What is common between oil, Greece and Goldman?
Until now, these names could be fondly linked for their significant contribution to civilization and modern finance. Well, last week witnessed their spill-over effect on the Gulf coast, Southern Europe and financial markets respectively and brought dark clouds over the brighter picture emerging from the global economy at large. Still, there is a lot of exuberance around the world economy these days as financial markets are buoyant, business confidence is rising and global growth is seemingly robust. In its latest forecasts, released on April 21st, the IMF predicts that global output will grow by 4.2% this year on a purchasing-power basis, a full percentage point more than it foresaw six months ago. Other economists go further in predicting growth of more than 4.5%, which is close to the average pace of the boom years before the recession. Back home, American consumers helped propel the U.S. economy at the start of 2010. Gross domestic product grew at a 3.2 percent annual rate in the first quarter as household spending climbed at the fastest pace in three years, as figures from the Commerce Department showed today in Washington. The Federal Reserve Open Market Committee met this week and expressed cautious optimism that economic recovery is solidifying. Hopefully, the spill effect will soon be over.
Crying over spilled milk looks mild when compared to the context of crying over spilled oil. The total bill related to the oil spill drifting toward Louisiana from a well (operated by BP) in the Gulf of Mexico, could exceed $14 billion, analysts said. Since an explosion almost two weeks ago on the Deepwater Horizon rig, a disaster scenario has emerged with hundreds of thousands of gallons of crude oil spilling unchecked into the Gulf and moving northward to the coast. The Coast Guard said Wednesday that the amount of oil spilling from an underwater well has increased to as many as 5,000 barrels of oil a day, five times more than what was originally believed. Efforts to minimize the damage are under way and options under consideration include asking the U.S. military for assistance and burning the oil. Wildlife conservation groups say that the oil is posing a “growing environmental disaster.” Maybe we should consult the folks at Goldman Sachs on how to package this crude and make money doing so.
The ancient Greeks have made a significant contribution to Western civilization. Now it seems to be payback time. After going back and forth for several weeks, Europe is finally racing to Greece’s rescue. The bailout, with the International Monetary Fund and Greece’s European partners, calls for as much as $145 billion in loans intended to stave off an immediate debt default and stop the spread of economic contagion to other parts of the region. Standard and Poor downgraded the country’s sovereign debt to junk status last Tuesday. There is a consensus that the Greek economy is broken and needs major structural reform, and the rescue deal announced on Sunday is intended to give Athens a couple of years of breathing room to change the fundamental pattern of Greek behavior. The government is now committed to contain public sector spending, including pensions and popular social benefits; to raise consumption taxes to record highs; and to promote tax reform, in an effort to shrink the enormous black market, reduce tax evasion and increase government receipts. U.S. Home borrowers have benefited from all of this as mortgage rates have remained low since the Fed exited the stage, and have trended lower over the last couple of weeks as Greece’s economic issues have produced a run into the safe-haven investment of US-backed debt.
Warren Buffett is strongly defending Goldman Sachs Group Inc. on Sunday, saying faulty government regulations are to blame for most of the economic turmoil of the past few years, and not investment banks. Disclosure: he is a shareholder of the bank. When Goldman Sachs went public in 1999, its prospectus announced: “Our clients’ interests always come first. Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore.” Now Goldman is striving to restore its reputation. Of all of the accusations that really matters, the Securities and Exchange Commission says Goldman misled two clients by failing to give adequate disclosure. At the urging of a hedge-fund, Paulson, it enlisted an insurance firm, ACA, to select a pool of mortgage instruments upon which the security’s price would be based. Goldman argues that Paulson’s role was not material. Many at the firm might wish it could go private again and recover its capitalist vim. But after a decade of huge success, it is now too big to do that. It is also so dedicated to trading that it cannot go back to being just a normal, run-of-the mill bank.
Meanwhile, continue watching the few important economic news updates this week. We have Factory Orders on Tuesday, Non-Farm Productivity on Thursday and the much awaited Unemployment report on Friday. Enjoy the beginning of a warm week ahead.
©2007 ABBA First Mortgage, Inc.
