Author: David Korslund

On 17 July 2014 Malaysian Airlines MH17 was shot down. As noted by the Dutch and Australian governments when announcing legal proceedings on 14 March 2022:

1. Flight MH17 was shot down by a Russian Buk-TELAR surface-to-air missile system;
2. the missile system was transported from Russia to an agricultural field in the east of Ukraine on the morning of 17 July 2014 – an area under the control of Russian-backed separatists;
3. the missile system belonged to the Russian Federation’s 53rd Anti-Aircraft Military Brigade, and was accompanied by a trained Russian military crew;
4. from the launch site, the Buk-TELAR fired the missile that shot down Flight MH17, killing all 298 people on board;
5. the missile could only have been fired by the trained Russian crew of the Buk-TELAR, or at least by someone acting under their instruction, direction or control; and
6. the Buk missile system was returned to the Russian Federation shortly after the downing of Flight MH17.

These facts were gathered in part by the efforts of Bellingcat. As noted on their website: “Bellingcat is an independent international collective of researchers, investigators and citizen journalists using open source and social media investigation to probe a variety of subjects.” This innovative use of a wide range of sources investigated by professionals and volunteer supporters provides an interesting idea for ways of approaching the hidden oligarch wealth that was stolen from the Ukrainian and Russian people and whose owners provide support to the vicious Putin war on Ukraine.

The Financial Times recently highlighted three books that provide in-depth analysis of how the financial industry and its legal, accounting and consulting supporters managed to make the US and the UK “safe havens for dirty money.” These safe havens are now being looked at as the US, UK and European Union look to apply sanctions against oligarchs and their wealth. Of note the US Department of Justice has established a Task Force KleptoCapture as reported in the New York Times and the Washington Post.

At the same time there are increasing stories about oligarchs and their assets outside Russia. These include Alexei Mordashov whose ownership of the travel agency TUI is covered in The Guardian. The Guardian also covers a real estate development in a private housing compound in Surrey where it is estimated that more than 25% of the homes are owned by “Russians and those from former Soviet states.” Direct action is being taken including the capture of a balcony of a mansion in London linked to Oleg Deripaska as noted by the BBC. Similarly many luxury yachts are also being taken into custody in France, Spain, Germany, and Italy.

Much of this wealth has been carefully concealed using legal structures that hide true ownership. Looking behind these structures will require significant effort and expertise and most likely changes in laws and regulations to create transparency for the ownership of partnerships, offshore shell companies, Dutch BVs, North Dakota trusts, Delaware corporations and so forth. Perhaps a Bellingcat is needed to enlist bankers, lawyers, accountants and consultants to help do the research necessary to find the stolen wealth. But who better to find the money than those who helped hide it in the first place. A small price to pay to atone for past sins.

The terrible war by Putin against Ukraine raises many issues of which fossil fuel dependency of Europe on Russian oil and gas resources is just one. The emergence of wealth from these resources and how that wealth is used is of interest. Norway and Russia are two countries blessed with an abundance of fossil fuels that have created economic wealth and climate change crises. But the paths of these two countries vis-à-vis the use of the wealth generated from exploitation of those resources are substantially different. The path chosen by Russia potentially provides a way forward once the war is over and both Ukraine and Russia need to rebuild their economies.

Norway established an “oil fund . . . to ensure responsible and long-term management of revenue from Norway’s oil and gas resources, so that this wealth benefits both current and future generations.” This fund reports transparently on its activities and has a value as of the end of 2021 of approximately USD 1.4 trillion. That amount is just under USD 260,000 for each of the 5.4 million residents of Norway.

The Russian model is quite different. The Carnegie Council for Ethics in International Affairs in an article: How Did Russia’s Oligarchs Rise to Power provides access to an excerpt from a 2001 book by David Hoffman: The Oligarchs: Wealth and Power in Russia. In essence the oligarchs were able to amass huge amounts of wealth essentially through purchase of companies, many of which were based on fossil fuels, owned by the Russian government at very favourable prices. This transfer of wealth from the government to individuals gave away the value which would have been for the benefit of the Russian people to a small number of individuals.

