Why Mr. Buffett plays bridge

Aside from an affection for charity and cherry Coke, one of the personal facts commonly known about Warren Buffett is his love of bridge, which he periodically plays other active people like Katharine Graham, from The Washington Post and Bill Gates.

Why bridge? Though Graham wasn't talking about Buffett at the time, he offers a clue:

“I recall to those of you who are bridge players the emphasis that bridge experts place on playing a hand right rather than on playing it successfully. Because, as you know, if you play it right you are going to make money and if you play it wrong you lose money – in the long run. There is a beautiful little story about the man who was the weaker bridge player of the husband-and-wife team. It seems he bid a grand slam, and at the end he said very triumphantly to his wife ‘I saw you making faces at me all the time, but you notice I not only bid this grand slam but I made it. What can you say about that?' And his wife replied very dourly, ‘If you had played it right you would have lost it.'”

It seems to me (and it has certainly been others' experience) that it takes an enormous amount of restraint to focus on playing every investment hand “right,” according to an established discipline, allowing the law of averages to work in your favor, rather than trying to win every hand. I would guess that this is exactly what appeals to Warren Buffett's temperament. Over the long-term, good investing requires it.

Inequality : Is Globalization to Blame?

by Prabhu Bardhan

Internal forces, technological change and problematic policies spur growing inequality

Economic inequality is on the rise around the world, and many analysts point their fingers at globalization. Are they right? Economic inequality has even hit Asia, a region long characterized by relatively low inequality. A report from the Asian Development Bank states that economic inequality now nears the levels of Latin America, a region long characterized by high inequality.

In particular, China, which two decades back was one of the most equal countries in the world, is now among the most unequal countries. Its Gini coefficient - a standard measure of inequality, with zero indicating no inequality and one extreme inequality - for income inequality has now surpassed that of the US. If current trends continue, China may soon reach that of high-inequality countries like Brazil, Mexico and Chile. Bear in mind, such measurements are based on household survey data - therefore most surely underestimate true inequality as there is often large and increasing non-response to surveys from richer households. The standard reaction in many circles to this phenomenon is that all this must be due to globalization, as Asian countries in general and China in particular have had major global integration during the last two decades. Yes, it is true that when new opportunities open up, the already better-endowed may often be in a better position to utilize them, as well as better-equipped to cope with the cold blasts of increased market competition.

But it is not always clear that globalization is the main force responsible for increased inequality. In fact, expansion of labor-intensive industrialization, as has happened in China as the economy opened up, may have helped large numbers of workers. Also, the usual process of economic development involves a major restructuring of the economy, with people moving from agriculture, a sector with low inequality, to other sectors. It is also the case that inequality increased more rapidly in the interior provinces in China than in the more globally exposed coastal provinces. In any case it is often statistically difficult to disentangle the effects of globalization from those of the ongoing forces of skill-biased technical progress, as with computers; structural and demographic changes; and macroeconomic policies.

The other reaction, usually on the opposite side, puts aside the issue of inequality and points to the wonders that globalization has done to eliminate extreme poverty, once massive in the two Asian giants, China and India. With global integration of these two economies, it is pointed out that poverty has declined substantially in India and dramatically in China over the last quarter century. This reaction is also not well-founded. While expansion of exports of labor-intensive manufacturing lifted many people out of poverty in China during the last decade (but not in India, where exports are still mainly skill- and capital-intensive), the more important reason for the dramatic decline of poverty over the last three decades may actually lie elsewhere. Estimates made at the World Bank suggest that two-thirds of the total decline in the numbers of poor people - below the admittedly crude poverty line of $1 a day per capita - in China between 1981 and 2004 already happened by the mid-1980s, before the big strides in foreign trade and investment in China during the 1990s and later. Much of the extreme poverty was concentrated in rural areas, and its large decline in the first half of the 1980s is perhaps mainly a result of the spurt in agricultural growth following de-collectivization, egalitarian land reform and readjustment of farm procurement prices - mostly internal factors that had little to do with global integration.

