Bank Accounting Stinks

"The financial-services industry is taking steps to delay an accounting rule that would force banks and others to bring some of their off-balance-sheet vehicles back onto their books next year, which could force some to raise additional capital. ... The letter was signed by 16 industry associations, many of which were part of a group known as thwe 'Fair Value Coalition,' which was formed with the goal of changing mark-to-market accounting rules. ... Now the group of financial organizations is trying to put the brakes on the off-balance sheet accounting measure, which would force banks to bring hundreds of billions in assets back onto their balance sheets at the beginning of 2010, effectively forcing them to set aside more capital. Some accounting experts say they aren't surprised by the banking industry's latest effort. 'Here we go again. They will get out their checkbooks, and go to the Hill,' says Lynn Turner, the [SEC's] former chief accountant", Susan Pulliam at the WSJ, 4 June 2009.

This is a joke as is bank accounting. Where are the Big 87654 to scream about this? Or: FASB, OCC, SEC or PCAOB? Did the Fed's stress tests give effect to off balance sheet vehicles?

Whose Watching?

"The Big Four accounting firms are used to embarrassing headlines about their purported misdeeds. After all, the past decade has seen one business catastrophe after another at companies audited by the major firms. Witness the scandals at Tyco, WorldCom and Xerox. ... In investor lawsuits filed in recent months, BDO Seidman [BDOS] and McGladrey & Pullen stand accused of shoddy audits and signing off on the books of fraud-ridden businesses and investment funds. The cases, together with a string of earlier ones involving the two firms, raise unsettling questions about the level of confidence investors can put in financial audits. ... The gray area centers on what is reasonable, an issue that often plays out in the courts because accounting firms can be one of the only solvent players left when a company goes down. ... [BDOS] had audited [ES Bankest LLC] and concluded its books were free from material error. ... 'Auditors are supposed to have professional skepticism, and that is just inconsistent with the client relationships that they try to preserve to keep the money flowing,' [Steven] Thomas says. ... [BDOS] ... also is contesting a civil lawsuit from the collapse of Le-Nature's Inc., a Pennsylvania iced-tea producer shuttered in 2006 after allegedly faking $240 million in revenue, according to forensic accounting undertaken by a bankruptcy court. [BDOS] auditors had certified that Le-Nature's financial statements were free from material error. ... For McGladrey & Pullen, some tough questions have come from Frederick J. Grede, a Chicago bankruptcy trustee who claims the firm's auditors actively participated in the 'looting' of Sentinel Management Group, a $1.4 billion investment fund that failed in August 2007. ... According to New York Attorney General Andrew Cuomo, [J. Ezra] Merkin repeatedly lied to his customers about what he was doing with the $2.4 billion they had given him. ... The Merkin funds were audited by [BDOS], which attested that the books were free of material error. ... In a lawsuit [New York Law School] blames [BDOS] for not telling investors about Merkin's alleged sleights of hand. Exhibit A: the 2007 audit of Ascot, which lists the fund's assets on a week-to-week basis, but doesn't mention that just one broker, Madoff, held nearly all those assets. ... But New Jersey lawyer, Alan Wasserman, who is preparing another case against [BDOS] on behalf of Merkin investors, says Merkin's heavy reliance of Madoff is a 'red flag any accounting firm should have seen' and noted. ... In the view of Richard L. Kaplan, a law priofessor at the University of Ilinois, a diligent auditor should go to source documents to verify the financial statements it is scrutinizing. If a fund claims it has cash in a bank account, auditors should get records directly from the bank, he said. Kaplan has advocated tougher oversight of accounting firms. Still, he acknowedged there are limits. 'A very determined crook.' he added, 'will deceive virtually any auditor'," my emphasis, AC Thompson and Jake Bernstein at Barron's, 11 May 2009.

Yes, Thomas, one problem with CPA audits is the fee arangement. Another is the SEC. I disagree with Kaplan, CPAs have too much regulation now. It doesn't work. The SEC should eliminate the "large accelerated filer" and "accelerated filer" concepts. It should give registrants 120 days to file: 10-Ks and 60 10-Qs. But the "analyst community" will scream. So? CPAs have enough excuses for shoddy work, short SEC filing deadlines should not be another. Go "to source documents", how novel. What did PWC do at Satyam? If you haven't recently, read a 10-K. The SEC has registrants include much repetitious material. Why?