It is difficult to determine the actual amount of wealth of the oligarchs but there have been a series of attempts to do so. In 2018 the National Bureau of Economic Research published study of the history of wealth in Russia produced by Thomas Piketty among others. In 2020 the Atlantic Council in an article “Defending the United States against Russian Dark Money,” the authors estimated that the value of “dark money” from Russia held outside of the country was about USD 1 trillion. The amounts can also be estimated from the real time billionaires list provided by Forbes Magazine. Regardless of the source, the Russian oligarch wealth would appear to be more than 70% of the wealth accumulated in the Norwegian fund – but that oligarch wealth is solely for the benefit of a few individuals rather than the Russian people from whom it was stolen.

The significant wealth of the oligarchs is now under scrutiny from those fighting the invasion of Ukraine by Putin and his army. It appears highly likely that the wealth of the oligarchs invested in assets outside of Russia, will be subject to sanctions and perhaps even confiscation. Chris Truax in The Bulwark suggest that this wealth could be the basis of a fund noy only to provide for support of the millions of refugees from the terrible Putin war underway but also a source of funding for the rebuilding of the destroyed Ukrainian infrastructure. And perhaps even for the necessary rebuilding of a Russian economy that is focused on meeting the needs of all the Russian people and not just the oligarchs.

The last week has been one in which the various negative impacts of fossil fuels has been emphasised. Two reports have been issued noting the critical vulnerability of our earth to climate change arising from the use of carbon-based fuels. The Intergovernmental Panel on Climate Change issued its Sixth Assessment Report which highlights a series of challenges we will be facing. It is a long and detailed report that does not make for easy reading both in terms of content and message.

Almost simultaneously the UN Environmental Program issued “Spreading like Wildfire: The Rising Threat of Extraordinary Landscape Fires.” As noted with the release of the report: “Recent years have seen record-breaking wildfire seasons across the world from Australia to the Arctic to North and South America.” They go on to note that “(u)ncontrollable and extreme wildfires can be devastating to people, biodiversity and ecosystems.”

But we also see the impact of our reliance on fossil fuels in the Putin invasion of the Ukraine – also leading to flames as reported by the BBC among others. It appears that an element behind Putin’s attempt to extinguish the sovereignty and freedom of the Ukraine people was a belief that the dependence of Europe, and especially Germany, on Russian gas would deter any meaningful response to this violation of civilized norms as well as the 1994 agreement between the Russian Federation, Ukraine, Britain, and the US to “respect the independence and sovereignty and the existing borders of Ukraine.”

Whilst the invasion of Ukraine is an egregious example of how the use of fossil fuels creates geopolitical challenges, it is not the only time that these challenges have been seen. With solid reporting again by the BBC we learn of the murder and dismemberment of Jamal Khashoggi for his critical reporting on Saudi Arabia. Again there was very little effective response from a world that was and is dependent on the flow of fossil fuels from Saudi Arabia.

The poison of a dependency on carbon-based fuels leads not only to global warming that threatens our future but also to geopolitical actions that threaten a civilized society today.

The black swan is often used as a metaphor for the arrival of unexpected risks. And a group of swans is generally referred to as a wedge – reflecting their flying pattern. In looking at the world today, it seems to be that we are potentially facing a wedge of black swans creating significant social, political, and economic risks. Perhaps the realisation by many that the world is currently risky drives the current negative feelings that seem to be unjustified by relatively benign or even positive economic measures.

Inflation is one of the issues for which there does not appear to be a clear perspective of what will happen and what policies should be taken to address it. A recent article by Paul Krugman provides interesting insight using data. Krugman has been sceptical of the longevity of the current increase in inflation, but he digs deeper into potential driving factors and is consequently more concerned. He specifically focuses on the possibility that US economic potential has permanently decreased due to a decrease in the number of people who are part of the workforce.

An analysis by the Peterson Institute for International Economics digs deeper into the workforce issue noting that the Congressional Budget Office sees excess mortality and reduced immigration as being driving factors for reduced labour. Excess mortality is clearly a result of COVID-19. But immigration has been impacted by the policies of the former Trump administration to reduce immigration to the US. The impact of those policies is now being felt by the labour market at all levels of compensation.

Unexpected issues related to COVID-19 are also significant. As reported in Nature, The Economist magazine has developed a model to measure excess deaths since COVID-19 began. That model estimates excess deaths of between 12.5 million and 22.5 million people, significantly higher than the 5 million reported COVID-19 deaths. In any case the impact on the economy is meaningful as these excess deaths represent people who are neither working nor consuming – thereby reducing economic potential.