In India the latest survey data suggest that the rate of decline in poverty somewhat slowed for 1993-2005, the period of intensive opening of the economy, compared to the 1970s and 1980s, and that some child-health indicators, already dismal, have hardly improved in recent years. For example, the percentage of underweight children in India is much larger than in sub-Saharan Africa and has not changed much in the last decade or so. The growth in the agricultural sector, where much of the poverty is concentrated, has declined somewhat in the last decade, largely on account of the decline of public investment in areas like irrigation, which has little to do with globalization.

The Indian pace of poverty reduction has been slower than China's, not just because growth has been much faster in China, but also because the same 1 percent growth rate reduces poverty in India by much less, largely on account of inequalities in wealth - particularly, land and education. Contrary to common perception, these inequalities are much higher in India than in China: The Gini coefficient of land distribution in rural India was 0.74 in 2003; the corresponding figure in China was 0.49 in 2002. India's educational inequality is one of the worst in the world: According to the World Development Report 2006, published by the World Bank, the Gini coefficient of the distribution of adult schooling years in the population around 2000 was 0.56 in India, which is not just higher than 0.37 in China , but higher than that of almost all Latin American countries.

Another part of the conventional wisdom in the media as well as in academia is how the rising inequality and the inequality-induced grievances, particularly in the left-behind rural areas, cloud the horizon for the future of the Chinese polity and hence economic stability.

Frequently cited evidence of instability comes from Chinese police records, which suggest that incidents of social unrest have multiplied nearly nine-fold between 1994 and 2005. While the Chinese leadership is right to be concerned about the inequalities, the conventional wisdom in this matter is somewhat askew, as Harvard sociologist Martin Whyte has pointed out. Data from a 2004 national representative survey in China by his team show that the presumably disadvantaged people in the rural or remote areas are not particularly upset by the rising inequality. This may be because of the familiar "tunnel effect" in the inequality literature: Those who see other people prospering remain hopeful that their chance will come soon, much like drivers in a tunnel, whose hopes rise when blocked traffic in the next lane starts moving. This is particularly so with the relaxation of restrictions on mobility from villages and improvement in roads and transportation.

More than inequality, farmers are incensed by forcible land acquisitions or toxic pollution, but these disturbances are as yet localized. The Chinese leaders have succeeded in deflecting the wrath towards corrupt local officials and in localizing and containing the rural unrest. Opinion surveys suggest that the central leadership is still quite popular, while local officials are not. Paradoxically, the potential for unrest may be greater in the currently-booming urban areas, where the real-estate bubble could break. Global recession could ripple through the excess-capacity industries and financially-shaky public banks. With more internet-connected and vocal middle classes, a history of massive worker layoffs and a large underclass of migrants, urban unrest may be more difficult to contain.

Issues like globalization, inequality, poverty and social discontent are thus much more complicated than are allowed in the standard accounts about China and India.

About the Author: Pranab Bardhan is professor of economics at the University of California, Berkeley, and co-chair of the Network on the Effects of Inequality on Economic Performance, funded by the MacArthur Foundation. He was the editor of the "Journal of Development Economics" for many years.

Tackling Financial Crime

As Financial Institutions, Banks are in a unique position to contribute to the fight against financial crime. It is vital that they keep pace with new threats as they emerge. And they must have the best processes in place to protect us and our customers and to minimise the impact of financial crime on the communities we serve.

In 2006, global money laundering was estimated at over USD500 billion¹. In the political arena, this criminal activity is increasingly linked to international terrorism a, hecnd, as a result, is subject to more stringent sanctions and regulations.

The Banks should go beyond the minimum legal requirements, setting standards that lead by example. Tackling financial crime is an area where they have a significant influence . The procedures they adopt will improve their understanding of the customers and help protect their business as well as helping them build a sustainable business for the Bank and the communities these bank operate in.

¹ Source: United Nations Office of Drugs & Crime, 2006

Connecting Financial Markets to the Sustainable World

Submitted by Amit AGNIHOTRI - HEC Paris

THE CONTEXT

Sustainability has become a fashionable, if not particularly well-defined, term in recent years. The issues that were once regarded as irrelevant to economic activity, today are dramatically rewriting the rules for business, investors, and consumers. The key component of the general discourse around sustainability has been so-called multi-stakeholder initiatives, which bring together corporations, governments, and non-governmental organizations to develop mechanisms for addressing, particular areas of concern addressing important human rights, environmental and labor issues.

