $2.5 billion, about the amount of debt it sells for all schools and borrowers in a typical year. The board usually takes two meetings to approve a bond sale. In Harvard’s case it took just one meeting.

“I can assure you that Harvard doesn’t get any special treatment,” Caswell said. “Other borrowers have received the same service.”

Caswell said one board member, Marvin Gordon, is a Harvard graduate and that as long as there is no conflict of interest between his business and the use of the bond proceeds, a board member may vote on approval of a bond sale.

Gordon said while he didn’t have a conflict in voting to approve Harvard’s bond issue, “they never should have been in the position where they had to get out” of the swaps.

Harvard unwound the swaps at possibly the worst moment in the history of financial markets, said Shapiro, the municipal swap adviser. Just as Harvard’s request for approval to sell tax-exempt bonds arrived in the state offices, the swap market began sliding, according to Bloomberg data. While the school waited for permission to raise money, the price to break the swap agreements escalated.

Tumbling Index
On Nov. 13, the index used to value the agreements, the U.S. dollar 30-year swap rate, closed at 4.247 percent. By the time Harvard held its bond sale Dec. 8, the swap index had tumbled to 2.7575 percent. Harvard exited three of its swaps tied to $431 million debt on Dec. 9, when the benchmark fell again to 2.6885 percent. The interest-rate swap market reached a record low of 2.363 percent on Dec. 18.

Harvard’s decision to borrow money came at a time when the difference, or spread, between yields on corporate and U.S. Treasury securities was the widest since at least 1990, according to data from Barclays Plc. That meant AAA-rated Harvard was selling bonds when the market was demanding the biggest premium in at least 18 years.

“December 2008 was, by an enormous amount, the worst time in history” to terminate the swaps by borrowing money, said Shapiro.

Harvard’s Payments
Harvard sold $1.5 billion of taxable and $1 billion of tax- exempt bonds, using $497.6 million of the proceeds to pay investment banks to extract itself from $1.1 billion of interest-rate swaps, according to its annual report released Oct. 16. Separately, the school agreed to pay another $425 million over 30 years to 40 years to the banks to terminate an additional $764 million of the swaps, Harvard’s Shore said.

The school on Dec. 12 paid JPMorgan $34.5 million from the tax-exempt bond proceeds to unwind a swap tied to $205.9 million of variable-rate bonds it sold for capital projects, according to documents obtained from the Massachusetts financing authority. It also paid Goldman Sachs $41.6 million on Dec. 9 and $23.2 million on Dec. 11 to end agreements on another $226.8 million of existing debt. Harvard didn’t disclose recipients of the other termination payments because it paid them from the taxable bonds.

Not ‘Ideal’
The timing was “less than ideal, but the surrounding context was less than ideal as well,” said Shore.

Harvard and JPMorgan celebrated the bond issue by hosting a cocktails-and-dinner party at the French restaurant Mistral, in Boston’s South End neighborhood, where appetizers start at $15 and entrees cost about $40, according to e-mails obtained from the state finance agency. JPMorgan invoiced the agency $388.78 for three employees who attended: Caswell, Marietta Joseph and Danielle Manning.

Since then, some of the values in the swap market have recovered to their levels of December 2004 when Harvard signed the forward contracts.

“If Harvard had waited, the cost of terminating may well have been lower, but they weren’t willing to take that risk,” said Matt Fabian, managing director at Municipal Market Advisors in Westport, Connecticut.

No Choice
Shore said that he, Mendillo and “a lot of us in senior management” contributed to the decision to break the swap agreements. That group included Ed Forst, the former executive vice president, who returned to Goldman Sachs after less than a year at Harvard, Shore said. Shore also cited Harvard Corp.’s role as bearing the school’s ultimate fiduciary responsibility. Forst didn’t return calls seeking comment.

Waiting didn’t appear to be an option at the time, Shore said.

“In evaluating our liquidity position, we wanted to get ourselves some stability and some safety,” he said in an Oct. 16 interview this year at Harvard. “It was to take the losses now rather than run the risk of having further losses if we continued to hold on to the positions.”

No one expected the indexes used for valuing swaps to fall as fast and as much as they did, said Chris Cowen, managing director of Prager, Sealy & Co. in San Francisco.

“What we ended up with was an outlier event,” said Cowen, who advised Harvard as it unwound its position last year. “I was taken by surprise by the falling rates.”

Spending Cuts
Harvard, in the meantime, has cut its capital spending estimate for the next four years in half to about $2 billion. Before the credit crisis, it planned on spending $10 billion over a decade on capital projects, including Allston. Faust is building a team to study “financially and structurally” how Harvard can expand, and holds regular monthly meetings with top financial advisers, including Mendillo, to guard against future financial catastrophes, she said in an e-mail announcing the work stoppage in Allston.

