The World & Beyond

The writings of a global transient.

Tag: Finance/Economics

UK Election Investment Implications

Like most countries, if you are resident in the UK, you will be subject to the UK on your worldwide income.

However, if you are resident in the UK but you are not domiciled in the UK, you can claim the ‘remittance’ basis of taxation.  This means the UK will tax you only on money you bring into the UK.  The remittance basis is essentially free for a certain number of years, then you have to start paying for the privilege, like GBP 30,000 per year or GBP 70,000 per year or something like that

So if you are am American and you are resident in the UK but not domiciled there because you are there temporarily then on the portion of your income paid from the US side of your firm to you US checking account you are not paying UK tax.

So you can be a Russian billionaire, buy a huge home in London, live in London and not pay any UK tax on all your assets which are in Switzerland or the Channel Islands or Russia or wherever.

Many people think that this is part of the reason that London property prices are so high and a lot of people are resentful that foreigners come in and drive up property prices.  So the Labour party is saying it wants to do away with the non-dom regime so that if you are resident in the UK, then regardless of your domicile status you must pay UK tax on your worldwide income. But, basically, with the non-dom regime, the UK is one of the world’s greatest tax havens.

If labour wins then potentially this should be negative for London real estate pries and the pound as well.

No reason to assume oil prices will rise any time soon.

The masses of oil bulls continue to value companies such as Oklahoma’s Continental Resources using models that assume $50 dollars per barrel of oil this year, and up to $75 next year.  There is no reason to bet on this.  Not only might oil prices go significantly lower, there is no reason to believe that low prices won’t last for a long time.

What exactly this means for Oklahoma’s oil companies is the subject of another post, but in short it will be a massacre for most, with only Devon emerging in a decent position.

Reason 1:

The first argument against oil prices staying low is that the reduced price will cause rigs to shut down and therefore the supply to decrease. That is true at some level, but:

As pointed out recently by Bloomberg “The CHART OF THE DAY shows how West Texas Intermediate, the U.S. oil benchmark, tumbled 69 percent from $31.82 a barrel in November 1985 to $9.75 in April 1986 when Saudi Arabia, tiring of cutting output to support prices, flooded the market. Prices didn’t claw back the losses until 1990. ”

oil-chart

If the current decline in prices did not result in a quick rebound in 1986, why is everyone so sure it will now?

More importantly, as the price declines oil companies might slow drilling, but they actually have every incentive to pump as much oil as possible in the short-term – and that is exactly what is happening:

As pointed out by The Daily Oklahoman

The U.S. Energy Information Administration this week said domestic production is likely to increase throughout this year and into next, and will approach record production levels in 2016.

Analysts like to point out that the price of oil is below the per-barrel production costs in many areas. However, suggesting that this means there will be a decrease in production ignores basic economics. Sunk costs are not factored into current production. The money spent to drill a well has already been spent. Oil will be pumped until the price falls below marginal production costs, not total production costs. With prices down and balance sheets under pressure, oil companies will make sure that existing wells maximize production rather than minimize it.

This same analysis applies to countries such as Russia and Venezuela which will also pump as much as possible for the time being.

The hope exists that Saudi Arabia will cut production, but there is no reason why the lowest cost producer will cut production before the high cost producers do. This would be like expecting Dell to cut production in order to raise prices: The world just doesn’t work that way.

Production will continue at a high rate for a significant amount of time.

We see this today as production continues to rise

Reason 2:

Those focused on supply and demand tend not to talk about financial players in the oil industry. If you want to have a discussion about why oil prices are going down then at some point you need to have a discussion about why they went up to begin with. The “standard” analysis says that oil prices have gone up as “peak oil” combined with rising demand from China and other developing nations to push oil prices through the roof. However, that is not the entire story.

Once upon a time, for well over 50 years, non-physical participants were subject to position limits in commodities markets. Speculators are needed in commodities markets but the government limited their participation to assure that they didn’t dominate commodity markets. This worked well for a long time. In the 1990’s, however, these limits were done away with in a secret manner. In 1991, J. Aron (owned by Goldman Sachs) wrote a letter to the Commodities Futures Trading Commission asking that it’s speculative hedging be treated as a “physical hedge”, the theory being that just as a farmer is hedging a real risk, so were they hedging a real financial risk. The CFTC agreed, and this was the beginning of the end for position limits. These letters were quietly and without public comment issued to more and more speculators and by 2008 at least 80% of all commodities market activity was being done by neither producers nor suppliers. These letters were issues in secret and it was almost by accident that a congressional staffer overhead an offhand remark about them and then pressured the CFTC for their release.