Around the world, innovative responses to climate change and other environmental problems are affecting more than $100 billion in annual capital flows as pioneering entrepreneurs, organizations, and governments take steps to create the Earth’s first “sustainable” global economy.

A key problem affecting all such initiatives is that they are just voluntary, and thus lack any real enforcement mechanism for sanctioning corporations that fail to comply with the principles or standards promoted by the initiatives. The lack of enforcement capacity has led some skeptics to argue that these initiatives are nothing more than corporate "greenwash" that enable corporations to argue that they are taking sustainability issues seriously but are in reality not fundamentally changing the ways they operate.

Off late there have efforts to find a solution to this problem and answer were found in identifying what corporations are most interested in: Access to capital and access to markets. If ways can be found to link corporate performance on sustainability issues to continued access to both of these things, real leverage could be established for holding corporations accountable. For capital linkage, the focus fell on the private banks that finance transnational corporations. They provide the lifeblood to corporations. Respect for human rights and environmental standards could be made a legally-binding part of the loan agreements between the banks and the corporations.

In 2003, a group of private banks, in line with World Bank’s approach with its social and environmental safeguard policies, has adopted the Equator Principles, essentially committing to following World Bank standards for projects it lends to. Yet here again, there is no real sanction for violations of these policies. What incentive would these banks have to require compliance with CSR criteria?

Putting teeth into sustainability is a challenge. Incentivizing lenders to care enough to recall their capital or cancel contracts if problems arise is a conundrum. Answering this question is about hitting corporations where they live—in the worlds of capital and markets—rather than in the comfortable confines of sustainablity dialogues.

This report discusses the limitations of current voluntary initiatives to manage the negative social and environmental impacts generated by the finance sector in both developed and developing countries. It proposes an alternative agenda that is far more likely to deliver greater accountability and lasting sustainable development.

THE EQUATOR PRINCIPLES

The Equator Principles is a set of environmental and social benchmarks for managing environmental and social issues in development project finance globally. Once adopted by banks and other financial institutions, the Equator Principles commit the adoptees not to finance projects that fail to follow the processes defined by the Principles. The Equator Principles were developed by private sector banks – led by Citigroup, ABN AMRO, Barclays and WestLB – and were launched in June 2003. The banks chose to model the Equator Principles on the environmental standards of the World Bank and the social policies of the International Finance Corporation (IFC). Over 50* financial institutions have adopted the Equator Principles, which have become the de facto standard for banks and investors on how to assess major development projects around the world. In July 2006, the Equator Principles were revised, increasing their scope and strengthening their processes.

The Equator Principles represent a significant industry-wide initiative. They were drafted by the banks in consultation with the IFC, project sponsors, project engineers, and non-government organizations.

The Equator Principles state that adopting financial institutions will provide loans directly to projects only under the following circumstances:

Scope: The Principles apply to projects over 10 million US dollars. (The scope has been brought down from 50 million USD in 2006)

* The details of the principles are given in separate blog - the Equator Principles.

Principle 1: Review and Categorisation

Principle 2: Social and Environmental Assessment

Principle 3: Applicable Social and Environmental Standards

Principle 4: Action Plan and Management System

Principle 5: Consultation and Disclosure

Principle 6: Grievance Mechanism

Principle 7: Independent Review

Principle 8: Covenants

Principle 9: Independent Monitoring and Reporting

Principle 10: EPFI Reporting

THE CRITICS

The world welcomed the principles and revisions but remained cautious, arguing that the principles still suffered from fundamental governance and accountability problems. They want the EP banks to adopt more robust governance and implementation systems, such as a procedure for dealing with "free riders" and a regular reporting requirement. So the sentiment remains that in spite of the overwhelming evidence belies the reality that the industry has so far failed to move beyond largely ineffectual attempts at self-regulation. It is the view that this agenda neglects the ‘big picture’ issues and the sector’s responsibility as a major actor in today’s globalised world. As such it represents a missed opportunity.

