Business.view: Clunky but effective | The Economist

Business.view: Clunky but effective | The Economist

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"Cash for Clunkers", known as the Car Allowance Rebate System (CARS) — is a federal program which was introduced by President Obama on June 24, 2009. This program aims to encourage consumers to trade in older, less fuel-efficient vehicles for new vehicles that get better fuel economy by providing a credit of either $3,500 or $4,500. The Cash for Clunkers program covers qualifying transactions that occur between July 1 and November 1, 2009.

The National Highway Traffic Safety Administration (NHTSA) was tasked with hashing out the details and implementing the Cash for Clunkers program.

The program divides cars, trucks, SUVs and vans into four categories, in most cases based on weight and length of their wheelbase. Vehicles that are traded in are to be destroyed, not resold, and the base manufacturer's suggested retail price of the new replacement vehicle cannot exceed $45,000. Miles-per-gallon (mpg) figures set out below refer to the EPA's published "combined" mpg.


If you have a used vehicle you want to trade in that is worth more than $4,500, the Cash for Clunkers program will probably not make financial sense for you.

An interesting article of the Economist is trying to find out wether the CARS program is really helping the economy or useless due to the phenomenon that Keynes called the liquidity trap.

Tackling the liquidity trap answers one criticism of the scheme—that it is simply pulling forward demand from the future, rather than creating additional demand. In normal times, this criticism would be more powerful. (In France, which offered a scrapping bonus in the mid-1990s, sales fell by 20% in the year after it expired.) However, in a situation where fear could lead consumers to shift to a lower level of demand that could last for years, breaking them out of that negative psychology could mean higher demand tomorrow as well as today. That does not mean that all consumption is good, nor that there should be a return to the unsustainable debt-fuelled consumption that helped cause the current mess, only that it is good to dispel the sort of irrational fear of consumption that Keynes identified as creating liquidity traps.

New Opportunities in Waste Management Industry

A revolution in the world of waste management
Waste management has changed dramatically over the past few years. Dependence on landfill as the preferred method of waste disposal has steadily reduced with alternative methods sought mainly by local authorities but also commercial businesses. Even the simple perception of what “waste” is has also changed. As a result the industry as a whole should look more closely at the three Rs. Reduce, Reuse and Recycle with disposal as the last resort.

UK, or “the dirty man of Europe”
The UK is consuming natural resources at an unsustainable rate. If every country consumed natural resources at the rate the UK does, we would need three planets to live on. The UK generates roughly 100 million tonnes of waste from households, commerce and industry. Currently most of this ends up in landfill where the biodegradable part generates methane while valuable energy is used in extracting and processing new raw materials.
However the UK is already in the process of improving its green policy. In 1997 only 7% of England’s household waste was recycled. It has almost quadrupled to 27% - a tremendous achievement by the public and local authorities. Despite this improvement, the UK still remains a long way behind many of its European neighbours, who recycle well over half their municipal waste.
The Landfill Tax escalator, UK’s main fiscal measure encouraging diversion from landfill, means it is becoming more and more expensive to send waste to landfill.
Therefore it is time for change, and the government aim must be to reduce waste by making products with fewer natural resources. The link between economic growth and waste growth shall disappear. Most products should be re-used or their materials recycled. Energy should be recovered from other wastes where possible. Only and exclusively for a small amount of residual material, landfill will be necessary.

Changing regulation
EU Landfill Directive
The UK currently produces 28 million tonnes of municipal waste every year, 79% of which ends up in landfill. In England and Wales the directive is applied under the Landfill Regulations 2002 and must be fully implemented by July 2009. It sets demanding targets for the reduction of biodegradable municipal wastes sent to landfill which are detailed as follows:
-By 2010 we must reduce biodegradable municipal waste landfilled to 75% of that produced in 1995.
-By 2013 we must reduce biodegradable municipal waste landfilled to 50% of that produced in 1995.
-By 2020 we must reduce biodegradable municipal waste landfilled to 35% of that produced in 1995.

WEEE Directive
The UK generates around 1.9 million tonnes of Waste Electrical & Electronic Equipment (WEEE) each year from domestic and commercial sources. Everyone should be aware that under the WEEE Directive, as from 1 July 2007, it is illegal to dispose of waste electrical and electronic equipment into Landfill.
The Directive affects producers, distributors and recyclers of electrical and electronic equipment and encompasses everything from electronic games, calculators, toasters and kettles to audio equipment, fridges, washing machines, commercial and industrial equipment. When put into landfill, WEEE relinquishes its toxins and pollutes the environment. The EU introduced a directive aimed at reducing WEEE, encouraging reuse, recovery of its base materials and reducing the environmental impact of disposal. The directive has passed into law in all member states.

Change means new opportunities and potential business
development

The evolution in waste policy was initiated by politics mainly for ecological reasons and green goals. Though this will have a greater impact on household waste managed by local authorities, it will also present major commercial opportunities for the waste management industry as waste producers will increasingly be looking towards it for innovative solutions to their problems.

Finally it will be interesting to keep an eye out for attractive new businesses, which could offer alternative options to current waste management processes. There is still room for opportunities. Change means opportunity: be ready to find out the right solutions to the new challenges of the waste industry!

M&A and the recession

• Global picture

Globally most bankers and M&A analysts expect the recession to eventually spark waves of consolidation in many industries. In fact weakened companies will need buyers to survive, whereas strong oness might take advantage of low stock market valuations to acquire troubled rivals at discounts.
Nevertheless a revival in M&A will not be that simple. First, there is the credit crunch issue. Banks and other lenders have made it tough to finance deals, making loans, especially for big deals, scarce and more expensive. A second barrier to a revival in M&A is fear. Firms are storing up cash, holding onto it as insurance against a nasty economic downturn.