What did these banks do with their secret letters? They created index speculation among other things. The most prominent of these were the Goldman Sachs Commodity Index (GSCI) and the Dow Jones-AIG commodity Index.

These served the basis of a huge influx of pension and trust money into the long only side of the commodities markets. Simple supply and demand suggests that a massive surge in demand of a commodity is going to increase the price of it. As opposed to the traditional speculator supplying liquidity to the market, the GSCI is essentially hoarding commodities, as it is a long only index.

As reported by Matt Taibbi in Griftopia from 2003 until July 2008, the amount of money invested in commodity indices rose from $13 billion to $317 billion. Not surprisingly the prices of all twenty-five commodities listed on the GSCI rose sharply.

In short, commodity prices in this day and age may, in the long run, depend on the supply and demand of the end suppliers and users, but in the middle Wall Street, with its free money from the Fed, drives price movements.

So, all of those citing the supply and demand are not really saying anything about the short and medium term if they are not accounting for financial flows into the oil business. And just what is going on at the moment?

Due to the Fed’s fear of deflation interest rates have been near zero for some time – this punishes savers, including pension funds. In a never-ending search for yield Special Purpose Vehicles have been created to conduct cash and carry trades in commodities in contango as oil normally is. In the cash and carry trade oil is bought and stored at spot, with the futures sold forward. As the trade nears its end the rise in the price of the spot covers the short futures obligation. If leveraged this trade can provide a nice return that a pension fund otherwise can’t get- and leverage has been easy in these days during the periods of Quantitative Easing. A friend who sees a lot more deal flow than I do tells me:

“Over the past few years oil production has been estimated to have exceeded demand by 2 mil bbls/day. Much of this excess supply was absorbed by governments adding to their strategic reserves and investor buying into these structured c/c trades. The structured c/c trades often involved baskets of commodities (e.g., oil, gold, copper). They were bundled into Special Purpose Vehicles The buyers were anyone looking for a bond-like rate of return notably pension funds or hedge funds who bought these packages for their pension investors.”

Now that the appetite is gone, US oil production has increased and OPEC has decided not to cut production oil prices have declined rapidly.

The really big questions are how were the SPV’s financed? Are they marked to market? Are the susceptible to margin calls? And then there is the question of why the banks wanted to revise Dodd Frank to let them hold on the Collateralized Loan Obligations for a few more years???”

Those are good questions. I don’t claim to know exactly what is going on, but I do know that the oil price collapse happened with the end of QE, suggesting that many of these trades have imploded and their spot oil is being dumped on the market. If one doesn’t understand how many of these deals are out there than one has no business predicting the end of the decline in prices.

The many conflicts of interest between Continental Resources and Harold Hamm

I’m a bear on the E&P companies as I believe oil prices are likely to stay down for a long time.  However, as long as Hamm is in the picture there is no circumstance in which I would want to be a Continental shareholder regardless of oil prices . A major take-away from reading his divorce triaHarold Hamml documents is that despite Continental having gone public long ago, Hamm still runs it as his personal company and conflicts of interest abound.

An example would be Hamm’s activities with Wheatland Oil.

Hamm and Jeff Hume formed Wheatland Oil in 1987 to pursue various drilling activities. Wheatland was owned 75% by Hamm and 25% by Hume. In March 2012 Hume negotiated the sale of Wheatland’s assets to Continental for $340 million worth of Continental stock. (Wheatland had no debt at this time).

The court records notes:

“Jeff Hume ultimately negotiated the sales price for Wheatland assets with Continental. Harold Hamm minimized his involvement in the negotiations at the time of the sale because the sale was a related party transaction with Continental”.

This is rather amusing. Just who exactly is Jeff Hume? According to Continental’s website Jeff Hume is Continental’s Vice Chairman of Strategic Growth initiatives and

“Previously, Mr. Hume was President from November 2009 and Chief Operating Officer from October 2008. He has also served as Continentals’ Senior Vice President of Operations, Senior Vice President of Resource and Business Development from October 2005, Senior Vice President of Resource Development from July 2002 and Vice President of Drilling Operations from 1996. Prior to joining Continental Resources in May 1983 as Vice President of Engineering and Operations, Jeff held various engineering positions with Sun Oil Company, Monsanto Company and FCD Oil Corporation. “

I’d like someone to find me the person who had the job of negotiating against the financial interests of Mr. Hume and Mr. Hamm at Continental. Somehow I doubt he tried very hard.