A Russian's Warning

"It must be said, that like the breaking of a giant dam, the American descent into Marxism is happening with breathtaking speed, against the backdrop of a passive, hapless sheeple, excuse me dear reader, I meant people. ... First, the population was dumbed down thorugh a politicized and substandard education system based on pop culture, rather then the classics. ... The final collapse has come with the election of Barack Obama. ... His spending and money printing has been record setting, not just in America's short history but in the world. If this keeps up for more than another year, and there is no sign that it will not, America at best will resemble the Weimar Republic and at worst Zimbabwe. ... First came the announcement of a planned redesign of the American Byzantine tax system, by the very thieves who used it to bankroll their thefts, loses [sic] and swindles of hundreds of billions of dollars. These make our Russian oligarchs look little more than ordinary street thugs, in comparison. ... Prime Minister Putin, less then two months ago, warned Obama and UK's Blair, not to follow the path to Marxism, it only leads to disaster", Stanislav Mishin, 17 May 2009 at: http://www.lewrockwell.com/orig10/mishin1.html.

This article originally appeared in Pravda! Imagine finding sound financial advice in Pravda. Putin did, my 13 February 2009 post: http://skepticaltexascpa.blogspot.com/2009/02/putin-and-wen-on-finance.html. Michael Savage read this article in its entirety on 29 May 2009 at 5:25 PM on 950 AM radio in Houston.

IA Goes to Meetin'

On 7 May 2009 I attended the Houston CPA Chapter's "Financial Reporting Symposium". Here's the "dramatis personea" then some excerpts from my notes.

Jane Adams (JA)--a financial consultant who once worked for the SEC.
Bret Dooley (BD)--Citigroup Accounting Policy Head, Markets & Banking Segment.
James Kroker (JK)--Acting Chief Accountant of the SEC, formerly a D&T partner.
James Leisenring (JL)--IASB member, formerly FASB member.
Mark McCollum (MM)--CFO Halliburton.
Charles Niemeier (CN)--PCAOB member, formerly with the SEC.
Marc Siegel (MS)--FASB member.
Phil Wedemeyer (PW)--Grant Thornton partner.
Katherine Schipper (KS)--Duke University accounting professor, formerly FASB member, Chicago PhD student in the early 1970s, my classmate in three clases, panel moderator.

The symposium had no formal presentations. KS took audience questions and read them to panel members for responses. KS did not read my question. That did not surprise me.