• The crucial role of confidence

Confidence, has become a rare commodity. In business, M&A and everyday life, the ability to make quick and bold decisions or clinch the big deal requires a sense of confidence. The previous months have seriously dented people confidence and that is reflected in the relationship with banks, regulators and business. Trust in these organisations has simply been eroded. Banking crisis, rising unemployment...that makes a lot of terrible news. The government has tried to enhance the level of the economy with a huge bailout, and then some help has been given to the car industry. But still the level of confidence is quite low! Therefore a revival in M&A activity will be enabled only by some news which would enhance confidence.Once that confidence has come back, deals will proliferate. An M&A move is a bet on the future, and it's hard to make those bets when the outlook is so cloudy.

LTCM and the current financial crisis

I. Introduction

Long-Term Capital Management (LTCM) was an American hedge fund, which developed trading strategies in the 1990's. After many years of growth, success and triumph, this company collapsed amazingly in early 2000 and provoked a huge chaos in the financial environment. How did such a drama occur? What was the role of the financial authority regulation? ... Many questions occurred from that collapse. It appears that the financial system has not managed to cure from that incident and problems have not been resolved yet. In fact the current crisis emphasises the existence of many issues and problems in the banking system. After a brief description and analysis of LTCM collapse, the following report will aim to find out some similarities between that failure and the current crisis.

II. Description and analysis of LTCM bankrupt

A. A quick development to become a major actor within the financial industry
LTCM was founded in 1994 by John Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers. Among the directors of LTCM, there were also Myron Scholes and Robert Merton, who were both Nobel Prize in Economics. During the first years, LTCM managed to develop quite rapidly. Furthermore LTCM attracted plenty of investors by achieving amazing annualized returns of over 40% in its first years. LTCM hedge fund focused its business on trading strategies such as fixed income arbitrage, statistical arbitrage, and pairs trading, combined with a high leverage.

B. An amazing and unexpected failure, which generated a domino effect
However the dream of LTCM did not last very long. It turned out that their system was not that good. Their success was only a fiction; and reality finally occurred. That reality was very harsh! In 1998 LTCM indeed lost $4.6 billion in less than four months following the Russian financial crisis. Therefore LTCM suddenly became a sad example of the existing risk in the hedge fund industry. Finally LTCM hedge fund collapsed in 2000. This major failure then lead to a massive bailout by other banks and investment houses, which was supervised by the Federal Reserve.

III. Similarities with the current financial crisis: some reasons that lead to the failure

A. The danger of models based on mathematics
The failure of LTCM was devastating for many involved. In fact Merton and Scholes lost huge amount of money, but that is not all. Their theories were also quite damaged.
Both LTCM and the current crisis emphasise the existence of mathematical risk models. Although mathematical theories generate kind of a sense of security, reliance on these models should be limited. Perfect models do not exist; and actually it is not the role of models to predict exactly the future. Models should only be used to help take decision; nevertheless they should not be used systematically.
The problem is our brains are prepared for narrative, not statistical uncertainty. Therefore models are prepared to establish simplified stories to explain the complex reality. This is the message that Nassim Taleb try to transmit in his book “the black swan”. According to him, the truth is that bankers have no idea why stock markets go up or down. Their theories are grossly simplified, if not wrong! All the current theory is based on the normal distribution theory. However LTCM and the current crisis prove that finance is not governed by such a mathematical law. Exceptional facts are much more common than predicted by the normal distribution. Mr Talib calls these exceptional facts “Black Swans”. He therefore makes a reference to a 17th century philosophical thought experiment. In Europe all most of people only knew white swans, which made them believe that all swans are white, while black ones actually existed.Finally it appears that most of the big events in our world are rare and unpredictable. Therefore trying to extract generalizable stories to explain them is practically useless.

B. Lack of effectiveness from the regulation authority
Both crises emphasise the lack of regulation from the various authorities: Federal Reserve, bankers, rating agencies, charted accountants…

Alan Greenspan: is the myth declining?
Although the former chairman of the Fed has managed to become the genius of finance and the most important person in the world, it appears now that some specialists are criticizing his previous policy.
Greenspan was chairman of the Fed from 1987 to 2006...almost twenty years! During these years, he managed to build a wonderful reputation. He maintained the interest rates at a low level for a long while in order to boost the economy and avoid a recession. Thanks to this policy, Greenspan enabled USA to reach very high level of growth.
Some analysts criticize him regarding his policy. They claim current financial problems of USA are due to previous mistakes of Greenspan. According to them, Greenspan shouldn't have slashed interest rates to such a low level to avoid housing bubble.
On the other hand, Greenspan claims nothing can avoid a bubble.”Bubbles are unavoidable”. Fed policy is not the origin of this crisis...the bubble was a world phenomenon! By trying to avoid the housing bubble, Fed might have created a recession.
Bernanke, the new chairman of the Fed, has decided to defend Greenspan policy by claiming he would have done exactly the same.