This report discusses various case studies and examples, which clearly demonstrate the finance sector’s inability to embed corporate responsibility on a voluntary basis. In particular, it reveals that the finance sector (Many a times EP Banks):

• Perpetuates poverty and social exclusion, by providing unscrupulous levels of debt at high rates to those least able to afford it, all the while bringing in record-level profits
• Regularly undermines human rights protection, by financing projects which pose a threat to the implementation of human rights laws in developing countries, in breach of some companies’ own codes of conduct;
• Often fails to assess adequately the environmental impacts of projects and to address issues raised before releasing project finance, yet continues to reap the reputational benefits of participation in voluntary sustainability and corporate social responsibility initiatives.

THE CASE STUDIES

Baku-Tbilisi-Ceyhan pipeline

The pipeline which in 2004 was financed by eight Equator Principles' banks and the IFC despite an NGO assessment which alleged 127 breaches of the Principles. The banks and IFC said they were confident that the Equator Principles were followed, and said an independent consultant had confirmed this assessment. Critics of the pipeline have pointed out that the region through which it travels is highly seismic, suffering from frequent earthquakes. The route takes the pipeline through three active faults in Azerbaijan, four in Georgia and seven in Turkey.

Trans Thai-Malaysia Gas pipeline

The Trans Thai-Malaysia pipeline development is a collaborative enterprise between the state-owned oil companies Petronas of Malaysia and the Petroleum Authority of Thailand. The route of the pipeline also runs through important areas of wetland forest and some of the few remaining stretches of rare sand dune forest along the coast of southern Thailand. There are also concerns that it will give rise to harmful effluents and emissions that will threaten local livelihoods and have negative health impacts. In 2004, Barclays, one of the four banks that led the way in the creation of the Equator Principles, agreed to lead on the arrangement of finance for the pipeline. The bank has provided a loan of $257.1 million, nearly half of the total loan, giving it significant leverage over the project. The participation of Barclays has played a crucial role in attracting finance from other foreign investors. Barclays was also responsible for carrying out a satisfactory risk assessment for the project, ie to consider all problems associated with the project, including the potential for environmental and social harm.

ABN AMRO Bank

One of the adopting banks is the most climate-unfriendly bank in the Netherlands, with estimated annual indirect CO₂-emissions of almost 250 million tonnes in 2005 from industries to which it provides financial services. NGOs say this is just over the annual CO₂-emissions of the Netherlands and almost 1% of the total annual worldwide CO₂-emissions. ABN AMRO defends its environmental record and has announced steps to reduce its direct emissions, but some NGOs say it is the indirect emissions through their clients that make global banks such important targets in climate change.

Angola’s Indebtedness (Bank lending perpetuates indebtedness, corruption & poverty)

At the heart of Angola’s poor development record lies its huge indebtedness which currently stands at $9.5 billion, equivalent to 50 per cent of the country’s GDP. The international donor community and development banks have continued to insist on concrete improvements in good governance, including progress towards more responsible and transparent management of the country’s natural resource revenues, before providing Angola with concessional loans and debt relief. However, the willingness of western banks to lend to Angola has undermined international pressure for reform. The government continues to seek expensive commercial loans backed by oil rather than seeking cheaper loans from development banks, which would require a commitment to more transparency.

The Angolan case is symptomatic of many resource-rich poor African countries. With many states already heavily indebted, lenders have turned to more complex methods to extend credit to those countries, such as using increasingly sophisticated financial instruments to exchange future mineral exports for money today.

Sakhalin II oil and gas project (2007)

The Sakhalin II project in the Russian Far East is said by project sponsors to be the largest integrated oil and gas project in the world. The project is subject to various investigations by the Russian Authorities . The Russian Ministry of Natural Resources has found violations relating to protected forest being felled, water code violations associated with river and other damage, and risks of landslides. The project is now over 90% built, and has caused damage to salmon spawning rivers and exposed endangered gray whales to excessive noise. IFC and other major european banks are contemplating to invest in the project. Any investor will inherit the problems that have been built-in to the project, and cannot ignore the numerous breaches of the Equator Principles that have already occurred.

