Archive for December, 2009

Carbon Futures Price A Cheese Danish

Tuesday, December 22nd, 2009

A nice thing about markets: they have a way of expressing themselves with minimal spin. Just consider the eight point seven percent plunge of futures on EU carbon dioxide permits after the Copenhagen climate “deal” was announced (UN contracts took a similar dive). The message in this swoon is that the understanding in Denmark has a lot in common with the pastry named for the host country: sugar-coated, not particularly nourishing, and yes, rather cheesey.

The so-called Copenhagen Accord, negotiated between the US, China, India, Brazil and South Africa, is not binding, and despite this fails to reach UN targets to prevent “catastrophic” climate change even if it were implemented. Everything from developing nation aid to China’s willingness to accept compliance verification is left squishy, another trait shared by Accord and pastry. Twenty some-odd nations signed on (whatever that means) while many of the rest of the 193 countries represented only consented to “take note” of the document, which is to say acknowledge its existence.  – very postmodern, no?

Unsurprisingly, those who trade and utilize the right to pollute evaluated the odds of Obama, Hu & Co.’s fluffy and legally vacuous understanding having any effect on future restriction on carbon dioxide emissions and responded accordingly: they sold. Carbon rights are worth a lot less in a world where the ability to pollute is unlikely to be diminished in the foreseeable future.

There may be some lessons to be learned from the fiasco in Denmark. If any progress is to be made in limiting pollutants it may have to be achieved in negotiations between the principal polluters, as opposed to a forum with almost two hundred nations, many of whom are simply being asked to accept some degree of first-world largesse. Moreover, the governments of the G20 and their industrializing like may have to be motivated by demands from their own (currently otherwise engaged) populations before they take real action on global warming. That popular will may only come from locally oppressive climactic change, or else as a side effect of the increased cost of scarcer fossil fuels. Not a recipe for either rapid or painless progress.

Paul Samuelson taught that consumers’ desires, as represented by what economists call “utility” could be studied through the theory of “revealed preference”, essentially by analyzing purchasing behavior. It is perhaps appropriate in the wake of that grand old man’s passing that we have been given a peek at the preferences of polluters (who are, in the end, all of us)  though the purchasing of  carbon futures. Though it was known for some time that the chance of anything of substance coming out of Copenhagen was vanishingly small, the ability to pollute is held so dear that even the removal of an infinitesimal chance of its attenuation succeeded in engendering a marked sell-off in futures of that right. We are, it seems, a species determined to foul its own nest, or at least to consume that whose byproduct has this effect. The question is, how uncomfortable will we have to become before we give this planet a break?

New York’s New Darling

Thursday, December 10th, 2009

If you love New York, you have to love Alistair Darling.

The United Kingdom’s Chancellor of the Exchequer yesterday told Parliament he proposes to slap a 50% tax on bank employee bonuses in excess of 25,000 pounds (about $40,633). This new levy might be the greatest escape from peril the British have allowed Americans in New York since Howe let Washington retreat into Manhattan after the Battle of Brooklyn Heights in 1776.

The recent crisis has left the U.S. financial sector facing a rising tide of regulation, which, combined with the prospect of healthcare reform-driven tax hikes, have made the States a considerably less inviting abode for banks, hedge funds, private equity firms and the like. Onerous NY state and city taxes have only compounded a situation Britain might have taken advantage of by holding taxes steady or even (perish the thought!) easing off on banks. This would have allowed City of London-based firms to bid up for talent while restoring their capital. But Darling and the rest of Prime Minister Gordon Brown’s Labour Party are facing bleak prospects in an election that must be held by June of next year. By sticking it to the City, Brown, Darling & Co. hope to play on populist resentment enough to narrow the electoral gap, at least to the point of creating a hung Parliament and denying the Conservative Party a clear majority.

To this end, Darling’s latest proposal is part of a larger program of eye-popping tax increases. Indeed, the bonus tax, to be paid by the banks themselves as opposed to employees, comes on top of an increase in the marginal personal tax rate from 40% to 50%. Throw in National Insurance and Bloomberg reports the British Treasury will receive 103% of every quid paid to top City earners.

With his latest move, the Chancellor has, for the moment, decisively ceded the competitive advantage back to Wall Street, even with New York and America’s challenging tax and regulatory environment. Darling’s tax, not to mention uncertainty about future British taxes, should mean more jobs and revenue for NYC as international banks and financial firms move easily transferable personnel to offices and trading desks to the western shore of the pond.

When you think about it, it’s the least Darling could do, since the UK’s refusal to back Barclay’s bid for Lehman last year helped usher the later firm into bankruptcy (and its choice assets into Barclay’s hands at fire sale prices). A bit more than a year later it’s another story for the Yanks: Darling’s gift comes just as Bank of America repays its TARP loan and Citi appears poised to do the same, which would remove the largest US banks from Washington-imposed pay caps and enhance their ability to poach London-based talent.

There remain, however, several flies in the Big Apple’s sauce. Darling’s bonus tax is currently envisioned to be a one-time “raid” through April (i.e. just before the election) and once this pandering expires, so will much of NY’s newfound advantage. Higher UK taxes may encourage yet more levies on US firms, dulling the edge Labour has granted America. And the authorities in Beijing seem to lack Downing Street’s generosity, meaning Shanghai may do to NYC what London has demurred from. Further, NYC  need not look across oceans for potential rivals – Greenwich has already taken half the hedge fund business and Jersey City is siphoning away back office jobs from Lower Manhattan.

On the other hand, today French President Nicholas Sarkozy is said to be considering matching Darling’s bonus tax, and, being this is France, at a lower level (27,000 euros, or about $39,750) Of course the land of the 35-hour work week has been a self-hamstrung global competitor for a long time; this move simply safeguards Paris aginst acquiring any unexpected competitive advantage.

Financial service jobs, like money itself, can and do move across boarders with relative ease. High taxes and stiff regulation in one financial center will often only encourage rivals to take the opposite tack so as to garner a greater share of an industry which, lest we forget, remains a huge generator of both jobs and tax revenue. If Wall Street and the United States hope to remain the center of global finance, Washington would do well to remember what London has been kind enough to forget.