Dangerous products allowed by regulation authority
Subprime loans are a very dangerous tool. They were provided most of time to “bad” customers, whose credit rating was under medium average. In fact these borrowers who did not qualify for loans from mainstream lenders. This phenomenon was widespread in the US, where about six million people who have no money have borrowed about 100% of the value of a house, right at the top of housing market which has since fallen sharply. These are the subprime borrowers. With subprime loans, customers pay only the loan's interests for a long while and then have to pay suddenly all the borrowed money. This is very risky... Furthermore these loans depended on the interest rates. As central banks raised their interest rates, it became harder and harder for customers to pay back their loans. A slowdown in the US housing market coupled with rising US interest rates have also hit the subprime system.
A lot of people have been unable to pay their debts. Thus banks lost huge amounts because of this risky tool. All the financial community is suffering from this incident. Banks are afraid and refuse to lend money each other. Thus Central Banks are now obliged to lend huge amounts to banks.

C. Do authorities have to rescue banks in trouble?
Some industry officials said that Federal Reserve Bank of New York involvement in the rescue of LTCM, however benign, would encourage large financial institutions to assume more risk, in the belief that the Federal Reserve would intervene on their behalf in the event of trouble. Federal Reserve Bank of New York actions raised concerns among some market observers that it could create moral hazard.
In comparison central banks and governments are providing huge amount of money to help bank prevent from collapsing in the current crisis. Since the announcement of Northern Rock' crisis, the bank of England has already lend huge and impressive amounts to help this bank to survive. Similarly most of banks have received help. Only the giant Lehman Brothers did has not been saved by the authority. Was it a good idea for financial authorities to intervene in such a situation?
In short-run, a helpful policy enables financial authorities to avoid a crisis by rescuing banks in trouble. It helps bank's customers, who might have lost all their savings and also helps bank's employees, who may lose their job and thus increase unemployment rate.
Furthermore this policy avoids a domino effect, which could have drastic consequences on the financial community as a whole. Central banks may also intervene for personal reasons...pride and honour instead of rational and realistic judgment!
Fortunately authorities refuse to rescue banks sometimes. For example it happened in the UK, when Barings collapsed. Barings Bank was the oldest merchant banking company in London until its collapse in 1995 after one of the bank's trader lost $1.4 billion in speculation.
Let us move on to the reasons not to help. If a company has a harmful management, why should authorities help it? By rescuing such banks, authorities may appear weak and thus may encourage careless management.
Moreover by lending money to banks in trouble, central banks risk losing even more money in the future. Here is a big dilemma...a helpful policy may avoid the crisis in the short-run, whereas it might create a bigger one in the future. Financial authorities have to be credible. Thus banks would be aware of risks and that is crucial!

D. Stock Options: why might they be responsible of crisis?
Although the banking system is suffering huge losses similarly to the LTCM hedge fund at the time, most of directors still earn impressive wages, bonuses and other kind of inflows such as stock options payout! Therefore the public opinion is getting worse and worse with regards to this policy. As a result stock options are strongly attacked at the moment. People want this tool to disappear.
Stock options have been created originally in order to motivate managers to work efficiently. Their earnings were indexed to the company's shares value. Theoretically this tool was supposed to help all the stakeholders. Shareholders would eliminate the agency problem, which claims managers may not work for the benefit of shareholders. And Managers would have the possibility to increase their earnings.
However the real and effective impact of stock options is different. Managers use their insider knowledge for their own goals. They focus on short-run to maximise shares value and thus their earnings. Then just before bad news announcement, they sell illegally the shares. It is illegal because it privileges an investor over another and establishes asymmetric information. Thus stock market confidence goes down. This problem is not new. Previous financial scandals such as Enron emphasized it.
Finally financial failures may release the end of stock options existence. New French government intends to establish new rules to prohibit them and act to curb so-called “golden handshakes”

E. The crucial role of information
LTCM failure and the current crisis both emphasise the crucial importance of information. In fact it appears that both of these failures are the result of poor information flows. Therefore it might be useful to change the organisation of financial markets, in order to enable better information.
Nowadays world is organized around the concept of financial markets, which are a mechanism that allows people to easily trade. The appearance and development of these markets have given a crucial role to information.
In fact information has become a key tool in the current system. It enables people to get a knowledge of the market and thus to trade efficiently.
Most of time knowledge is not equal; some agents may have more information or maybe different information than the others. These problems of asymmetric and non perfect information may destroy the effectiveness of the market. Such inconveniences have been the origin of substantial researches in economics, like the market of lemons theory. Moreover this year, American economists received the Nobel price regarding their contribution to the establishment of a more efficient market.

Firms and investors are willing to pay huge amounts to get the best information possible. Thus they make a kind of intangible investment, as information is supposed to generate profits in the future. Information has become a quite valuable asset.
Another crucial point is the information flows speed. Time is important; those who get information first have a great advantage over the others. Sometimes a difference of only a few seconds can create a gap of millions pounds. As a result, companies need efficient system to spread and find information.

IV. Conclusion
The analysis of both LTCM and the current crisis emphasises some issues in the financial system. Several aspects of the banking system should therefore be modified. Although mathematical theories generate kind of a sense of security, reliance on these models should be limited. Perfect models do not exist. The systematic uses of normal distribution on financial markets lead to awful losses. Furthermore those failures also emphasised the lack of effectiveness of the financial regulation: rating agencies, charted accountants, audit... Also the organisation of financial markets does not enable good information flows. Finally the current crisis proves that the system did not change enough to prevent banks from collapsing like LTCM. Hopefully authorities will arrange a new and better organised system in the future.

Are French banks in danger?

The financial crisis generated by toxic products has already affected a substancial amount of financial groups. The crisis might have reached its peak last week, with the collapse of Lehman Brothers. Who could have guessed that a couple of monthes ago? Even Morgan Stanley is currently about to disappear. What a big mess!

Due to this increasingly unsecure environment, consummers are more and more scared. How can they trust their bank after all these issues and dramas?

