The Race for the Bomb

Iran wants a nuke. That seems to be the consensus of Western intelligent agencies. How close Iran is to actually getting their hands on one, though, is a matter of disagreement. Last week, Benjamin Netanyahu went on NBC’s Meet the Press and declared that “Iran is six months away from being about 90 percent of having the enriched uranium for an atom bomb.” That statement is both ambiguous and misleading. Americans nuclear experts agree that it won’t be before 2015 that Iran has the capability to build a crude atomic device. In recent days, however, Israel has begun voicing concerns that Iran is about to travel down a path of “no return.” It is easy to appreciate how Iran’s nuclear ambitions make Israel anxious: Iran has stated that it wants to wipe Israel off the map. But with a costly, decade-long war that was initiated through faulty intelligence just wrapping up in Iraq, it is understandable that Americans are leery about taking military action against another middle eastern country. The IAEA, the international nuclear watchdog agency, meanwhile, has openly expressed concerns that Iran is testing nuclear triggers and toying with warhead designs. In the city of Qum, Iranians have admitted that they are building a nuclear enrichment facility (for peaceful purposes only they say) deep underground, below 250 feet of granite. Even with the most advanced bunker-busting bombs, it might be a challenge for the U.S. military to penetrate that kind of compound. The West has said, though, that it is determined to stop Iran from developing a nuke, but what course of action can it take?

In office only a short while, Obama reached out to Iran and invited the leadership of the country to rejoin the “community of nations.” As part of his overture, Obama barely said a word about a brutal crackdown that occurred in the summer of 2009 when Iranian youth protested a rigged presidential election. But instead of taking Obama up on his offer of renewed diplomatic ties, the Iranian leadership has become even more confrontational in the international sphere. But just because soft diplomacy has failed doesn’t mean that war is the only other option. Iran’s economy has sagged over the last two years as sanctions have tightened their grip. The Arab Spring has shown that citizens unhappy with their governments do have the ability to overthrow them.

In 2006, President Bush, not liking the idea of going to war within Iran over its nuclear program, began a series of covert steps to thwart the country’s ability to enrich uranium, a basic building block needed for a nuclear weapon. Codenamed Olympic Games, the operation included sabotaging electrical supplies, altering Siemems control boards before they were shipped into the country, and, on occasion, colluding with Israel on the assassination of Iranian scientists. The highlight of the program, and the thing that gave the Iranians the most grief, was a computer worm that ended up damaging hundreds of centrifuges over many years. Later nicknamed Stuxnet, the computer worm damaged enrichment facilities by rapidly increasing or decreasing the rate at which centrifuges spun. The best part of Stuxnet was the fact the Iranians didn’t know that their computer network had been infected until the worm found its way onto the World Wide Web, where it was quickly detected by computer security firms. 

If Israel or the United States did attempt a precision strike against Iranian facilities, what would be the consequences? In order to keep its pride intact, Iran would probably launch a barrage of missiles at Israel in response. And regardless of whether it was Israel or the United States that carried out the attack, Iran would most likely close the Strait of Hormuz by mining it. The strike could also lead to a regional war if the Iranians decided to attack Saudi Arabia by bombing its oil fields in the east of the country and by encouraging Saudi Shia Muslims to rise up against the Sunni monarchy. If the Strait of Hormuz was closed and Saudi oil was flowing below capacity, the price of oil on the world market would skyrocket, potentially sending the U.S. back into recession.

Many experts agree that it would be near impossible to attack all of the nuclear sites around the country. A strike, even if successful in inflecting huge damage to current facilities, would only set back the program a few years. And it might make Iranians, even those who don’t now want the bomb, more determined than ever to join the nuclear club. The humiliating strike, Israel argues, might lead to the toppling of the government. Israel also points to the fact that after it bombed nuclear sites in Syria and Iraq, the atomic programs in those countries never really recovered. Without a strike, though,  Middle East advisors say, Iran getting the bomb would lead to a regional arms race. Saudi Arabia has already told Washington that it will have to develop a weapon if Tehran does.