Moving beyond inflation and COVID-19 there has also been an increase in geopolitical risk. The current dispute between Russia and the Ukraine is one such risk. Whilst it is easy to focus on the overall risk of conflict, it may be the case that the conflict represents more serious issues within Russia. There is evidence that excess deaths in Russia are particularly high (see Nature article referenced above). Furthermore, the impact of the melting of the tundra as reported in The New Yorker will create economic stress. These stresses can be creating internal strains that may not be fully apparent. What better way to address internal stress than to focus people on external threats – real or imagined.

China is also a potential black box of risks. These range from the long-term sustainability of a zero-COVID policy to internal economic stresses arising from real estate speculative investments as summarised in a Financial Times commentary. Increased internationalisation of funding for China real estate introduces new risks for the ability of the Chinese government to manage the situation as shown by the actions of foreign investors with secured lending positions. Again, these internal stresses may lead to actions to focus a nation on external issues such as the need to reunite with Taiwan. The Olympics create yet another potential point of stress with increased likelihood of COVID-19 entering the country to potential political statements by Olympic athletes from countries not as well controlled as China.

And of the known black swans we continue to see erratic weather patterns. The impact of climate change seems to be increasingly manifested in weather patterns that create social and economic stress in a variety of locations.

In summary unease seems fully warranted as a wedge of known and unknown black swans approach.

Leadership is one of the most analysed topics in business literature. There are thousands of management books issued – all with the intent of helping people be better leaders. But perhaps the most critical success elements for leaders are common sense and an openness to feedback on bad judgement – preferably before mistakes are made. Recent stories revolving around COVID-19 issues supports this simplistic view of good leadership.

Queen Elizabeth II highlighted her approach to being a leader in a trying time at the April 2021 funeral for her husband, Prince Philip. As reported in The Guardian, the Queen attended her husband’s funeral and sat on her own. This simple act of lonely suffering resonated with many in the United Kingdom who were also suffering losses at a time that human contact was limited in an attempt to control the spread of COVID-19.

No such leadership was on display during this same timeframe at No. 10 Downing Street as summarized by The New York Times. There parties continued throughout and whilst the final report on who did what when is expected this week, it was clear that the Prime Minister Boris Johnson did not see his leadership as requiring the sacrifice of good times and parties even though the government policy imposed that sacrifice on the rest of the country.

This same lack of leadership was more recently seen in António Horta-Orório’s departure from Credit Suisse. The Financial Times summarized the numerous times where he did not follow various quarantine and travel requirements relative to COVID-19. Having been brought into Credit Suisse to address reputational issues, it was clearly not possible to continue in that role after a series of violations of COVID-19 requirements.

Then we move to the Antipodes where the participation of the Novak Djokovic in the Australian Open ended up not happening. Tennis is a game of man-made rules but apparently Djokovic was not able to adequately follow the man-made rules of Australia relative to COVID-19. The twists and turns of this story were usefully covered in The Guardian.

And just as Queen Elizabeth II showed her leadership ability at the funeral of her beloved husband, Prime Minister Jacinda Ahern showed her leadership ability when she cancelled her wedding due to the increase in COVID-19 and the imposition of stronger rules in New Zealand. As quoted in a BBC article:

“I am no different to, dare I say it, thousands of other New Zealanders who have had much more devastating impacts felt by the pandemic, the most gutting of which is the inability to be with a loved one sometimes when they are gravely ill,” she said. “That will far, far outstrip any sadness I experience,” she added.

Why is that too many leaders lack the simple common sense to follow the rules established for all? Where are the advisors and friends who tell them they are making a mistake? Or do too many leaders believe that they are too important to have rules apply to them? Do they suffer from the Leona Helmsley syndrome: “Only the little people pay taxes?”

Everyone would like to believe that the work they do is critical to improving the world. Prior to the financial crisis investment bankers active in creating the financial products that ultimately led to the crisis saw themselves as “masters of the universe” delivering wealth for society. A similar self-importance can be seen among sustainable bankers with a belief that their work will somehow solve the critical economic, environmental, and social issues facing today’s world. An advantage of being a retired banker is the realization that banking and finance should not be the center of the world.