In France people are starting to raise some interrogations; they are wondering whether their money is really in a safe place. So here is the point: how healthy is the French banking system? What is the difference between French and US system?

The major difference between those two systems is based on an organisationnal criterion. On the one hand the French system is based on a universal bank, meaning that all the different activities are made by the same bank. On the other hand the US system consists in diffenciating different types of activities. Thus investment banks, such as Lehman Brothers and Morgan Stanley, cannot benefit from cash deposits. They have got to find their funds on specific markets. Therefore a credit crunch can affect a US investment bank much more sharply than a Universal bank.

Finally French banks appear to be better builted to face the current financial crisis. However French consummers should'nt be oversatisfied neither! Although their bank should not collapse, they will still suffer a bit from the crisis: credit crunch, decreases in shares value...

Greedy people in a world of fraud

“le monde se divise en 2 categories: ceux qui ont le pistolet charge et ceux qui creusent”

Journalists are more and more blaming Wall Street for manufacturing and selling the subprime poison. American bankers are the bad guys, whereas French and German bankers are the serious ones. Let’s think about it…
On the one hand, it’s true that Americans are those who sell the poison. But who purchase it?
In reality, on the other hand there are foolish European bankers who are stupid enough to purchase subprime via CDOs. They do it because they do not have a full knowledge and understanding of the new and evolving exotic products.
Who is to be blamed? The ignorant or the greedy…I let make your own choice.

Is it related to the subprime?

As many banks are suffering from subprime issues, journalists have rapidly guessed that SocGen difficulties were due to it as well. Although subprimes seem to have an indirect impact on this situation, the biggest issue in this case is the terrible lack of efficiency within the risk management department. What a disaster for these teams.

Rogue trader: one man against five control teams

How is it possible that one man, who does not belong to the top management, can use more than $100 billions without being caught by its hierarchy? …a five control teams hierarchy…
How did he conceal all his massive trading positions by creating fictitious transactions?
What were the auditors doing over the past few months?

Is it the first time?

The most amazing part of the story is that…it is the first time that a greedy trader creates (what a destructive creation!) such a big waste of money.
Just remind Nick Leeson and the Barings in the 1990s. This bastard (sorry for my impulsive language, but I couldn’t resist) utterly destroyed his bank by leading it to bankruptcy. Afterwards he visited jail only a couple of years…and he is now CEO of a football club in Ireland. What’s going on in this world????

Fraud, fraud…an fraud

The subprime scandal is a story without hero. Or maybe I missed something. Where are the good guys?
Greedy idiots, the bankers, sell debts to people who cannot repay it. Thus they can earn more money thanks to impressive commissions.
Their bosses are delighted, because they also take bonuses.
Clients are happy because they can borrow money (whereas they are definitely not solvent).
Center banks are happy as well, because it enables them to claim it will enhance growth.
Credit Rating forget the reason of their existence…and decide rather to benefit from this greedy world.
And so on…

The reputation of France goes down

SocGen used to be renowned broadly thanks to its expertise in shares futures. It was even considered as one of the leading groups in this business. This quality also offered to France the opportunity to create a solid reputation among the financial community.The sudden appearance of SocGen scandal changed the framework of finance sector. Due to this fraud, French reputation has collapsed. SocGen is definitely not the only group to suffer from this story.

Future of Societe Generale

SocGen situation is really uncertain at the moment.
In the past all the frauds lead to the end of the company’s existence. Thus various scenarios are possible.
There might be a merger or an acquisition; the most probing bidder are Hsbc, who is already settled in France, and BNP Paribas, who is the strongest French group. The second possibility is the most obvious, as French Government intends to defend its economy ( by the way this is really funny because France always claim Europe, whereas it always act as a nationalist country).

Future of Banking sector

The severity of the scandal damages is still unknown at the moment. What is it extent? Should we create a new institution? Should we rather finish the capitalism era?
Noyer, the governor of Bank of France, claims that there is no need to change the system. However he is preparing new controls. Merkel and Brown would like to avoid too much regulation on the other hand.

What's going on!

The subprime crisis has not finished yet. Maybe even its peak has not occured yet. In fact several banking groups announced this mornings terrible losses due to the subprime and the CDO.
But this is not the most amazing part of the story. Although those banks used to be helped and backed by central banks in the past, this time rescuers are investors from ... China, Singapore , Abu Dhabi. Here is the point: what's going on? Who is supposed to be helping and who is supposed to be helped? And I am even more amazed because nobody seems to criticise this situation. What a shame for the US, the UK and all these countries who were supposed to be the best in the field of finance!!!

Sarkozy in China: a wonderful haul

Nicolas Sarkozy has visited China, where he has meet Hu Jintao’s Administration. In fact French government is willing to build strong partnership with China to enhance economy growth, spur exports and negotiate some changes in monetary policy. It appears for the moment that this meeting has generated many agreements. Thus Sarkozy’s trip in China seems to be a huge success.

· New contracts for French companies

o 20 billion of contracts
French companies have strengthened their position in China, where they have managed to create many fruitful partnerships and agreements. In fact French companies have already signed 20 billion of contracts. This wonderful haul is much higher than expected. Thus Sarkozy intends to enhance French economy by spurring exports to China.

o Many companies involved
Most of the sectors have benefited from this wave of agreements. Although Areva and EADS are the biggest winner of those transactions, many other companies also managed to find a deal.

EADS managed to sell 160 planes to China, which will generate 12 billion of Euros. Although this command is a huge success for EADS, it might be a disappointment as it is does not include any A380. However Mr Gallois, the CEO of EADS, is quite delighted regarding those new commands.