Containment was the name of the game with the USSR, but would it work with Iran? It’s hard to say. With the USSR, the basic component of the policy was the belief that our enemy was rational. In Iran, where religious extremists hold all the major government posts, the likelihood that someone decides to launch a nuclear attack on Israel is probably not great, but it can’t be discounted entirely.

The Iranian debacle has largely played out in the media as a response to Israeli security concerns. While those concerns can’t be downplayed, America must condede that a major reason the current regime in Iran wants the bomb is to ensure its own survival. The West, we must admit, would be a lot more cautious about supporting an uprising in Iran if it was possible that nukes could disappear in the chaos.
Read more about it here: NYTimes and NYTimes

Private Empire by Steve Coll

Private Empire is a big book about a big company: ExxonMobil. Its author, veteran journalist Steve Coll, examines in detail how Exxon Mobil, America's largest company for decades, has grown through the years and how it is adapting in an era when it is becoming harder and harder for multinational oil firms to acquire new petroleum reserves. The topic of the book is oil, but Private Empire, like Exxon itself, is not concerned exclusively with the matter of drilling holes in the ground. Coll spends a considerable amount of time sifting through climate change legislation, international politics and human rights violations – things that ultimately affect Exxon's business model.

The book opens by describing in depth the event that would come to define the company in the public's imagination: Exxon Valdez. The spill, from a super tanker off the coast of Alaska in 1989, dumped hundreds of thousands of barrels of oil into Prince William Sound. Apart from being an ecological calamity, the spill was a PR and financial nightmare for the company. While most of the blame was placed on the captain of the tanker, who was drunk when the ship ran aground, the event came at a time when the company was deeply cutting costs. The fact that the captain's past drinking problems didn't raise red flags still rankles Exxon executives to this day. Valdez forced the company to reevaluate its worldwide operations. And in order to prevent future safety or environmental violations, big or small, the firm went on a safety code binge. Employees at its global headquarters in Irving, TX were tasked with the job of reviewing all protocols related to Exxon's businesses and rewriting or retooling the ones that didn't meet the highest standards. The resulting deluge of revised regulations micromanaged the work habits of thousands of Exxon workers, and the new, closely enforced mandates made long-time employees bristle. But, while seeming like overkill at the time, the issued rules have helped Exxon maintain a safety record, since the Valdez, that has trumped all other firms in the oil industry.

Requiring employees to pay close attention to detail in everything that they do for the company is a core theme of the book. Mediocrity, Coll reminds readers again and again, is not a characteristic that is looked favorably upon at the company. Within the industry, the company is known for hiring excellent engineers, meeting deadlines, coming in under budget, and in general, demanding excellence not only from itself but also the people it does business with. The reason that Exxon has been able to maintain a profitability ratio that is higher than its rivals is that the company is better at finding oil and at extracting it from the ground. That point might seem obvious, but the pursuit of competitive advantage and the search for excellence forms the basis of Exxon’s corporate belief system. This can't be said for all companies.

The task of finding oil that it can own, though, is becoming more difficult for the world's largest private oil company. Since the 1970s, a large chunk of the world's reserves have been taken out of play as nationalism in the Middle East has stopped governments from selling off valuable natural resources. This change has had a three pronged effect on Exxon's business strategy. For one, it has forced the company to seek out oil deals in countries that are politically unstable and are often dangerous for the company's employees. Searching for oil in inhospitable places has also meant that Exxon has been forced into drilling far offshore and in the Arctic. Secondly, it has meant that Exxon has had to turn itself into a part-time oil services firm much like Haliburton. In Iraq, for example, Exxon does not any own oil (except for a field that it might own in Kurdistan, but that is another story). It does, however, have a contract with the Iraqi government to develop the gigantic West Qurna Field outside Basra and is paid for each barrel of oil that it extracts. Lastly, Exxon has been forced to scour the globe looking for energy opportunities besides oil. The company now owns about as much natural gas (in barrels of oil equivalents) as oil itself. These three strategic shifts have been a challenge for the company - finding oil in dangerous places requires more resources and involves more risk, extracting oil on a per barrel basis is not the same as owning the oil, and natural gas is not nearly as profitable (in terms of return on capital) as petroleum.