Summers, along with Rubin and Greenspan opposed the U.S. Commodity Futures Trading Commission’s attempt in 1998 to regulate so-called over-the- counter derivatives, which included agreements like interest rate swaps. At the time, Summers was Rubin’s deputy secretary.

Now Summers is leading the Obama administration’s effort to write stricter rules for the derivatives market “to protect the American people,” he said in October at a conference in New York sponsored by The Economist magazine.

Universities would have been better served if they had stayed away from the more complicated financial instruments being sold by Wall Street, said David Kaiser, a Harvard class of 1969 alumnus who has been critical of the high salaries paid to managers of the school’s endowment.

Bank Strategy
“They used many of the investment strategies of the big banks and hedge funds, and when things went badly they could not get a bailout,” said Kaiser, a history professor at the U.S. Naval War College in Newport, Rhode Island. “It would clearly be better for any nonprofit on whom many people depend to pursue safer, more stable strategies.”

Pennsylvania State Auditor General Jack Wagner said Nov. 18 that the state should ban local governments from entering into derivative contracts tied to bond issues, a practice he termed “gambling” with taxpayer funds.

Harvard might have considered it a conservative step to lock in rates when they were low, said Shapiro, the New Jersey- based swap adviser.

“You can be very big and very rich and very smart and still get things wrong,” Shapiro said.


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Harvard Swap Toll Tops $1.4 Billion as Deals Terminated

By John Lauerman and Michael McDonald
November 8, 2013

Harvard University, the world’s richest college, lost $345.3 million terminating interest-rate swaps last year, bringing its cost of unwinding debt derivatives since 2008 to more than $1.4 billion.

Harvard made the most recent payments to exit derivatives linked to about $942 million of existing and future debt, the Cambridge, Massachusetts-based university said in a report today on the fiscal year ended June 30. The university lost an additional $134.6 million a year earlier linked to $756 million of swaps.

The costs add to more than $900 million Harvard agreed to pay in 2008 to exit swaps linked to an ambitious expansion plan in Allston, a Boston neighborhood near the main campus. The use of the derivatives backfired at the same time the university’s endowment was on pace to lose more than a quarter of its value. Since then, the school has raised cash and cut debt to stabilize its finances.

“Like most colleges and universities, we already have exhausted the easiest opportunities for budget improvement,” Daniel Shore, Harvard’s vice president for finance and chief financial officer, and Treasurer James Rothenberg said in the report. “As a result, we will face increasingly complicated yet unavoidable choices as we seek to cover more ground in cost management.”

Allston Campus
The school agreed to many of the swaps when former President Lawrence Summers was planning to build the Allston campus, including a $1 billion science center. The swaps, which locked in interest rates for Harvard, also required the school to post collateral if rates fell. Harvard officials said that the hedges on debt that remain are unrelated to Allston.

After Drew Faust succeeded Summers as president, the school terminated swaps at a cost of $923 million to avoid posting millions in collateral. Faust put the expansion plan on hold as Harvard’s frayed finances forced the school to take budget-cutting measures, including cutting some student services.

Faust has since resumed the building plan, and the school is shifting its construction financing from debt to donations. In September, the school announced The Harvard Campaign, a fundraising drive with a record goal of $6.5 billion.

Harvard Deficit
Harvard had an operating deficit of $34 million for the year, an increase from $7.9 million the earlier period. While the deficit is a small proportion of the university’s $4.2 billion 2013 revenue, it’s representative of a number of pressures on the school’s funding sources, such as federal research grants, Shore said.

U.S. government funding at Harvard fell 2 percent to $653 million in the fiscal year as the increases from the American Recovery and Reinvestment Act of 2009 expired, the report said. While non-federal funding increased 17 percent to $191 million, lifting overall sponsored funds 1 percent to $845 million, the university faces “looming challenges” in managing its budget, Shore said.

“We need to think about whether there are more creative ways to think about alternative revenues,” he said in an interview posted on Harvard’s website, “and at the same time, whether there are different choices that we can make about how to manage our expenses so that we can not only survive, but thrive through what could be a challenging number of years coming up.”

In further moves to stabilize its finances, Harvard raised holdings in cash and liquid investments outside its endowment to $1.5 billion from $1.3 billion at the end of the earlier fiscal year. Outstanding debt fell to $5.7 billion from a high of $6.3 billion on June 30, 2011, the report said.

“While we believe debt is an important enabler of growth, it currently constitutes an outsized proportion of the university’s capital structure,” Shore and Rothenberg said in the report. “We are de-levering in a deliberate yet gradual manner in order to maintain flexibility.”





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