Areva also managed to generate 8 billion of euros through negotiation of new contracts with China. Areva has been negotiating for those contracts for many years in order to be the company which will supply China with nuclear energy. There was a big competition with American companies. Finally they managed to convince Hu administration that French nuclear knowledge was the best in the world. This is a huge success for Sarkozy, as China will spend substantial amounts of money in this business in the following years. Furthermore EDF, and Suez have also been able to create some partnerships with China in Energy sector.
Moreover in technology sector, Alcatel-Lucent has signed some contracts with China. Thus this company will earn 750 million of Euros thanks to Sarkozy’s trip.
In Pharmaceutical sector, the French champion Sanofi-Aventis has also benefited from this negotiation wave in China. In fact it will create a new factory in China in order to be stronger in vaccines market.
Finally Alstom, Europcar and also Natixis have developed their position within Chinese market.

· Negotiation regarding monetary policy

In the same time, Sarkozy has tried to negotiate some changes regarding the monetary policy. In fact most of currencies specialists claim the Yuan is undervalued. Thus world trade is unfair and China is benefiting from an undervalued Yuan to sell its products at very cheap prices.
The goal of French government is to convince China to increase the value of its currency, as Sarkozy said ``we need to reach harmonious and fair exchange rates''. Consequently these negotiations should accelerate the Yuan appreciation against the Euro.

· Big change after a long period of tension due to trade

The visit of Sarkozy in China is the symbol of a big change in geopolitical situation. In fact, during the previous years there was a big tense between China and Europe due to trade policy. Thus current negotiations may create a new period of strong cooperation between France and China. For instance they emphasized that they have the same point of view regarding the cooperation in North Korea nuclear dispute, the restoration of peace in the Darfur region, the nuclear problem in Iran, the position with Taiwan,etc.
Furthermore French government agreed to share technologies with China in order to improve climate and energy issues.

· A good opportunity for Sarkozy to improve its image

Finally those successful negotiations might help Sarkozy to improve its image in France, where its popularity is going down sharply. Thus he might convince French people that he is still the one they need to improve economical issues.

Ethanol: the worst energy investment of the year

Although Ethanol has been encouraged and substantially supported by the Bush administration and important investors those previous years, it has been ranked as the worst energy investment of the year. Thus it appears that Ethanol failed to substitute oil energy, and more and more analysts are beginning to claim investing in such energy was a big mistake. Consequently Ethanol sector is in a particularly uncertain and hazardous situation. Let us analyse more precisely the environment of Ethanol market.

Production and consumption encouraged by Bush administration

President Bush elaborated a plan to confront high gasoline prices. Thus this plan encouraged investment in Ethanol, which appeared to be the best alternative and substitute to oil. In fact US economy was still addicted to oil, and thus was dependent on other countries, who supply oil. The goal of the plan was to change this situation. Ethanol was also presented as a good manner to fight against the high level of oil barrel price and thus protect consumers. The government also intended to encourage oil companies to invest their huge profits in research and development or exploration.

Furthermore Bush administration tried to enhance hybrid vehicles. Thus it encouraged drivers to use for instance General Motors cars, which work with Ethanol. Consumers are encouraged with tax credit.

US government made substantial efforts in order to boost investments in oil substitutes, in order to reduce the dependence on foreign oil. Most of those investments targeted the Ethanol market. Thus the government supported farmers and small companies to invest in this energy.
Generally Bush administration has created 20 laws and incentives in order to enhance ethanol use. This trend was also adopted by most of the states.

Does ethanol really benefit to the population?

On the one hand numerous studies claim Ethanol really benefits to the environment. Thus Ethanol seams to create new activities for farmers, who can generate more profits. Furthermore it is supposed to boost employment in the US. And Ethanol would also enable the US to create a substitute to oil, which means that Ethanol would enable the US to diminish its energy imports and maybe even generate some exports.

On the other hand, more and more analysts believe there are no Ethanol benefits. In fact it does not improve the environment; it is not as environmentally friendly as once claimed. Moreover a professor of Cornwell University emphasized that ethanol requires more energy than it generates. Finally Ethanol is not important enough to change US dependency on foreign oil.

Threats


As ethanol is becoming more popular, corn demand has increased sharply. Consequently price of corn is very high nowadays. Thus ethanol production is becoming more expensive. Corn price may have a negative effect on ethanol development.
This year has been really disappointing for Ethanol companies. Inventories go up, whereas demand slows down. In sort-run, this situation is not terrible. However, it must not last long; otherwise it would be very dangerous for those companies.
Moreover Ethanol could also be affected by the tight credit. In fact lack of liquidity could sharply affect small companies who would not be able to attract investors any more.

Is a rebound possible?

The previous year, many projects were cancelled because of the bad trend of Ethanol market. Some companies also went bankrupt. In this uncertain environment, Barry Frazier, the president of Center Ethanol LLC, does not anticipate “any sort of immediate rebound”.
However some people still believe in this energy.

To sum up Ethanol future is really uncertain, and it will be interesting to see how the situation evolves in the following months.

Natixis: french symbol of subprime crisis and unrealistic annual reports

· Who is Natixis?
Natixis is one of the biggest financial institutions in France. It was created by the merger between two subsidiaries of Caisse D’Epargne and Banque Populaire about one year ago. The merged group is specialised in five areas of expertise: corporate and investment banking, asset management, private equity and private banking, services and receivables management. Natixis in currently quoted on the Paris Stock Exchange and it belongs to the CAC40.

