Tag Archive for Rolling Stone

Climate Change and Big Carbon

Bottom Line:  Climate change signs are coming through stronger now than ever before, and faster than scientists anticipated.  The droughts in India and the US bode ill for food prices later this year, early next.  The suffering in poorer countries may cause additional deaths, social upheaval.  The economic interests of Big Carbon are working against our need to change.

Hot Enough for You?

Anecdotally, it’s been a hot summer.  My parents in Connecticut have talked about the 5 heat waves (3+ days of 90 degree+ weather) before August.  Anudip Foundation talked about “faculty that braved 45 degree Celsius (113F)  temperatures in stifling humidity [in India] to conduct their classes in remote places. Several suffered heat strokes in the process.”  Bill McKibben, in his Rolling Stone article marvels at Saudis’ report of “rain in Mecca despite a temperature of 109 degrees, the hottest downpour in the planet’s history.”  And that’s just the tip of the iceberg.  The rest of the iceberg (Petermann Glacier) broke off from Greenland, a mass of ice twice the size of Manhattan.  But maybe it’s OK, because one bigger than that broke off two years ago…  If you want something that’s unprecedented in 150 years, you can turn to this month’s ice melt of of the Greenland ice sheet, which overshot it’s “typical” level of 55% melting to go from 40% to 97% in 4 days.   Heat records have been broken left and right in the US, and the heat and drought has caused serious crop failure in key farming regions in the US 

“Some stuff technically is not going to be worth the combine bill to harvest it,” he said. “This is my 49th crop, and I have never had a year like this.”

In India, the story is similar:

“The situation is quite bad, exceptionally bad, and very serious for farmers,”  said scientist Kirpal Singh Aulakh, former head of Punjab Agricultural University in Ludhiana.

The Geo-Political Landscape for Change

(What follows is a summary of Bill McKibben’s Rolling Stone article.)

The weak consensus of the Rio+20 Global Summit was to maintain a temperature increase of 2 degrees (Celsius) or less.  Scientists believe this increase will cause a host of problems, but not be an existential threat to humanity and our way of life.  We have already seen a 0.8 degree increase, with associated problems (ice melt, droughts, oceans 30% more acidic). So some question whether even 2 degrees is permissible.  But no binding actions were taken to commit the largest emitters (China just surpassed the US) to any definite course of reduction.

Scientists have further estimated the amount of CO2 that could be released while still remaining within the 2 degree limit:  565 Gigatons by 2050.  According to the research cited in the article, on our current path, that level will be reached in about 16 years (adding 32 Gigatons per year, growing 3%).

Big Carbon (Big Energy)

The greatest source of the CO2 emissions is the burning of fossil fuels for energy (coal, oil, and natural gas).  The biggest energy companies (and, in countries where the state controls petroleum reserves, the states themselves) are sitting on known reserves that will exceed the 565 Gigaton limit 5 times over.  Yet in their quest for more energy (and to increase the $1 Trillion in profits captured since 2000), exploration for new deposits of carbon-based fuel continues unabated.  Indeed, with the easiest “finds” already exploited, the new sources (like tar sands or shale) require much more energy to extract, thereby increasing the effective emissions (and cost) of the “useful” energy.

So, while humanity ponders our existence, (or gets distracted by the latest celebrity gossip), the oil companies will also be pondering their existence, recognizing that if we (as a human race) were to enforce the 565 Gigaton limit, nearly 80% of the existing known reserves, plus whatever additional finds are made, could not be burned, rendering it essentially worthless.  Since the companies’ market value is derived from these assets and future earnings stream, any such limit would savage the value of the industry, possibly driving some of them out of existence.

If it’s a race to see who can organize faster to protect their interests to avoid being driven out of existence, all the signs so far point to the oil companies winning.

Postscript:  The Silver Lining?

A friend shared Matthew Ridley’s The Rational Optimist a couple years ago–the central thesis is that our inventive capability is providing for huge gains, and things that look grim today will be solved by technology or discoveries in the future.  Linear extrapolation misses the “disruptive game-changers.”  He argues that given a choice between a dollar of mitigation effort today and one (inflation adjusted) a hundred years from now, we should delay, and pay later, because our wealth and standard of living will have increased so much from discoveries between now and then.