CN said something about the PCAOB's continuing its inspection program. My comment: so? Someone asked, "Are PCAOB CPAs competent"? CN fumfered that one. Someone else noted most PCAOB CPAs were "former" Big 87654 partners. CN has no problem with that, since only those with large client audit experience could inspect the Big 87654's work. Hey, CN, I've got some oceanfront property in Arizona to sell you. Many CPAs, IA included believe, based on "inspection" results that PCAOB CPAs are incompetent or Big 87654 stooges. CN explained Sarbox was passed to prevent fraud. I ask, has Sarbox improved bank accounting? When asked about bank accounting, CN's response was such that I concluded, "he doesn't know what he is talking about, doesn't understand internal controls". Some CPAs do what I call "disclosure" audits, i.e., they never dig into "non-accounting" data to ascertain the correctness of a client's accounting records. For instance, looking at industrial engineering reports which might underlie a manufacturing company's inventory costs. The Big 87654 is full of CPAs who do not understand cost accounting. CN reminded us the "PCAOB can't reveal its findings". I ask why not. Who or what is the PCAOB protecting? PW stunned me by asking CN "What is the purpose of the PCAOB". PW added six CPA firms audit 99.2% of all SEC registrants by market cap. Why does the PCAOB look at the rest of them. Francine McKenna at re: The Auditors and I have echoed similar sentiments. PW asked this despite Grant Thornton's being the fifth largest US CPA firm. JL asked, "where were the regulators" with respect to our current financial crisis. KS directed JL's remark to CN who fumfered an answer. Someone asked if CPAs should have found problems with the banks' capital levels. I wrote, CN "is a government tool". JL noted the FASB's recent SFAS 157 capitulation to Congress, then said it is "propaganda instead of useful information". Right one JL! JL was a breath of fresh air during the symposium. Can we clone JL? CN said, "we don't engage in disputes over GAAP". I ask, what do you do? CN said there are 1,800 PCAOB registered firms. I say, why look at say 1,780 of them? CN said of the new risk assessment standard, "it was so dense, it was hard for me to get through". Much of what the PCAOB generates is garbage. Just like the AICPA and its Assessing and Responding to Audit Risk in a Fianancial Statement Audit, a 498-page tome, my 30 November 2008 post: http://skepticaltexascpa.blogspot.com/2008/11/more-good-news.html. JA favored one set of global standards. I ask why? JL noted the FASB's independence is threatened. I agree. JL said the FASB is "not stabilizing the banking industry". I agree. Was it supposed to? Where's the Fed, OCC, etc? MM commented about Halliburton's cost of maintaining multiple sets of books. I say so? Someone noted "principles are difficult to audit". This is one reason I oppose IFRS, it will produce more unauditable results. That may be why some favor it, like the SEC. It will let SEC staffers "pass" any registrant they want to. I'd rather give the SEC less discretion. I don't trust it. JL noted the Fed has the "right to print money" and asked at what amount should that be capitalized? Henry Kaufman asked this in about 1980. A discussion of oil and gas accounting and SFAS 71 took place. KS said something to the effect it was amazing SFAS 140 still exists. JL said of QSPEs, they "are a silly idea in the first place". Amen. BD defended QSPEs, I wrote BD's "a double talker". A discussion of puts and guarantees followed. JK was asked if further Sox 404(b) deferrals might occur for small companies. He gave no clear answer. JA wants the auditor's report revised to list corporate risks. I think she wants auditor assurance on an SEC registrant's risk comments in its filings. A discussion of SFAS 5 followed. MM didn't want "prejudicial information" released. Potential changes in SFAS were discussed and cash balance plan accounting. Now SFAS 157 came up again and someone attacked "internally developed inputs" for valuing bank assets. JL said they amount to to banks saying, "we don't like that price". JL challenged bank managements to buy the supposedly undervalued assets personally. BD flinched at this. I made JL's suggestion on 17 July 2008. JA said the FASB "abdicated its responsibility" in caving in to Congress on SFAS 157. Amen.

I had some surprises at the symposium. JL was a breath of fresh air. Obama likes "czars". JL for accounting czar. JA, once with the SEC Chief Accountant's Office disappointed. She seemed preoccupied with trivia and searching for a "magic number" that would facilitate her financial analysis. BD is a Citigroup middle manager and apparently said whatever "C" told him to. If you weren't skeptical of "C's" financials before, you should be after hearing BD. JK disappointed; I concluded this former D&T partner is hopelessly incompetent. MM seemed a typical Fortune 500 CFO, he wants to minimize his firm's accounting costs and present whatever it does in the most favorable light. CN was a complete blowout in my book. This current PCAOB member, and former SEC employee struck me as not having my professional skills when I had 30 months CPA experience. Really. Close the PCAOB. Now! MS struck me as another bureaucrat who won't rock the boat. PW was a pleasant surprise. A straight talking no-nonsense guy. The kind of guy to "tip a brew" with now and again. Even his PCAOB stint apparently didn't hurt him. It may have made him hostile to it. KS was her 1973 self. When a UC PhD student, I thought KS was the smartest female in the school. Aside from having grey hair she hasn't changed a bit, analytical, caustic, but unwilling to throw molotov cocktails when I believe warranted. All in all, worth the day.

Glaxo's Taxes

"GlaxoSmithKline PLC is embroiled in a potential $1.9 billion court battle with the [IRS], which says the drug maker owes back taxes, interest and penalites stemming from tax deductions Glaxo generated essentially by making payments to itself. The dispute centers on a practice known as earnings stripping, in which a multinational company reduces its taxes by claiming interest deductions for payments to a related unit overseas. The company claims deductions on its US tax returns, but no money ultimately leaves the parent company's coffers, and the publicly reported profit is unchanged. ... The tax saving technique used by Glaxo is popular among foreign companies that have large US operations and often is legal. But the strategy has come under greater scrutiny as US authorities crack down on tax-cutting strategies. ... The case comes from the $75.7 billion merger in 2000 of UK rivals GlaxoWelcome and SmithKline Beecham. ... The US operation was then merged into SmithKline's US business, which agreed to pay the Swiss company $13.5 billion over seven years as compensation. GlaxoSmithKline treated a portion of thise payments as tax-deductible interest. ... A typical attraction of such transactions is that the company gets a US tax deduction, while its overseas unit genrally pays lower or no taxes on what it receives, says Robert Willens, who runs a corporate tax-consulting firm. Glaxo didn't disclose in its court filings the tax treatment of the payments in received in Switzerland", my emphasis, Jesse Drucker at the WSJ, 22 May 2009.