· First financial report the 30th August 2007

According to the Web site of Natixis
In its first six months of activity,

Natixis achieved solid operating performance. These good results were achieved thanks to strong business momentum across all segments.
Furthermore the group announced strong development potential and resilience to the subprime crisis and depreciation of the American currency. Natixis believed the subprime crisis was limited and under control.
Moreover Natixis believed the merger would create substantial synergies thanks to its integration process. In this first announcement, they emphasised €83m of synergies.
To sum up, this financial report provided a very positive image of Natixis. As a result Natixis’ shares increased sharply the day of this announcement.
Let us have a look now on the community reaction.

Community point of view

Before the announcement, some people within the financial community were really pessimistic regarding the capacity of Natixis to handle the credit crunch. Then this optimistic and positive financial report reassured most of the community in the short run. However most of analysts realized in the followings weeks the extent of the crisis. And the reality was terrible. Thus most of analysts have slashed their opinion regarding Natixis future, by discovering the real impact of the subprime crisis on the financial community. For example, “Credit Suisse” decreased its objective regarding Natixis from 19.70 to 17.50 euros after the financial report.
To conclude the financial community has realized the danger of the subprime too late.

· Very difficult and uncertain position now
In France, Natixis is the bank which suffered the biggest losses due to the credit crunch. Its position is now quite dangerous and its shares are decreasing sharply.
In this difficult context, the future of Natixis is particularly uncertain. Thus different rumours have been created these previous weeks. Maybe there will be a change in the governance of Natixis in order to establish a more efficient management. In the same time, another French bank might be interested in making a bid to Natixis. In fact it appears that Societe Generale is preparing a bid in order to establish a partnership with Natixis. This is a good moment to make a bid, as Natixis shares are very cheap now. Furthermore some analysts even believe Natixis might collapse by the end of the year due to the subprime crisis.


To conclude, the case of Natixis is really interesting and instructive. In fact it emphasizes the unrealistic vision provided by companies’ annual reports. Although Natixis was supposed to be in very comfortable position according to its financial reports, it appears in reality that Natixis has suffered huge losses due to the subprime crisis.

A complete restructuring of the oil sector in Mexico

• Nationalization in the 1930s

In the 1930s, a major problem occurred in the oil sector in Mexico. People tried to find out: “whose oil is it?”. In other words, there was a competition to become the owner of energies. At this time, oil belonged to American companies. However Roosevelt did not defend them during this competition. In fact his goal was to create friendly relationship with Mexico. Between the two World Wars, the most important was the access and not the control of this oil. Thus oil sector was nationalized in 1938 with the regime of Lazaro Cardenas.

• A strong growth to become a crucial sector

After its nationalization, oil sector has rapidly developed. Thus Mexico was the second strongest producer of oil before the appearance of the “Elephants”, meaning the countries of Middle East. Furthermore the oil crisis of 1973-1974 has encouraged Mexico to look for additional reserves. This process has lead them to substantial discoveries in the 1980s. Thus Mexico, who was importer of oil, managed to transform its economy to be one of the leading exporter in the world. Although Mexico does not belong to the OPEC, it was the fifth-strongest producer in the world in 2005. Consequently oil sector has become crucial within the economy of Mexico; and the government is now relying on Pemex for about one third of its budget. Nowadays Mexico is dependant on oil sector.

• A complete restructuring program
  

The government of Mexico has been trying to transform its oil sector these previous years. In fact Mexico is willing to threat the nationalization of this sector. Vicente Fox is the first president who tried to reach this goal. However he never managed to change the rules. The new president of Mexico, Calderon, and its government are now trying to privatise oil sector in order to improve the declining situation of its flagship Pemex. Nevertheless it will be a very difficult task, as it is even written in the constitution that energy belong to the government and the country. Although it is difficult, most of specialists believe Calderon will manage to privatise and deregulate oil sector and reform the tax system.

The impact of the Fed policy

The Federal Reserve, which is the central bank of the US, has decided to cut once again its interest rates. Although this decrease was anticipated by most of the economists, there was a surprise regarding the extent of this decrease. In fact market thought the Fed would slash interest rates by a half of a point, whereas it has been only a quarter of a point. In the end US interest rates are now at the level of 4.5%.

• What is the aim of this policy?
  

Housing crisis and subprime meltdown have strongly damaged the mood of the market. Every week, another company announces terrible results with huge losses. And we do not know yet the extent of this crisis. In order to avoid a recession, the Fed has decided to slash its interest rates in order to improve the market confidance, avoid a recession, and boost the growth of the economy.

• Is this decrease a trend?

There is no consensus regarding the policy of the Fed. Economists ignore whether this decrease is only a short-run policy, or whether it is long-term trend. However most of specialists believe it might be the last cut until 2008, if at all.

• What is the impact on the bond market?

The immediate impact on bond market is positive. In fact this cut is a good opportunity to purchase bonds in the second market.

• What is the impact on the stock market?

Stock market is strongly related to the Fed policy. When interest rates go up, it becomes less attractive to invest in shares, as cost of opportunity is higher. On the other hand, when interest rates go down, it becomes more profitable to invest in shares, which is the case now. Consequently stock market will benefit from the policy of the Fed.

Interest rates policy through the world

Interest rates are a tool used by central banks in order to regulate the economy. Their policy has an impact on growth and inflation. Thus high interest rates enable government to avoid inflation, whereas low interest rates are used to enhance growth and avoid recession.

Different Central Banks do not all have same goal and policy. Let us have a quick look at the different institutions through the world.