Mr. Hamm owns many businesses that enter into relationships with Continental. On the one hand it is perfectly reasonable for an E&P company to not want to be in the real estate, transportation, or pipeline businesses. A complete look of Hamm’s behavior, however, shows that Continental’s philosophy is more about “what benefits Harold Hamm”. A few examples stand out:

In March 2011 Continental fronted Hamm 23 million dollar to buy the building (owned by Hamm) that how houses Continental’s headquarters in Oklahoma City.

The most egregious example, however, has to do with an entity called Highland Partners.

Highland Partners was created in 2004 as a Continental Subsidiary to own pipeline assets. It was spun off in 2005. In 2009 it was taken private by Mr. Hamm. In 2012 Continental and Highland entered into an agreement whereby Continental agreed to pay over 95 million dollars over five years to Highland for the rights to use a proposed new pipeline, weather Continental ever used such rights or not. On the basis of this deal Hamm was ultimately able to raise the financing for the new pipeline. As of just this month, Kinder Morgan has agreed to pay 3 billion for Highland (Hamm clears 2 billion, as 1 billion was assumption of debt).

So, now, when Continental is reeling from oil price declines we see Hamm cashing out 2 billion dollars on a deal which could have and should have been Continental’s, but instead Continental was left in the role of simply propping up Hamm’s investment when needed in the initial stages.

Interestingly enough, the judge valued Highland in the sub-400 million range for the purposes of the divorce. One wonder what the judge will make of Hamm telling the him the asset was worth one thing while attempting to sell it for another.

The argument can and has been made that Continental has an independent board of directors with fiduciary duties which approves these deals, and that therefore they are in the interest of shareholders. We know from the court records, however, that Continental is operating on behalf of Hamm even though it has no real interest in who owns it’s shares theoretically. For example, court documents show that Continental relentlessly fought and stalled on discovery request made by Ms. Arnal for documents she needed to advance her case. The legal fees expended by Continental on this ultimately futile quest in no way benefitted Continental Shareholders.

The employees and directors of a billion dollar company wish to please its majority owner and act in his interests is not something that anyone should take as a surprise.

Given the evidence, I simply would not entrust my money with company that operates in the interest of some shareholders over others.

Women are the future of the 3rd world

Based on my travels in Africa, Eastern Europe, and Central America I am a firm believer in the 3rd world development story and its positive implications for investors. I have been saying for some time, however, that it is primarily a female story. If you walk by a coffee shop outside a University in Nairobi or Panama City it is easy to see that the students are almost entirely female. Entry level jobs are almost entirely staffed by females as well. Walk into any pharmacy or cell phone store in Panama City, Tirana, or Nairobi and it will be staffed by females.

At my restaurant in Panama I have almost never seen three 28 or 30 year old local guys come in and buy a few drinks. It is all young women with jobs who go out once a week together and have a few margaritas- and they are not inviting their men with them.

People will debate the reasons for this (I imagine feminists would cite the availability of birth control) but for an investor the reasons don’t really matter. The fact is that women are taking charge of their lives and putting in the hard work to improve their position. The guys by and large are sitting around and drinking like they always have. This will certainly have implications as luxury brands expand into Africa and Central America. The mainstream media is finally starting to pick up on this with an ABC Article on the caribbean:

http://abcnews.go.com/International/wireStory/caribbean-gender-gap-grows-women-rise-men-stagnate-28908308

From the article:

Overall, women in the Caribbean and parts of Latin America make up the managerial ranks to a greater extent than in the developed world. Experts say the gain is due in part to improvements in the level of female education, but also because men have failed to keep pace and have in some cases gone backward.

So what exactly are the investment implications? Look towards female oriented luxury brands as opposed to the alcohol and tobacco companies, by and large.

Why Managment Culture Matters: Thoughts on Petrobras, Devon, Chesapeake, and Kerr-McGee

The recent events at Petrobras have taken the investment community by storm, and there is much discussion about when the right time is to get in.  Bulls figure that given the reserves and the potential that the current price is cheap and will work out well in the long term despite the current scandals.  I am usually an “asset based” contrarian, but in this case I am not so sure.  Let me give you my perspective:

PetrobraI’ve worked at both Devon and Kerr-Mcgee and had many friends at Chesapeake.