I can't tell from this article if I agree with Glaxo or the IRS. Since Glaxo did not disclose these payments Swiss tax treatment, a judge could rule they were not taxable in Switzerland and let Glaxo prove otherwise, like the burden of production in a tax evasion case, see Holland v US, 99 L ed 150 (1954). This case reminds me of Wal-Mart, my 14 January 2008 post: http://skepticaltexascpa.blogspot.com/2008/01/wal-marts-leaky-tax-shelter.html. I went to Glaxo's website and downloaded its 2008 Annual Report. Reading Footnote 14, "Taxation", shed no light on the situation as this tax issue was not disclosed. From what little I saw, I think Glaxo has a big bill to pay and PWC should be strung up for not having Glaxo adequately disclose this situation.

Fed Power

"Donald L. Kohn is a powerful man, as Vice-Chairman of the Board of Governors of the FED. He shouldn't have this power. Nor should the FED have the power it has. Not under the US Constitution. Not in a nation of free men and women. And not if we want a sound economy. ... Ideas like these [promoting maximum sustainable employment (MES) and stable prices over time] are superficially plausible. They are picked up and repeated in the press. They are accepted by the public. Sadly, they are accepted even by trained economists, who should know better. Tragically, these ideas embody all sorts of myths. They are all false statements. ... More generally, the Constitution does not give Congress the power to control the economic activites of Americans through central banks or in any other ways for the sake of these goals. ... But what [Kohn] and others are blind to and do not admit is that this power is not different in kind than the power of the Politburo of the Communist Party of the Soviet Union. ... And when [Congress] does apply its powers, to regulate the efficiencies of engines and the preservation of insects, its applications of power are at least as thorough and potent as those in the Soviet Union. ... Since the actual goals of those who govern through power are not the stated goals, the resulting laws are neither practical nor sensible for most of us. ... The stated goal itself, of [MES], is neither well-defined nor sensible. No one knows what the term even means. ... The FED doesn't know what employment is or even what it means. A person who has a garden at home is not counted as employed, but if he trims a neighbor's shrubs for pay, he is employed. ... If unemployment rates are used., no one knows whether the maximum sustainable rate is 3, 4, 5, 6 or some other percent. No one knows what sustainable means. It suggests a level of employment that is kept up. But who knows what rate should be kept up? ... It is impossible for voting methods to translate or aggregate personal desires for happiness into an aggregate item like [MES]. ... This goal that Kohn accepts in not different in character from the Pharoah commanding people under his rule to work producing wheat and pyramids, so as to have [MES]. ... The second goal that Congress and the FED posit is 'stable prices over time.' Central bankers worldwide constantly talk about price stability, even as they inflate their money supplies And cause prices to rise in their countries. ... Price levels are notoriously difficult to measure due to variations in prices, quality, avaliablity, location, product innovation, product improvement, product differentiation, and consumption patterns, among other things. Neither is it obvious that stability is a desireable thing. ... 'Central banks are uniquely suited to promoting price stability, and they contribute to maximum employment and growth over time by eliminating the uncertainties and distortions of high and unstable inflation.' This is pure fantasy. ... Aggregate demand ignores the wishes and choices of the millions of Americans in the complex economy. It refers only to final demand and ignores all the intermediate productive choices. It ignores the prices of different goods (relative prices) in favor of the (single) price level. ... Textbooks invariably show that long-run aggregate supply depends, not on money prices, but on real variables like labor and capital. ... The FED does not know whether it is observing short run or long run changes in prices and employmjent. It cannot separate them. In practice, the FED acts as if all changes are short run. It constantly toys with financial markets. ... Since the economy is complex, dynamic, and people act with unpredictable lags, sometimes years later, when the shocks cumulate or the economy responds, the FED responds to the shocks of its own creation. It thinks they are exogenous short-term shocks when they are the results of its own actions. ... The FED acts as if the economy's adjustments to prices and employment should be counteracted, when, in fact, the adjustments may be just what is needed to create a healthy and balanced economy. ... The goals are crude central-planning goals, as in state socialist economies. They are arbitrary and poorly defined. ... The economy does not need the FED crudely to force feed it with gobs of money and debt when it observes the economy going through a slowdown. This will undermine the patient's recuperative powers and interfere with it regaining its natual strength", original italics, my emphasis, Michael Rozeff (MR), 20 April 2009 at http://www.lewrockwell.com/rozeff/rozeff290.html.