A series of recent articles have reinforced my view. Two articles in the Financial Times in August (“The whistleblower who calls ESG a deadly distraction” and “The ESG industry is dangerous”) led me to the Secret Diary of a Sustainable Investor written by Tariq Fancy, BlackRock’s first global chief investment officer for sustainable investing. His “secret diary” is worth reading in full.

As noted in early in this well written and entertaining essay, he sees sustainable investment as “a dangerous placebo that harms the public interest.” He goes on to note that a systemic crisis requires systemic solutions – and the environmental challenges we face are systemic in nature. He correctly notes that “many things that are lucrative are also bad for the world.” As a result, in a world where “we’ve built private firms from the ground up to do one thing really well: extract profits,” it is not surprising that firms are not sufficiently addressing climate change.

Fancy also brings additional nuance to the supposed view of Milton Friedman that the only purpose of a corporation is to make money. Fancy notes:

What’s most galling about the entire debate is how Friedman’s own message has been mangled. Yes, he said that the sole purpose of a business is to generate profits for shareholders. But that didn’t mean that he thought no one should look out for the public interest: in the very same paper he argued that the responsibility for protecting society fell to civil servants, whose authority business executives should not usurp as such roles “must be elected through a political process.” In fact, he called the idea of business executives taking on this role to be “intolerable” on grounds of political principle.”

This analysis leads to his conclusion that there is “a dire need for government action.” This view is supported by a recent article in The Economist on Glencore. As summarized in the final sentence: “Only concerted government action to tax carbon emissions and redesign energy systems will kill off king coal.”

Bankers with good intentions were prominent in Glasgow with assurances that their work could resolve the environmental challenge. This path was skeptically viewed by Christopher Caldwell in the New York Times. He noted that “(m)oney men have taken the thing over.” He quotes Gillian Tett from The Financial Times that Glasgow like other COP events have been taken over by “business leaders, financiers and monetary officials.”Caldwell goes on to note “(t)hat is bound to render the movement’s tactics and goals less democratic.”

This democratic deficit is further highlighted by Olufemi Taiwo in The New Yorker in a review of three recent books. The first book builds on the story of nutmeg and the role of the Dutch East India Company (V.O.C. in Dutch). Taiwo notes: “The global marketplace, created and shaped by forays like the V.O.C.’s in Indonesia, is fixated on growth in ways that have led to an era of depredation, depletion, and, ultimately, disruptive climate change.” The two other books reviewed tell similar stories about “hierarchy, commerce, and exploitation” highlighting broken climate politics. Taiwo notes that none of these books provide a solution for the politics but all note the need for political solutions.

So whilst finance should focus on issues of sustainability, bankers as individuals and professionals should be working to deliver the necessary systemic change within existing political structures. Perhaps outside their comfort zone but one required for long term, sustained change.

Boomer Banker has been quiet for the last six months. This pause has allowed me time to take a step back and consider what issues are most important for bankers in the current environment of increased evidence of environmental risk, heightened levels of political risk and the ongoing high level of economic inequality. Unfortunately, I have not been able to develop any breakthrough ideas for solving these complex and inter-related issues. But I realized that this blog can and should provide links to a variety of thinkers and writers on issues that may be less directly related to banking. So 2022 will be a year of fewer posts with a reduced focus on banking but an increased focus on the overall environment in which banks and bankers are operating

In that vein, what struck me most in the last week is the question above: Why is everyone so angry?

This question came to mind after reading two articles highlighting the high level of anger that seems to be prevalent in various locations. The New York Times on 1 January 2022 reported on increased anger among young South Korean men regarding women’s rights. Despite having one of the highest gender gaps for pay and a low level of female participation in both government and business, there is a very large movement opposing feminism. One group even had the motto: “Till the day that all feminists are exterminated.

Just a day or so later I read an article by Evan Osnos in The New Yorker titled: “Dan Bongino and the Big Business of Returning Trump to Power.” This article provided an interesting insight into a business model that is focused on making money by creating and exploiting a general anger that seems to be prevalent in the United States. As noted in the article, he builds on the premise that “suspicion is an appetite that is never fully sated” as he covers a variety of conspiracy theories that seem never to be proven but also seem never to be able to be disproven. A key part of Bongino’s business model is that nothing is “more potent than the constant regeneration of fear.”