· China
China has an impressive growth nowadays. Some specialists even claim this growth is too high; it might be only the result of speculation wave. If this theory is true, there might be terrible consequences for Chinese economy. In fact speculation could suddenly change. Speculative bubbles are quite unpredictable. A bad result announced by Chinese institutions could radically change the movement of the wave.
In order to diminish the euphoria, the central bank of China has decided to increase its interest rates. Thus Chinese are less willing to borrow money. However it appears that this rates policy in not able to control this euphoria. It will be interesting in the following years to see what happens to China. Will China become the strongest economy in the world? Or is China going to collapse?

· US
The Federal Reserve (Fed) aims to enhance growth and avoid inflation. However its main priority is the growth. During the reign of Alan Greenspan, the Fed slashed the interest rates to a very low level to avoid recession and thus to boost the economy. Consequently US economy developed quite rapidly this period.
Nevertheless more and more economists claim that this policy is the origin of the current crisis. Low interest rates encouraged people to borrow money to purchase home; homeownership was supposed to enhance security and stability. But the rise in mortgage foreclosures, fuelled by subprime lending, seriously threatened and undermined American efforts of stability and revitalization.
Bernanke, the new chairman of the Fed, decided to change regulation laws and to slash interest rates in order to improve the market mood after the credit crunch.

· European Union
The European Central Bank (ECB) focuses on avoiding inflation. It does not really care of the growth. This policy is maybe the result of previous huge inflation, which occurred between the world wars. European countries are quite afraid of inflation.
The governor of ECB is currently JC Trichet.

· Japan
On the other hand, the bank of Japan was obliged these previous years to fight against deflation. Thus they slashed interest rates to a very law level in order to boost the economy and encourage people to borrow money. Consequently the level of interest rates was 0% for a long while.

No real alternatives to oil energy for the moment

Most of analysis show the evidence of a nearly end of oil reserves. Oil barrels are more and more expensive. In the same time, researchers have highlighted the danger of oil regarding the planet health. Consequently, governments are looking for new ressources and praising green energy. However, it appears that there are no real alternatives to oil energy for the moment. Let us have a look at the different energies, which tried to take the place of oil.



For a long while nuclear energy have been considered as the ideal substitute of oil energy. This ressource is indeed particularly strong. Neverthless, some scandals and accidents, like chernobil, have destroyed its image. Nuclear energy is now criticized by a lot of people; it is considered as a harmful and hazardous energy. Many associations and groups have demonstrated and have been militant against it.




Electricity and eolian energy have the advantage to offer a very “clean” and safe energy. However their strengh is not important enough; these ressources are not able to satisfy the world demand as a whole. Thus they can contribute to the energy supply; but definitely not threaten the oil hegemony.





Ethanol might be the most serious threat to oil hegemony. This ressource is indeed becoming more and more important in energy sector. Many companies have invested in ethanol, by claiming it stands for the future energy. Furthermore american(Georges W Bush) and brazilian (Lula) governments have spoken highly of this energy and established a parternship in order to boost ethanol production. Neverthless there is no consensus about this alternative. In fact ethanol consuption and production cause pollution and thus can not be considered as clean and green energy! In Brazil, ethanol factories have caused substancial inconveniances for employees and inhabitants. Furthermore ethanol industry's revenue stands for less than one percent of Brazil's GDP. There is no ethanol revolution.
In this environment, Gordon Brown is likely to reconsider green energy target. In fact, several members of the government claim that the previous target regarding alternative green energy will not be reached. This evolution seems to be more complicated that expected due to impressive cost and "practical difficulties" involved.

The crucial role of information

Nowadays world is organized around the concept of financial markets, which are a mechanism that allows people to easily trade. The appearance and development of these markets have given a crucial role to information.

In fact information has become a key tool in the current system. It enables people to get a knowledge of the market and thus to trade efficiently.
Most of time knowledge is not equal; some agents may have more information or maybe different information than the others. These problems of asymmetric and non perfect information may destroy the effectiveness of the market. Such inconveniances have been the origine of substantial researches in economics, like the market of lemons theory. Moreover this year, American economists received the Nobel price regarding their contribution to the establishment of a more efficient market.

Firms and investors are willing to pay huge amounts to get the best information possible. Thus they make a kind of intangible investment, as information is supposed to generate profits in the future. Inormation has become a quite valuable asset.

Another crucial point is the information flows speed. Time is important; those who get information first have a great advantage over the others. Sometimes a difference of only a few seconds can create a gap of millions pounds. As a result, companies need efficient system to spread and find information.

Do authorities have to rescue banks in trouble?

Since the announcement of Northern Rock' crisis, the bank of England has already lend huge and impressive amounts to help this bank to survive. Was is a good idea for financial authorities to intervene in such a situation?

In short-run, a helpful policy enables financial authorities to avoid a crisis by rescuing banks in trouble. It helps bank's customers, who might have lost all their savings and also helps bank's employees, who may lose their job and thus increase unemployment rate.
Furthermore this policy avoids a domino effect, which could have drastic consequences on the financial community as a whole. Central banks may also intervene for personal reasons...pride and honor instead of rational and realistic judgment!

Fortunately authorities refuse to rescue banks sometimes. For example it happened in the UK, when Barings collapsed. Barings Bank was the oldest merchant banking company in London until its collapse in 1995 after one of the bank's trader lost $1.4 billion in speculation.

Let us move on to the reasons not to help. If a company has a harmful management, why should authorities help it? By rescuing such banks, authorities may appear weak and thus may encourage careless management.
Moreover by lending money to banks in trouble, central banks risk losing even more money in the future. Here is a big dilemma...a helpful policy may avoid the crisis in the short-run, whereas it might create a bigger one in the future. Financial authorities have to be credible. Thus banks would be aware of risks and that is crucial!