Bravo MR. This is Austrian analysis. Kill the Fed. Now. The Master said, "Therefore by their fruits you will know them", Matthew 7:20 (NKJV). I estimate today's "price level" is about 38 times 1913's. The Fed seeks price stability? Hahahahahahaha would say the Mogambu Guru. Ludwig von Mises wrote of the "index number problem" in Human Action, 1949. MR brings up the Soviet Union. Why not, read Plank Five of Karl Marx's Communist Manifesto, 1848. Marx favored the creation of central bank.

Understand the Law

"You can see very plainly that a bad man has as much reason as a good one for wishing to avoid an encounter with the public force, and therefore you can see the practical importance of the distinction between morality and law. A man who cares nothing for an ethical rule which is believed and practised by his neighbors is likely nevertheless to care a good deal to avoid being made to pay money, and will want to keep out of jail if he can. ... If you want to know the law and nothing else. you must look at it as a bad man, who cares only for the material consequences which such knowledge enables him to predict, not as a good one, who finds his reasons for conduct, whether inside the law or outside of it, in the vaguer sanctions of conscience", 10 Harvard Law Review 457, 459 (1897), Holmes, Oliver. "Take the fundamental question, What constitutes the law?", 460. "But if we take the view of our friend the bad man we find that he does not care two straws for the axioms or deductions, but that he does want to know what the Massachusetts or English courts are likely to do in fact. I am much of this mind. The prophecies of what the courts will do in fact, and nothing more pretentious, are what I mean by the law", 460-1. "But what does it mean to be a bad man? Mainly, and in the first place, a prophecy that if he does certain things he will be subjected to disagreeable consequences [DC] by way of imprisonment or compulsory payment of money. But from his point of view, what is the difference between being fined and being taxed a certain sum for doing a certain thing?", 461.

This is law's essence. Not fancy. Not elevated. Just describing the circumstances when the state's sheriff at gunpoint, will take a man to prison or seize his property. Richard Posner, 7th Circuit Court of Appeals judge, called this the finest law review article ever written. I agree. Why cite it now? Because Holmes told us 112 years ago how to deal say, with Somali pirates, i.e., subject them to DC. Like? Since the Somalis have virtually no money we may only imprison or kill them. If we find other DCs we might subject the Somalis to them. We might inform the Somalis of the ten plagues of Egypt and say, "If you kill any of the 200 hostages you hold, we will defoliate your land, and give you bacon and grilled cheese sandwiches to eat. You may eat them or starve". But 99% of Somalis are Moslems. Precisely, a DC. Eventually if we impose sufficient DC on them, piracy ends. Isn't law simple? We have superior weapons, we make the law. At least with respect to Somalis. That's it. We impose DC until, if need be, all 9.6 million Somalis are dead. So? Barbaric! Such is the law. Since law students find it in books they are not forced to consider what underpins it: violence and threats to use violence.