In both of these examples and others, there is an underlying anger that is difficult to explain or understand. In general other than the known challenges arising from the impact of the COVID pandemic, the underlying economics for the vast majority of people are relatively good. Nearly all countries provided substantial economic support to date in the pandemic. But as Nobel Prize winner Abhijit Banerjee stated at a John Adams Institute event last year: “We ignore at our peril what people tell us.” And too many people are saying they are angry.

The final piece of my thinking fell a bit into place with an Elizabeth Kolbert article in the same issue of The New Yorker as the article on Dan Bongino. Whilst Kolbert is best known for her focus on environmental issues, she did an excellent analysis on the impact of social media on the rise of anger. She covers a variety of analyses on how social media has exacerbated societal division as well as noting some suggestions on how to address this challenge.

As bankers it is easy to ignore these challenges as being irrelevant to our work providing financial services. But I would argue that this rise in societal animosity is a substantial business risk that could have a very negative impact on the economy and banking. Perhaps the roots of the next financial crisis are being created in the fury that seems to be growing around the world. Whilst I do not know what bankers should be doing in either their work or in their personal efforts as citizens, ignoring these issues does not seem to be a very prudent approach.

A recent commentary in The Washington Post regarding the labor market in the United States highlights a bias towards wealth inequality and capital rather than labor in the general business press. Paul Waldman cleverly notes “(a)s any conservative will tell you, markets are extraordinary. They’re nimble and responsive, combining thousands or millions of individual decisions into a system that hums with efficiency and fairness, and it processes its inputs and outputs.”

Waldman goes on “it was only when the price of labor threatened to go up for some businesses that Republicans declared it an emergency that demanded immediate government action.” That government action being requested by these businesses was ending of extra unemployment payments that were seen as the reason why not enough individuals were accepting low paying positions. A request that was not necessarily supported by factual evidence linking the lack of individuals seeking work with the temporarily higher levels of unemployment compensation.

These comments highlight a frequent bias in much of the reporting in the financial press. Typically there is much hand wringing over increased wages for workers as that will lead either to lower profits negatively impacting share prices or higher inflation. But those remarks suggest that the allocation of revenues between capital, labor and providers of inputs works only if labor consistently gets less. Perhaps the growth of inequality and the related growth in populistic politics over the last several years is a result of this bias towards providing rewards primarily to the capital inputs without considering the role of labor in the economy.

Martin Arnold opined in the Financial Times on 31 May that regulators are “stepping up pressure (for) banks to tackle climate risk.” His opinion cited several examples of how the regulatory pressure has increased over the last several years – including a focus on how climate risks need to included when looking at safety and soundness of banks. The issue of safety and soundness is important as banks face financial losses both through climate change leading to disastrous weather conditions (flooding, drought, etc.) and through providing financing to companies for assets that lose their value (oil exploration, fossil fuel automobiles, etc.).

These issues were reinforced in a discussion on 1 June which I moderated. A panel of four experts on sustainability issues joined me for a roundtable organised by IFN to discuss the future of sustainable finance. Clearly sustainable finance is no longer a fringe issue for banks but has moved to the core of the issues which banks must address to be successful.

Yesterday’s events regarding the large oil companies shows that money talks and b.s. (Bad Science) walks as noted in three headlines:

• A Bad Day for Big Oil – Washington Post
• Climate Activists Defeat Exxon in Push for Clean Energy – New York Times
• Climate activists hail breakthrough victories over Exxon and Shell – Financial Times

For some time there have been numerous groups working to organise shareholders to take action on climate change. This work led to stunning successes at the annual meeting of Exxon Mobil where at least two directors were elected to encourage Exxon Mobil to address climate change. These directors were not supported by management but rather by shareholders who are concerned about the impact of climate change. Of interest was the support these insurgent directors received from large investment managers including those responsible for passive investing (Vanguard, BlackRock, etc.).

But the success at Exxon Mobil was just one of three yesterday where large oil companies will be required face their responsibility for climate change. The shareholders of Chevron, supported a resolution that the company must substantially reduce its climate impact. And a Dutch court ruled that Shell was required to substantially reduce its emission impact. 26 May 2021 will be remembered as a day when money via investors impressed on oil companies that their strategy of ignoring climate change is no longer sustainable.