To preface this post, I have never been a fan of “management guru” books and find them  to mostly be trash with little insight.  That being said, an excellent book could be written about the resurgence of Oklahoma City and the contrasting fortunes of Kerr-McGee, Devon, and the one-time high-flying Chesapeake Energy over the years and the differing management styles.  Perhaps I should write it.  However with the protagonist of this post now working for one of the antagonists the final chapter cannot yet be written.

If you don’t want to read a few thousand words and just want the punchline it is this:  Management and management culture matters, and Devon’s former CFO Jeff Agosta is the primary reason for Devon’s success whereas Kerr-McGee has disappeared and Chesapeake goes through recurring bouts to stay alive.  Interestingly enough, Jeff is no longer at Devon and now works for former Chesapeake founder Aubrey McClendon’s new company, American Energy Partners.  I will write more on that later on in this post.

The story for me begins in the mid to late 1990’s when I was working for my father’s money management firm.  Chesapeake was a high flying driller based on horizontal drilling in the Austin Chalk.

Wall Street was heavily promoting CHK and it was one of the biggest “momentum plays” on the street.  My father didn’t believe it.  Frankly, anyone with experience in the austin chalk knew that the decline curves were massive.  This time it was supposed to be different because of CHK’s horizontal drilling.  Horizontal drilling, however, wasn’t going to change the nature of the austin chalk as a play, it was just going to make the initial production bigger.  The problem however was that these were new wells and there wasn’t much history.

At the time getting well data was a pain.  We had to subscribe to a Petroleum Institute service for around 10,000 dollars per year that sent us CD’s with county well data from Louisiana which was months out of date.  Sure enough, the decline curves were massive.  We talked to wall street analysts, and of course they didn’t care.  CHK was everyone’s favorite.

A few years later CHK almost went out of business as sure enough the decline curves were massive.  That was the first time I heard the name Aubrey McClendon.

The next time was the summer of 2003.  I was sitting at my desk at the Zurich office of Kerr-McGee Luxembourg, (thank you IRS for creating such inefficiencies).  I had very little to do.  I was in Zurich for 2 months for a paid internship that was put together at the last minute because the employee whose job I was doing had a stroke and Kerr-McGee needed someone to take his place while he recovered.

Kerr-McgeeThe head of the office was an American hired in 1999 (a rare outside the ranks hire).  The rest of the staff was Swiss and/or German.  The European marketing team from the Chemicals unit (later spun off as Tronox) also shared these offices.  European Chemicals marketing was run by a Kerr-Mcgee old timer who was one of the few still around from the Karen Silkwood days.

The first sign that Kerr-McGee had issues was that I didn’t really have anything to do all day.  By and large I was done with my job by 10am.  In addition to my day job I was given a project to research the possibility of issuing euro-denominated bonds in Europe.  The project didn’t take long.  Other than that I had a lot of spare time.  Someone in IT at the main office in Oklahoma City seemed to have the sole job of tracking my web surfing and blocking every site that wasn’t work or finance related.

The Swiss like to take long lunches and usually have a few beers at lunch as well.  A directive had come down from HQ that nobody was allowed to drink at lunch but my boss told us to do what I wanted as long as he didn’t see it.  So, sometimes we would take 90 minute lunches by the seaside and have a couple of beers, but that still left the entire afternoon with little to do.  I had brought a lot of textbooks with me to Zurich to study finance and economics but I burned through those pretty quickly.

If I could do it all over again I would have spent the time learning German, although it was also when I first started to really study body language as I could not communicate verbally.  It is really the subject of another post but from my time in Panama, Switzerland, Italy, Albania, Poland, etc. I have become somewhat of an expert in reading body language.  Body language doesn’t lie.  People do.  I now like to sit in restaurants and watch body language.  It is fun to spot which woman doesn’t like her date and just wants to get out of there as quickly as possible even  vs. which guy is going to get lucky that night.  I’m also good now at knowing when I am being lied to – although I have had a few spectacular failures in that regard.

Back to Zurich: So I started spending my spare time looking for a permanent job.  Simply searching “energy companies in Oklahoma City” got by my IT censors and I quickly gathered up the names of all the big energies companies and their officers.  By googling around the domain names you can always come up with the structure of corporate email addresses (i.e. firstname.lastname or whatever) because some employee somewhere has always used his or her work address to post on a random message board.