The Fed's Trojan Horse

"Richard Fisher [RF] says he is always on the lookout for rising prices. But that's not what's worrying the bank's president right now. His bigger concern these days would seem to be what he calls 'the perception of risk' that has been created by the Fed's purchases of Treasury bonds, morgage-backed securities and Fannie Mae paper. ... The looming challenge, he says, is to reassure the markets that the Fed is not going to be 'the handmaiden' to fiscal profligacy. 'I think the trick here is to assist the functioning of the private markets without signalling in any way, shape or form that the [Fed] will be party to monetizing fiscal largess, deficits or the stimulus program.' The very fact that a Fed regional bank president has to raise this issue is not very conforting. It conjures up images of Argentina. ... In a speech at the Kennedy School of Goverment in February, he wrung his hands about 'the very deep hole [our political leaders] have dug in incurring unfunded liabilities of retirement and health-care obligations' that 'we at the Dallas Fed believe total over $99 trillion.' ... Regarding what caused the credit bubble, he repeats his assertion about the Fed's role: 'It is human instinct when rates are low and the yield curve is flat to reach for greater risk and enhanced yield and returns.' ... 'The second thing is that the regulators didn't do their job, including the [Fed].' ... And finally, he says, there was the 'mathematization' of risk. Institutions were 'building risk models' and relying heavily on 'quant jocks' when 'in the end there can be no substitute for good judgment.' ... 'I served on corporate boards. The way rating agencies worked is that they were paid by the people they rated. I saw that from the inside.' He says he also saw this 'inherent conflict of interest' as a fund manager. ... 'What is clear is that rating agencies always change something after it is obvious to everyone else. That's why we never relied on them.' That's a bit disconcerting since the Fed still uses these same agencies in managing its own portfolio. ... He surprises me by siding with the deflation hawks. 'I don't think that's the risk now.' Why? One factor influencing his view is the Dallas Fed's 'trim mean calculation,' which looks at price changes of more than 180 items and excludes the extremes. Dallas researchers have found that 'the price increases are less and less. Ex-energy, ex-food, ex-tobacco you've got some mild deflation here and no inflation in the [broader] headline index.' ... It's good to know that a guy so obsessed with price stability doesn't see inflation on the horizon. But inflation and bubble trouble almost always get going before they are recognized. ... 'I want to make sure that your readers understand that I don't know a single person on the FOMC who is rooting for inflation or who is tolerant of inflation.' The committee knows very well, he assures me, that 'you cannot have sustainable employment growth without price stability. And by price stability I mean we cannot tolerate deflation or the ravages of inflation.' ... Policy makers have to be 'always mindful that whatever you put in, you are going to have to take out at some point. And also be mindful that there are these perceptions [of the possibility of monetizing the debt], which is why I have been sensitive about the issue of purchasing Treasurys.' ... 'I wasn't asked once about mortgage-backed securities. But I was asked at every single meeting about our purchase of Treasurys. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the [US]. That seemed to be the issue [Asians] are most worried about.' ... 'Throughout history,' he says, 'what the political class has done is they have turned to the central bank to print their way out of an undfunded liability. We can't let that happen. That's when you open the floodgates. So I hope and I pray that our political leaders will just have to take this bull by the horns at some point, You can't run away from it.' ... 'The reason why the banks were put in the mix by [President Woodrow] Wilson in 1913, the reason it was structured the way it was structured, was so that you could offset the political power of Washington and the money center in New York with the regional banks. They represented Main Street. ' ... At heart, Mr. Fisher says he is an advocate for letting markets clear on their own. 'You know that I am a big believer in Schumpeter's creative destruction,' he says referring to the term coined by the late Austrian economist", my emphasis, Mary O'Grady (MO) interview of RF at the WSJ, 23 May 2009, link: http://online.wsj.com/article/SB124303024230548323.html.

Reassure the markets", hmm. "Without signalling", aha. RF means deceive. He worries about deflation. Do you believe RF? RF is the Fed's Trojan Horse or "Bad Cop" as opposed to Zimbabwe Ben the "Good Cop". So "obsessed with price stability"? What is MO talking about? This is more WSJ Fed boosterism. RF "doesn't know a single person on the FOMC who is rooting for inflation". I think RF speaks the truth. No single person is, they all are! "Whatever you put in, you are going to have to take out", in 100 years. Offset? No, the regional banks were created to make the Fed system more palatable to the populace and convince it the regional banks worked for them as opposed to the NY banking establishment. What rubbish, RF. "At heart", but not in practice, RF?