I found his argument partially persuasive, but am still troubled:

  1. These environmental changes are happening faster than forecasted, and the effects seem to be more extreme than forecasted.
  2. Inventions not only impact our ability to make a positive difference; they also increase our capability to make a negative difference.  We’re more capable of making large-scale changes to our environment.  Yes, that may bail us out, but we also may miss a fatal flaw in our plan.
  3. The Big Carbon companies seem to be sticking their heads in the (oil) sands.  McKibben cites the lack of investment, even the shuttering of the alternative energy projects undertaken by the reigning corporate leaders.

So, yes, let’s be looking at inventions that might enable us to capture and sequester carbon.  Let’s look at alternative energies.  But let’s agree that our course of charging ahead, ignoring the warning signs and continuing “business as usual” is a foolhardy recipe for disaster.

The Bond Market, Rolling Stone, and Feeling Let Down

Bottom Line:  Matt Taibbi of The Rolling Stone has broken a powerful story about fraud (“fixing” auctions in the municipal bond market) by big investment banks stealing from municipalities.  It also implicates politicians accepting bribes.   It’s worth a read, and also asking “Why are we hearing about this through an entertainment magazine and not the financial press?”

[I’m still working on the “Alternatives with a Social Return for your Bond Investments” post as part of my Mission Related Investing for the Rest of Us series, but this post preempted that one.]

Image from the original article

Image from the original article

The Rolling Stone has a powerful financial investigative journalism piece in the July 5, 2012 issue called “The Scam Wall Street Learned From the Mafia.”  It details a trial in New York with the conviction of 3 “bit players” in what appears to be a routine practice among the larger investment banks (“not just GE, but J.P. Morgan Chase, Bank of America, UBS, Lehman Brothers, Bear Stearns, Wachovia and more”) of fixing the bids on the interest rates that the banks offered cities and states across the country for the bonds they sold on the cities’ behalf.  Instead of letting the highest bidder win, the banks conducting the auction would provide guidance to the bidders, telling them the minimum bid they would need to win the auction, and in other cases, asking potential bidders not to submit real bids (in exchange for the opportunity to win an uncontested auction elsewhere).  The winning bidders would provide kickbacks to the banks on unrelated transactions.

Given the size of these dollar amounts, even a small rate difference (the examples in the article were about .04%) makes a huge dollar difference, money taken straight from the depressed city coffers, fattening the profits of these banks.  The article makes the point that it was so common that the bankers had even stopped remembering it was wrong.  They carried on discussions on phone calls they knew to be taped.  Even the defense at the trial was something along the lines of “Hey, maybe this was the fair price.  How do you know?”

So, today I’m feeling let down:

  • Let down that the banks would resort to this level of criminality.  (Here, I especially include GE, in which I am a shareholder.)
  • Let down by the financial press and mainstream media.  Why am I hearing about this through The Rolling Stone?  Can the entertainment press really do a better job of covering financial investigative stories?  Maybe they can.  Author Matt Taibbi’s previous article on “The Real Housewives of Wall Street” was another memorable expose on people with dubious credentials claiming TARP funds.
  • Let down by Bill Richardson, former Governor of New Mexico and Democratic Presidential candidate.  He is cited in the article as taking $100,000 in campaign contributions (to his PAC) and subsequently awarding $1M contract to the firm  (“Tell the big guy I’m going to hire you guys,”) while paying a second firm to actually do the work.  I’d met Gov. Richardson on the campaign trail, and been impressed enough to make a contribution to his campaign.  Guess I am not the best judge of character.

Changes to make things better

  1. Public funding of campaigns (whoa, subliminal slip there….  I’d originally typed “auctions”).  The Richardson example is yet another of how the need for campaign fund raising is corrupting the business of government.
  2. Stronger enforcement of these laws, with greater penalties to the banks (and potentially splitting them up so that if we needed to wind down a bank because of its criminal behavior it can’t claim that doing so would pull the economy down with it.)  Personal liability needs to be increased somehow as well, though I’m not sure how.
  3. Moving to a different/more transparent auction format.  “Sealed bid, highest bidder wins” auctions can be subject to strategic bidding with companies understating their real value in order to try to minimize the price they pay for a winning bid.  If they understate it by too much, they can end up losing to a firm that values it lower.  Google uses a second price bid system for their Adwords.  Under that scheme, each bidder has the incentive to bid his or her true value for the good, knowing that whether they win depends on that, but the price paid depends on the competitive bidders’ values.  Ironically, the bid shaving described in the article is almost the same effect that moving to a second price auction would have (the winning bidder would pay the price of the second highest bidder).  EXCEPT:  1)  The firms need to know the rules of the auction so that they submit their real values as bids and 2)  NO WAY should some priviliged bidders be permitted to see the bids of others prior to the close of the auction.