So I sent out some emails to some Oklahoma City energy company executives.  The emails read as follows:

Hello, my name is Gordon Haave.  I am currently working for Kerr-McGee in Zurich in the corporate Treasury department.  Previously I have served as Vice-President of a $300 million money management firm and as the CFO of a $20 million residential construction firm.  I am returning to Oklahoma City in August and am looking for a full time job if you have any available.”

Short and simple appeals work with some people and not with others.  I got replies from both Jeff Agosta (then SVP of Finance and Treasurer of Devon) and Aubrey Mclendon (CEO of Chesapeake)  Aubrey was very nice as everyone always says he is.  We had a brief back and forth and after inquiring around the company he told me that there was nothing available but to stay in touch.

Jeff responded basically with a “yes we are looking for someone, come and see me when you get back to Oklahoma”.  That’s how I ended up working for Devon.

However, I was still working at Kerr-Mcgee.  Every day was frustrating as there was little to do, and everything I did have to do basically had zero value added.  Let me explain:

My primary job was ensuring the accurate cash forecast of Kerr-McGee’s North Sea oil and gas operations, and to ensure that cash balances were kept at a minimum so that they could be invested in time deposits.  In the morning I had to make sure time deposits were properly received that were due that day, and in the afternoon all cash had to be swept up into new time deposits.  These were often overnight or just 2-3 day investments.

The process was based off of the weekly cash forecast which was stored on the Kerr-McGee mainframe and accessed by everyone via Citrix.  The weekly forecast started on Monday at the operating units.  The operators would have to forecast DOWN TO THE PENNY every single expenditure or receipt they knew about.  At the end of the day Monday the information would go to one higher level up, where it would be compiled.  It would then move on to one level higher up on Wednesday to a treasury analyst for that unit.  On Thursday morning I had all of the information for every unit and would complete the overall spreadsheet which presumably someone reviewed on Friday.  It was a pain-staking process that took the time of at least 10 people over the course of the week to do.  And to what end?

Of course a Treasury department needs to be able to forecast cash, but down to the penny?  There were times where somewhere along the way the info would be recalled because someone let out an anticipated  $500 expenditure.  What good does knowing about the $500 expenditure matter?

Ideally if you have the exact cash balance down to the penny you can invest better.  For example, if you have $1 million dollars extra and you know you can invest it for and extra 4-5 days instead of just overnight you will earn more interest.  But how much?  Enough to have 10 people working on the thing?  Enough to harass operating units into worrying about that instead of worrying about their operations?  Of course not.

I once said something to my boss about it and his response was “you are lucky, when I first started here they were doing this by carbon paper, and only changed to spreadsheet because they couldn’t buy the carbon paper anymore”.

I was in a good position to learn many other things about the corporate culture.  As the young American guy there by myself the chemicals sales force guys would take me out at night on their expense accounts when they passed through town and they expressed how hampered they were by the corporate culture.

Also, at the time, Kerr-McGee was spending literally millions of dollars per year on outside consultants whose job it was to change the corporate culture.  One of these consultants spent a week or so in Zurich and I went out to eat and have a few drinks with him a few times.  I’ll spare you the details of the horror stories but his conclusion was pretty straight-forward:  “It’s utterly hopeless.”

I don’t want to name names but I remarked to him once that a certain person in our division seemed to be the real brains of the operation, yet he was not the head of it and I was wondering why.  The answer: “Because X joined the company two weeks later than Y 20 years ago”.

So let’s review what I learned about Kerr-Mcgee:

A.  A massive number of employees doing useless jobs.

B.  A culture where seniority is all that matters.

C.  The corporate tail wagging the operating dog.

After Kerr-McGee it was on to Devon in Jeff Agosta’s unit.  I ran the “cash management” function which included the investment of excess assets as my primary job but I also performed as somewhat of an overflow worker for other corporate finance projects as needed.

devon_EnergyWhat was the corporate culture at Devon?  Well, it depends on what part of it you worked in.  In accounting it was just as bad as as Kerr-McGee.  There were massive, bloated staffs of people who did their job the way they did it and simply wanted it to stay that way and didn’t want anything to change.  That didn’t really matter too much except that corporate expenses were higher than they should be and landowners would be pissed off because they got their checks late.  More than a few times in social settings when telling someone I worked at Devon the response would be “why can’t you send your checks on time?”

