All that glitters

Gold and crime go hand in hand… The schemes that spook the gold trade can’t be sorted out so simply. They are the shadowy events, the phantoms rippling through the tall grass of the business, not clearly visible or understood, and sowing panic for that very reason. One such passage shook the market for two weeks in July 2010, when a massive, unexplained transaction parked a load of bullion in a place where those who monitor such movements did not expect to find it. When they discovered it, their confusion about why it was there was deepened by the stubborn silence of a little known Swiss bank, The Bank for International Settlements, or BIS. Headquartered in Basel, BIS is sometimes called the central bankers’ bank, because that’s where they go to borrow. … The cause of the panic was a footnote to the bank’s annual report. The note revealed that a bank or group of banks had lent 349 metric tons of gold to BIS in exchange for cash. The deal was so colossal — a sixth of the world’s annual production — that the news of it, without elucidation, stunned the bullion market. Who had lent the gold, and why? Was a bank in trouble? Could it be a central bank? What did they know that the bullion market didn’t? As questions thickened the air, investors started bailing out of gold, and the price lost $40 in a day. 

Here’s why the price went down. The deal looked like a swap — an exchange of gold for cash, with an agreement that the gold would be redeemed at a later date… For whoever swapped it, the gold raised $14 billion. What bothered the gold market was the question of what would happen to the gold if the $14 billion didn’t get paid back. The price was down anyway, depressed by a period of selling by ETFs. Would the 349 tons suddenly appear for sale if the swapper couldn’t manage the loan? A 380-ton gold dump would annihilate the price.

Suspicion swirled about who might need the cash. There were plenty of candidates. Fear of European countries reneging on their debts was in the air already, and this fear suggested an explanation for the swap. A central bank desperately needed cash.

For a while, that’s what everyone I spoke to thought — Greece or Spain or some other monetary basket case was being hooked up to life support. But then Edel Tully, an analyst at UBS, pointed out that it couldn’t be a central bank. European regulations, she said, did not allow a central bank to transfer funds to its government or to buy the government’s bonds — the actions they would have to perform to stave off a default. Not a central bank, then, but some other monetary authority. On her list of suspects, Tully placed the International Monetary Fund. Suspicion switched to the IMF.

The fund is the world’s banker of last resort. It had bailed out Iceland, the first sovereign meltdown of the financial crisis. The IMF had been “quietly selling off its gold” position anyway, according to the Telegraph… No sooner did opinion settle on the IMF, than the BIS itself torpedoed it. It was not the IMF, or even a central bank, that had swapped the bullion, they said in Basel, but a commercial bank or banks. If this announcement was supposed to calm the market, it failed. 

Insights

Business groups are a-changin'

In the age of open markets, the hold that big business groups used to have over the US has eased into a smattering of smaller, closely controlled corporates, which take care not to channel all resources into one sector. Not what the business groups of yore would have done, say researchers Eugene Kandel, Konstantin Kosenko, Randall Morck and Yishay Yafeh. In a study on business groups such as Western Union, GE, Dupont and Rockefeller between 1930 and 1950, they observed that most exhibited a pyramid structure and worked in the public utilities sector, providing electricity, gas and transport. Their replacement with modern corporate groups happened by the 1950s, after a sustained change in government policy.

Title: Business Groups in the United States: A Revised History of Corporate Ownership, Pyramids and Regulation, 1930-1950

Source: The National Bureau of Economic Research

The time is right

In the wake of scandals, many firms have attempted to alter the process of granting stock options to not draw scrutiny. One such attempt to dodge options backdating was to give out stock options on a yearly schedule. Robert Daines, Grant Richard McQueen and Robert J Schonlau found that several CEOs managed to still affect the strike price of the stocks by fiddling with announcements and timings, as they knew the dates the grants would be released.

Title: Right on Schedule: CEO Option Grants and Opportunism

Source: Social Science Research Network

Have you read...

What’s it about: The book tells the fable of a manager who is facing the closing down of his manufacturing plant by his company. Using the plot device of a mysterious teacher, the author describes how the plant manager finds a way out of his predicament and manages to increase efficiency.

 Key takeaways: Given that the management advice and business lessons in this book are told in the form of an incredibly detailed story, the book manages to stay engaging. Through a story anyone can relate to, it shows the true power of human potential.

 Why read it now: It is an entertaining yet thought-provoking novel. The author does an excellent job of explaining how to work with constraints and bottlenecks.

 Quotable Quotes: Science is simply the method we use to try and postulate a minimum set of assumptions that can explain through a straightforward logical derivation the existence of many phenomena of nature.