Cheap Oil and Shares

"Rising oil prices, believes Ali al-Naimi, Saudi Arabia's oil minister, may soon 'take the wheels off an already derailed world economy.' ... Indeed, at a recent summit of oil grandees covened by the Organization of Petroleum Exporting Countries (OPEC) it was hard to find anyone who did not expect a price rise to rival the giddy leap to $147 a barrel last year. ... On the face of things, this concern is absurd. The plunge of $115 in the price of oil from its peak last July to its nadir in December was the most precipitous the world has ever seen. ... Meanwhile, oil firms are not pumping nearly as much as they could. ... Despite this growing glut, however, the price of oil has been rising steadily in recent weeks. ... On May 20th it closed above $60 a barrel for the first time in more than six months. ... Oilmen are worried because they believe thay many of the factors behind the record-breaking ascent last year remain in place. ... So oil firms must work doubly hard to replace declining fields and to increase output. ... Yet the oil industry is short of equipment and manpower, thanks to decades of underinvestment in the 1980s and 1990s, when prices were low. That left it struggling to expand despite the strong price signal of recent years, and thus poortly positioned to cater to vast new markets in the developing world, including China and India, where oil consumption has been growing fast. ... Oil boses, OPEC ministers and anxious bankers all agree on what is needed to prevent this scenario from becoming a reality: lavish investment in the devlopment of new fields and in exploration. ... On London's Alternative Investment Market [AIM], a magnet for speculative ventures in natural resources, oil firms managed to raise just Pound23.6m ($37m) in the final quarter of last year, compared with Pound229m in the previous quarter", my emphasis, Economist, 21 May 2009, link: http://www.economist.com/PrinterFriendly.cfm?story_id=13693010.

I think oil and oil field service shares are cheap at current levels. Oil companies finding it difficult to raise money at AIM, I see as a good sign. Disclosure: I own oil and oil field shares. Agreeing with McKinsey here, I expect oil prices to rise. I recently attended a University of Chicago GSB oil indistry conference that had a McKinsey director as a panelist. He seemed to be the only panelist who understood oil industry economics. He was the prototypical McKinsey consultant, prepared, educated and smart as they come.

Congolese Farmers

"The Republic of the Congo isn't exactly a hospitable place: Two-thirds of its people are crammed into sweltering cities, and it's still stuggling to get back on its feet after five years of civil conflict. Plus, it rains a lot. But for a growing number of South African farmers, it's the Promised Land. They're scrambling to get on board an ambitious venture to reclaim farmland in Congo's interior and help relieve that country of a reliance on food imports. ... Fueling the mania were early reports the Congo was prepared to set aside 10 million hectacres of rent-free land, nearly the size of Ohio. That turns out to be an exaggeration. ... The South Africans in turn would build infrastructure, employ locals and instruct them in modern farming techniques. People familiar with the matter say the initial focus will be on restarting state-owned farms abandoned in 1992. ... The Republic of the Congo, a former French colony bordering the larger Democratic Republic of the Congo, gets most of its income from oil. ... South African commerical farmers, mostly the descendents of Dutch and French pioneers who began settling the continent's southern tip centuries ago, are renowned for the ability to coax food out of African soil. Eager for their expertise and capital, African countries from Ghana to Nigeria have offered them incentives to set up shop. ... Such programs can be controversial, touching on sensitive issues of race, colonialism and land tenure. ... Some South African farmers are skeptical the venture will get off the ground and they say that, if it does, investors will be vulnerable to land invasions and political instability. 'Nobody around here is going,' said Lionel Hartman, a farmer in Levubu, in the northern part of South Africa. 'They're not stupid'," my emphasis, Michael Allen at the WSJ, 23 May 2009.

IQ and Global Inequality, Lynn and Vanhanen, 2006, page 298 has four Congo-Brazzaville average IQ estimates, from 64 to 73, averaging 66. You don't suppose ... McKinsey, is there any relationship between IQ and the ability to use modern farming techniques? Ah, bring the natives "Christianity". Restart "state-owned farms". Interesting. The "decendents of Dutch and French pioneers ... are renowned for their ability to coax food out of African soil". How, by magic? What is the "sensitive [issue] of race" here? McKinsey, my 24 May 2009 post: http://skepticaltexascpa.blogspot.com/2009/05/mckinseys-pc-extravaganza.html, take note. That goes for you too, Jeffrey Sachs. What's going on? In "AA" terms, the Congo may have "hit bottom", just like Detroit may have, my 5 January 2009 post: http://skepticaltexascpa.blogspot.com/2009/01/wait-listed-by-jail.html.