Corporate finance, however was a lean and mean operating machine.  We had less people performing the finance and treasury functions than Kerr-McGee had working on the weekly cash forecast – and we did a good job of it too.  This was all under Jeff’s leadership and direction.

How did the cash forecast work?

When I started there was already a cash forecast spreadsheet which I later revamped.  Here is how it worked:

We pulled production estimates from an existing database.  We pulled gas and oil prices from Bloomberg and applied a discount to them for what Devon would actually receive for oil and gas sales.

We knew corporate overhead data and when payroll was due, and we knew interest and swap payments already.

As to the level of accuracy acheived it was pretty straightforward.  The conversation went something lie this:

Me:  Jeff, given interest rates and what we can do with extra cash in terms of investments (or lack thereof) and the manpower that we will have to expend in order to get a more detailed forecast it is cheaper to just leave an extra 100 million laying around than expend the effort to harass people so that we can do more detailed forecasts like Kerr-McGee does.  Plus, we don’t have to harass people who have other things they are working on.

Jeff:  Agreed.

And that was that.

A rational and efficient decision was made, without regard to “how things are always done” and taking into account that there is no need to be harassing operating units.

Not harassing the operating units was a theme that Jeff reinforced a few times.

I recall one even when a decision was made by an operating unit to bid on some blocks off of Brazil.  The email I got was basically “We have to have $40 million dollars in an account in Brazil in three days”.  The $40 million wasn’t a problem – remember we always had more than that just laying around.  The problem was opening the account.  This is was after 9/11 and the government was imposing all sorts of new Know Your Customer rules on the banks.

To open the account Bank of America wanted endless documentation that there was basically no way I could do within 3 days.  In the end I just said to our representative at B of A “look, this is Devon energy opening an account for a Devon subsidiary, we have 120+ accounts with you.  This account needs to be open tomorrow.  I will send you whatever documentation you want later, but this account has to be open tomorrow.  If you don’t know your customer well enough to open the account then we will have to find someone who does”.

He opened the account.

At some point during or after this event I said to Jeff “Hey, these guys (the operating unit) really have to give us more heads up next time”.  Jeff’s response was “It is fine for you to send them an email asking them to give you a better heads up when they can, but always remember they are the one’s who make the money.  We work for them, not the other way around”.

Meanwhile let’s get back to Chesapeake.  Aubrey McClendon the well liked and flamboyant founder had his own management approach.  I can’t speak too much to the internal culture as I was not a part of it, but Aubrey was generally highly regarded by his employees.  The problem was as follows:  He ran the company like it was his own as opposed to running it on behalf of the shareholders.

Although it is difficult to quantify this was apparent by the massive amount of money that Chesapeake through around the community in what appeared to me to be one big dose of self-promotion.  Chesapeake funding was all over Oklahoma City, and the news articles praising McClendon were legion as he achieved celebrity status.  Companies need to distribute money in their communities from time to time for their long run success, but Chesapeake’s giving far outstripped anything Devon or Kerr-McGee was doing.  I was constantly thinking to myself “I wonder how any of this benefits shareholders”?

Later events that are quantifiable proved me correct that indeed the company was being run in his own interested instead of the interest of the shareholders.

In short, McClendon has a sweetheart deal where, after shareholders paid to acquire land McClendon got an ownership stake of 2.5% of every well drilled.  He had to pay 2.5% of the drilling costs.  How did he come up with the 2.5%?  He borrowed against his interest in the wells.

Chesapeake_logoHere is the problem with that:

1.  McClendon was competing with Chesapeake for access to capital.

2. Let’s say the price of natural gas goes down and Chesapeake needed to curtail it’s drilling or shut-in some wells.  What decision should be made?  Well, if McClendon has massive personal interest payments to make on his personal debt, he suddenly has a conflict of interest with the company.

McClendon of course denied any conflict of interest, but it is ludicrous to believe that shareholders ever would have approved such a situation had they known about it.  The defense of course is that the board of directors (who represent the shareholders) knew, but this is the same board of directors that bailed McClendon out of his personal financial problems buy buying his private map collection from him and awarding him a massive bonus while Chesapeakes own fortunes were in decline.

In addition McClendon was using CHK employees to do personal work for him and also never disclosed that he had a hedge fund on the side which traded in the same energy markets that CHK did.

In short, he ran the company on behalf of himself, instead of on behalf of the shareholders.