The book also lays out an interesting comparison between the two most recent CEOs, Lee Raymond and Rex Tillerson. Raymond, who led the company in the 90s and early 2000s comes across as brash, arrogant, uncompromising, and self-assure. His tenure, measured by Exxon's stock price, was a success. While he was chief, he not only maintained Exxon's strong profitability, he also presided over the acquisition of Mobil. The merger, which took place in 2000 while oil was only $10 a barrel, turned out to be an uncanny business move when oil prices skyrocketed in the years following the deal. Tillerson, who took over from Raymond in 2006 was confronted with the same dilemma Raymond faced, namely the challenge of keeping shareholders happy at a time when Exxon's core competence (and major money-making center), finding and drilling for oil, was under threat. In response to this challenge, Tillerson bought XTO energy in 2009 for $35 billion. A leader in extracting natural gas from shale rock, XTO helped Exxon break into a growing industry that has transformed natural gas production in the United States. Unfortunately, for Tillerson (and the company's shareholders), Exxon bought XTO when natural gas prices were stratospherically high. Prices in the U.S. have fallen off a cliff since. XTO, without a doubt, provides value to Exxon, but if Tillerosn had waited a couple of years, it could have been had much more cheaply.

Exxon, the largest remaining piece of Rockefeller's Standard Oil, has a complicated relationship with United States government, and, more broadly, with the (American) public. Even though the company produces resources that help power our $15 trillion economy, oil companies have a bad reputation. Part of this sentiment is understandable: high oil prices in recent years have meant that Exxon and other oil companies have profited at the expense of middle class commuters who have little choice but to fill up their gas guzzlers. But politicians have fueled the flames by suggesting that oil companies have intentionally sent oil prices higher, even when there is no evidence of this. Unlike BP and Chevron, who have, over the last decade, tried to convince the public that they are “green” and friendly to the planet, Exxon has made no such move. Trying to pretend that its main business isn't selling carbon based fuels isn’t a charade that the company has been willing to participate in. That might be changing, though. Executives are starting to realize that in order to attract the best talent, your company has to have a reputation that people want to be associated with.

There is a lot covered in this book, and the details are meticulously reported. The most enjoyable parts are the numerous country case studies that detail Exxon’s operations around the world. The intersection of dictatorships, kidnappings, civil wars, bribery and billions of petro-dollars showcase the challenges Exxon, a company with a buttoned-down culture, has to deal with on a daily basis. It has been American companies, rather than military force, that have built the economic and cultural empire that America is constantly benefiting from. This book shows that Exxon is out on the pioneering frontier.

The Batman

Eagerly anticipated big-budget movies rarely live up to their hype, but the Dark Knight Rises is one of the exceptions. The movie's plot, action sequences and quick witted dialogue all work together to make a near three hour thrill trip seem a lot shorter than it is. I admit: I was worried about how this was going to turn out. Fairly or unfairly, the movie was going to be judged a success or a failure based upon whether it lived up to the high standard set by 2008’s The Dark Knight. Under that kind of pressure to deliver, directors can sometimes overindulge in implausible narrative twists and redundant action scenes. And while the action in DKR is certainly unrelenting, it doesn't seem excessive.

Movie fight scenes are typically boring, predictable, and unauthentic. But the DKR fist fights between Bane and Batman are one of the best parts of the film. In truth, this is probably due to the good job Christopher Nolan has done in developing the characters of both men: the clashes between the two seem momentous because you actually care about them. Apart from that, though, the fight scenes are just visually pleasing, especially at the end of the movie when Bane is desperately trying to fight his way back from a big loss.