Stock options : why do they scare people?

Louis Gallois has announced officially his desire to eliminate Stock options within his company EADS due to the insider trading scandal. Some top executives and corporate shareholders, Lagardere and DaymlerChrystler, indeed sold substantial amounts of shares just before announcing the company problems, by using illegally their insider knowledge.

Stock options have been created originally in order to motivate managers to work efficiently. Their earnings were indexed to the company's shares value. Theoretically this tool was supposed to help all the stakeholders. Shareholders would eliminate the agency problem, which claims managers may not work for the benefit of shareholders. And Managers would have the possibility to increase their earnings.

However the real and effective impact of stock options is different. Managers use their insider knowledge for their own goals. They focus on short-run to maximise shares value and thus their earnings. Then just before bad news announcement, they sell illegally the shares. It is illegal because it privileges an investor over another and establish asymmetric information. Thus stock market confidence goes down. This problem is not new. Previous financial scandals such as Enron emphasized it.

Finally EADS scandal may release the end of stock options existence. The desire to destroy stock options is not the goal of only Mr Gallois. New French government intend also to establish new rules to prohibit them and act to curb so-called “golden handshakes”

Subprime loan : a tool which contributed to the current crisis

Financial community is getting more and more anxious about the current crisis. In fact another prestigious bank, Merryl Lynch, has announced very bad results. This quarter, they lost $5 billion because of subprime loans. Many other banks have similar problems: Northern Rock, BNP Paribas, Morgan Stanley, Barclays, UBS…

Subprime loans are a very dangerous tool. They were provided most of time to “bad” customers, whose credit rating was under medium average. In fact these borrowers who did not qualify for loans from mainstream lenders. This phenomenon was widespread in the US, where about six million people who have no money have borrowed about 100% of the value of a house, right at the top of housing market which has since fallen sharply. These are the subprime borrowers. With subprime loans, customers pay only the loan's interests for a long while and then have to pay suddenly all the borrowed money. This is very risky... Furthermore these loans depended on the interest rates. As central banks raised their interest rates, it became harder and harder for customers to pay back their loans. A slowdown in the US housing market coupled with rising US interest rates have also hit the subprime system.

A lot of people have been unable to pay their debts. Thus banks lost huge amounts because of this risky tool. All the financial community is suffering from this incident. Banks are afraid and refuse to lend money each other. Thus Central Banks are now obliged to lend huge amounts to banks.

Plavix patent: the end of Sanofi-Aventis nightmare?

A Canadian Federal Court has rejected Apotex's challenge to Sanofi-Aventis' Plavix patent. Even if the fight is not finished, Sanofi-Aventis may feel reassured. In fact the result of this battle will be crucial for the French group.

Plavix is one of the most important medicines, which belong to Sanofi-Aventis. It enables them to earn a lot of money. We call it a “blockbuster”. All pharmaceutical companies need some blockbusters to finance their huge investments in research and investments. Plavix is the highest-selling antiplatelet agent and its main competitor is aspirin.

Apotex, a pharmaceutical company which produces more than 260 generic pharmaceuticals in approximately 4000 dosages, has challenged Sanofi over a Plavix patent, which expires in 2011. In fact Apotex claim that the 2011 patent is invalid because the molecular structure of Plavix is already described in another patent expiring in 2003.

This case has not finished yet, as it is still ongoing in US. Nevertheless the result in Canada is a great victory for Sanofi-Aventis, who was afraid to be obliged to share its blockbuster revenues…

Investor relations : a key tool

Because of globalization and the development of financial markets, companies have become obliged to focus on a new work : investor relations. Nowadays communication is very important...communication is key to success! It's a link between a company and investor community. That's why investor relations have a strategic importance. Thus companies have to devote time to this activity which enable to earn a good reputation.

• What are the criteria of good investor relations?
The key aim is to appear “transparent” by providing the maximum of informations. Thus investor community can feel reassured and confidant. Therefore annual reports have to be available as well as company' s strategy, structure and management. The company has to find the appropriate balance between technical and easy information. In fact this information must be useful for financial analysts but also for all the shareholders.
Finally another important criteria is the interactivity. Investors community is indeed keen to contact the company to request some information. Thus it would be advisable for company to elaborate some e-communication and blog.

• Do investor relations provide a real knowledge ?
For investors, information provided by the company is useful. Nevertheless it is not sufficient to create a knowledge. It is advisable for investors community to use it only like a data or an information and then create their own analysis. In fact companies try to influence and attract investors by giving a good image of their situation. Companies try to emphasize their advantages and hide their weakness. Consequently only the financial statements, which are neutral, are useful.
Thanks to balance sheet and income statement investors can determine financial ratios (liquidity, leverage, profitability, efficiency...) and compare the company to the whole industry. Thus investors can create their own knowledge of the company.

• The importance of financial informations : the case of LVMH and Morgan Stanley.

Financial informations are crucial for investor community. Without this tool, it would be impossible to examine companies. Thus this information must be precise and proved. Otherwise it could lure people...

For example in 2004 Morgan Stanley gave false information about the group LVMH. Consequently LVMH shares decreased sharply. Then Morgan Stanley was ordered to pay at least 30 million euros ($38.5 million) in damages to LVMH after a Paris court found the investment bank guilty of "talking down" the world's largest luxury goods maker in analyst research notes.

This example emphasizes the crucial importance of financial communication and the impact it may have on investor community.