To contrast this behavior to what I saw at Devon:  One time a senior manager operating out of Houston donated $10,000 to a charity without prior approval.  As Jeff relayed to me the manager was told “that is the shareholders money, either get it back or pay it back yourself”.

All of this leads to an interesting situation:

Aubrey McClendon is the last person in the world I would want to look after my interests as a shareholder.  Jeff Agosta is the first.

Now, Jeff works for Aubrey.

In January 2014 Jeff was fired as the CFO at Devon.  I don’t know the scoop and have not spoken to Jeff in 6 years, but as someone with more knowledge than I do tells me:

He fucked up on a forecast/reporting issue, plus he alienated virtually everyone who worked under him with his management style, it seems.

I have no idea myself, but that he might have alienated people under him would not be a surprise.  I for one liked working in his unit.  With Jeff would always knew where you stood.  If you did a good job you knew it, and if you did a bad job you knew it.  Not everyone is like me however.  Some people care more about the 5 minutes of pleasantries that need to occur when a conversation starts and need criticism of their idea in a roundabout manner.  Jeff was not that guy.

More importantly, I would bet that Jeff attempted to impose his efficiency viewpoint on the rest of the company and got a lot of pushback.

American Energy Partners is said to be getting ready for an IPO.  My advice:  figure out who is really calling the shots on the finances.  If it is McClendon then take a pass.  If it is Agosta then go all in.

Postscript:

So what does all this have to do with Petrobras?  In the end and after years and years of attempted reform Kerr-McGee called it quits.  The stock had basically gone nowhere for 20 years and eventually the chemicals unit was spun off and the Oil & Gas assets sold to Anadarko.  The archaic corporate culture just couldn’t be overcome.

In all companies the allocation of capital is incredibly important.  The difference between Energy companies and many other companies is that the economic consequences few key decisions will be apparent in short order.  Proctor and Gamble can make bad decisions and the result will just be a slow decline in overall market share over a long period of time – this is not the case with an energy company.

Petrobras can have all of the reserves in the world, but if management and the corporate culture are no good shareholders will never realize a profit from it.

The day to day burden of theft in Panama

My experience buying a new phone and sim card today in Panama helps to illustrate the day to day economic burden of rampant theft in this country, particularly by employees.

Employee theft of course occurs in the United States.  In the restaurant industry theft of alcohol by employees is extremely common, which explains strict rules on who has access to alcohol in most restaurants and bars and why, for example, there are strict alcohol counts between shifts at Henry Hudsons and companies as well as a proliferation of bar control and measuring systems.  We do the same thing at the bar I am a part owner of in Panama City.

The great difference in theft in the 3rd/2nd world (Panama is really “2nd world” in my opinion) is the attitude of the lower/working to middle classes to theft and corruption.

In Panama, the attitude among most is that “everyone steals or takes bribes” so you would be dumb not to.   They see the massive graft at the top and feel no great moral need to turn down a bribe or take advantage of an employer.  After all, the leading politicians and businessmen all got ahead with corruption.  Why shouldn’t they?

The great success of the United States as a country, in my opinion, is that they elite have managed to convince the middle class to live their lives on the straight and narrow while they (the elite) are busy plundering the country at levels that would be far more shocking than anything I have ever seen in Africa or Panama if the average person understood how the plundering works.  I will expound upon this idea in a later post before the end of the year.  Back to the point, however, crime is higher in Panama on a day to day basis and there are real costs to society imposed by it.

A case in point is my trip to the cell phone store today.

(please excuse the picture quality, I took them discretely)

Picture 1 is  a picture of the entrance, taken from where I was actually ordering my phone.  It shows:

A.  A security guard (on the left)

B.  A woman who checks you in and gives you a number. (also on the left)

C.  Two cubicles in back (more on what happens there later).

case

First I’m sure security guards exists in certain parts of the United States in cell phone stores, but they don’t anyplace I have ever been in Oklahoma and I have been to cell phone stores in less than desirable areas.  This Claro store is in a nice part of town.

2nd, the person checking you in is common in the US so there is nothing to comment on here.

Those two cubicles in the far background I will mention later.