Miscellaneous events

In 2004, environmental groups called on banks including Goldman Sachs, Merrill Lynch and HSBC not to sell bonds worth more than $2 billion on behalf of the China Development Bank and the China Export Import Bank. They argued the bonds would be used to finance controversial infrastructure projects, including the Three Gorges Dam. Still the banks went ahead and issue the bonds.

According to a 2004 study by KPMG and F&C Asset Management, ‘there is little evidence that human rights are being systematically integrated into sovereign or project credit risk assessments’.

These case studies show, voluntary nature of Equator Principles, limited or no oversight mechanisms or sanctions has proved incapable of preventing the serious problems and abuses they purport to address.

RECOMMENDATIONS :

Taken solely in numbers, the influence that finance sector has on every aspect of our lives can, at times, seem to dwarf the influence that governments have. One bank in the UK alone, the Royal Bank of Scotland, accounted for £600 billion in global assets in 2004, which is seven times the total flow of foreign direct investment to developing countries. While the finance sector has enormous influence, this must not override the responsibilities of governments to protect the public interest and to hold companies accountable for their actions.

Yet so far, the governments around the world have shied away from exercising the necessary leadership to ensure that the finance sector does not continue to undermine global policy objectives. Instead, they have relied on weak efforts to promote ‘corporate social responsibility’ and a patchwork of voluntary initiatives that perpetuate an unsustainable system. Voluntary initiatives, no doubt, have an important role in helping to define standards of best practice, but they are wholly inadequate on their own and must be coupled with binding standards of corporate behaviour. In particular, I recommend that:

• Efforts to self-regulate the finance sector be strengthened with a rules-based approach which clearly defines the expectations of behaviour in this area
• Any initiatives must include an independent monitoring and enforcement regime
• Binding and credible sanctions for instances of non-compliance must also be implemented and enforced.
• Moves to make financial institutions more directly accountable for their actions through such steps will go a significant way to enabling the finance sector to contribute to sustainable development targets, rather than undermine them.

• Adopt a more inclusive approach to Company Law and require companies to be legally responsible for their social and environmental impacts both within the EU and overseas.

REFERENCES

Articles

• KPMG and F&C (September 2004) Banking on Human Rights: Confronting human rights in the financial sector.
• ‘Combating Corruption in Africa’, report presented at January 2003 African Union Conference,
• World Bank (2005) Global Development Finance: Mobilising finance and managing vulnerability.
• BankTrack (June 2004) Principles, Profits or just PR?, 1st anniversary assessment of the Equator Principles.

Websites

• http://www.equator-principles.com
• http://www.globalpolicy.org/
• http://www.worldbank.org/
• http://www.ifc.org/
• http://www.ft.com/

APPENDIX I

Institutions which have adopted the equator principles (Jan 2008)

1. ABN AMRO Bank, N.V.

2. ANZ

3. Banco Bradesco

4. Banco do Brasil

5. Banco Galicia

6. Banco Itaú

7. BankMuscat

8. Bank of America

9. BMO Financial Group

10. BTMU

11. Barclays plc

12. BBVA

13. BES Group

14. Calyon

15. Caja Navarra

16. CIBC

17. CIFI

18. Citigroup Inc.

19. CORPBANCA

20. Credit Suisse Group

21. Dexia Group

22. Dresdner Bank

23. E+Co

24. EKF

25. Export Development Canada

26. FMO

27. Fortis

28. HBOS

29. HSBC Group

30. HypoVereinsbank

31. ING Group

32. Intesa Sanpaolo

33. JPMorgan Chase

34. KBC

35. la Caixa

36. Manulife

37. MCC

38. Mizuho Corporate Bank

39. Millennium bcp

40. National Australia Bank

41. Nordea

42. Nedbank Group

43. Rabobank Group

44. Royal Bank of Canada

45. Scotiabank

46. SEB

47. Societe Generale

48. Standard Chartered Bank

49. SMBC

50. TD Bank Financial Group

51. The Royal Bank of Scotland

52. Unibanco

53. Wachovia

54. Wells Fargo

55. WestLB AG

56. Westpac Banking Corporation