The following is picture two.  This is the sales clerk who was telling me about costs, plans, etc.  Note the window in back for later.

teller and phone

And finally the “cajas” in the third pic. (the window in the far back of the picture).

caja

So, how did the transaction go down?  I will take you through it step by step:

1.  I enter the store and am frisked by the security guard.

2.  I get a number to wait in line.

3.  My number is called and I speak with the sales clerk.  I choose a phone and plan.

4.  Sales clerk writes up the receipt.

5.  I stand in line at the “cajas” to pay.

6.  I return to the sales clerk.  She does something else ( I couldn’t figure out what).

7.  She sends me to the cubicle in the background of picture 1 to choose my phone cover.

8.  I return to sales clerk.  She does something again, then she has to go to the window behind her to get the phone.

9.  She makes sure phone works and then the transaction is complete.

In Oklahoma the process would have been:

1.  Walk in.

2.  (maybe get a number to wait)

3.  Talk to sales clerk, choose phone and plan, choose cover, and pay.  All in one interaction.

All of the unnecessary steps I under went today were because the security guard was needed to prevent customer theft, and after that because Claro can’t trust their sales clerks not to steal phones, phone cases or customer payments.

This is the norm here.  As a result the prices are higher for everything that they otherwise would be as businesses need to have multiple layers of separation in order to prevent embezzlement of one sort or another.

The losers of course are the Panamanians who are trying to get by on 400-500 per month of income.

Once Again, The Name Of The Game is Fraud

There is much academic debate over what causes so-called bubbles This  is something I will post about at a later date.  However there doesn’t need to be one single cause.  It can be a blend of causes.  One thing we do know from every major financial crises is that looting and fraud are pervasive.

In the wake of the 1929 financial crises the Pecora Commission described wide-spread criminal behavior by National City Bank.  These findings resulted in the Glass-Steagall Act.

In April of 1994 George Akerlof and Paul Romer of the National Bureau of Economic Research wrote a study titled “Looting: The Economic Underworld of Banking for Profit”.

They examined 4 events in the 1980s:  The collapse of the finance sector in Chile, the S&L crises, The Dallas real estate and construction boom and bust, and the boom and bust of the junk bond market.

From the abstract:

In this paper, we use simple theory and direct evidence to highlight a common thread that runs through these four episodes….Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society’s expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

“Bankruptcy for Profit” is the best was to describe the business model of Countrywide. It was announced yesterday that the government is putting together a civil case against former Countrywide CEO Angelo Mozilo, conveniently after the statute of limitations for criminal charges has expired.

Today we learn from the NY Times that a Texas based subprime auto lender has agreed to pay a fine for submitting bogus information to credit reporting agencies in order to get customers approved for sub-prime auto loans.

This is fraud – and it should be prosecuted.  Instead the government has extracted a fine.  All told the Obama administration has extracted over $20 billion in fines for Wall Street’s rampant criminal behavior.  Why no indictments?  One popular theory is that the banks are “too big to indict”, that is, that the government fears that criminal indictments will wreck the financial system.  This of course has it backwards:  It is criminal behavior that is wrecking the financial system.

Another popular theory is the “revolving door” theory.  This supposes that the various regulators all look the other way in order to secure lucrative jobs on wall street at a later time.  There is a lot of merit to both of these arguments.    I have written elsewhere that this behavior of looking the other way at criminal behavior and then extracting money from the criminals seems to mimic the behavior of Emperor Vespasian.

When Vespasian became emperor he was still dealing with the horrible fiscal mess left by Nero. One of his solutions was to let the tax collectors run rampant. He looked the other way while the tax collectors robbed the citizenry. Then, when they were wealthy, he would become the champion of the people and arrest the tax collectors and seize their ill-gotten gains, which he would of course deposit in the treasury.

As described by Suetonius in “The Twelve Ceasars”: “They were, at any rate, nicknamed his sponges — he put them in to soak, only to squeeze them dry later. ”

For some time now I  have viewed the banks and the government as essentially one and the same, and the two political parties as representing one pro-bank and pro-war party, that then squabbles over meaningless things in order to have us think they are in effect two different parties.

While I still feel the same way about the political parties, the recent fines and criminal inquires against JP Morgan and other banks have me wondering if perhaps I was wrong. Instead of the banks owning the government (or being one and the same) that in fact the banks are simply Vespasian Sponge’s.

Having bankrupted the country in all manners of spending (particularly raining bombs down on people on the other side of the world) the politicians figured that it was easier to let the banks steal from the population, (and then to squeeze the money out of the banks) then it was to just take the money directly from taxpayers (which might affect their re-elections).  This way everyone wins.  The government get’s it’s money, the bankers get their bonuses.

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