I was dreading Anne Hathaway playing Catwoman, but she does an outstanding job playing a small time thief trying to erase her past. Joseph Gordon-Levitt, on the other hand, plays a cop whose plot line needlessly interrupts the overall trajectory of the film. Gordon-Levitt is not a bad actor, but the subplot he is placed in, with its slow dialogue and uneventful happenings, does not suit him or the movie overall.

Nolan is a master at filming in and around NYC. The city at night is beautiful. The filming at Wall Street and on the bridges crossing the Hudson leaves no doubt that Gotham is New York. Nolan has also learned that battered-up lories charging through city streets is, for some unexplained reason, incredibly appealing.

In the last installment of Batman, Nolan’s script touches on a few hot button current events, like torture and wiretapping. The same goes for DKR. In reference to the debate being had over income inequality, Anne Hathaway’s character asks Bruce Wayne, how he though the rich “could live so large and leave so little for the rest of us.” Whenever Bane breaks into the stock exchange, one of the traders tells him that there is no money for him to steal. Bane replies by asking, “Then what are you people doing here?” The nuclear core that is being transported around the city even has something to do with politics: the fusion reactor was supposed to be used to generate unlimited “clean energy.”

So, is DKR better than the original? In my opinion, yes.

Not Looking Back

The big news in Ireland this week centered on whether a picture of a scheduled handshake between Martin McGuiness, a former IRA commander, and the Queen would be circulated to the media. After opposition from Buckingham Palace was dropped this morning, the photo and video of the encounter was eventually released. The handshake itself was largely symbolic (the Queen, while commander-in-chief of British forces, has no real power), but the gesture of unity from both sides of the long-running conflict was historic.

For outsiders, context is important. For over three decades, the IRA battled British rule in an attempt to reunite Northern Ireland with the Republic. That lofty goal of reuniting a country, while always remaining the stated purpose of the IRA, at times seemed less important than the real reason most Catholics in the North supported the terrorist group and its political wing, Sinn Fein: In standing up to British power, the IRA showcased to the world the civil rights violations being inflicted on a minority religious group. Indeed, the populist rise of the IRA might not have been nearly as successful had it not been for the resentment felt by Catholics over subpar educational opportunities and unequal incomes.

Martin McGuiness, in his early years as a leader in the IRA, helped pick out bombing targets in Northern Ireland and on mainland Britain. (He was jailed in the Republic for a few years for attempting to transport arms and ammunition.) In fact, the Queen was personally affected by the IRA violence: Her cousin was killed off the west coast of Ireland in the 1970s when the terrorist group blew up the yacht he was on. The IRA campaign, while notorious for its killing of innocent civilians, forced Britain to change how it treated its own citizenry.

History can change quickly. In 1998, with a push from Bill Clinton, the governments of Tony Blair and Bertie Ahern (the PM of the Republic), signed a long-term agreement with the people of the North to enhance the self-determination of the province. One key tenet of that agreement was the proclamation that the people of the North should be able to decide in a democratic fashion whether to break away from the U.K or not. That tenet is greatly important because when the Republic of Ireland was formed, the Protestant population in the North outnumbered Catholics by a large majority. Now, however, due to high birth rates among Catholics and the tendency of young Protestants to attend university in England and then never return, demographic trends predict a Catholic majority within twenty five years. People outside the country, thus, might easily predict that a reunited Ireland might not be far off. But a funny thing has happen to Northern Ireland: Despite being a true province of the island of Ireland, the North feels, in terms of culture, a lot more British than Irish. As the lot of Catholics has improved markedly over the last few years (Catholics now outscore Protestants on high school exams), the chorus of dissent over British interference in the province has largely dissipated. It seems that Catholics, while still very aware of their history, now in fact view themselves as true citizens of the United Kingdom. Recent surveys have revealed that over half of Catholics in Northern Ireland would vote against a referendum that would reunite the state with the Republic. (On this matter, it would unwise to ignore the fact the economy in the North benefits greatly from a Parliament in London that has lavished the region with money in recent years. That economic calculus no doubt plays into how Catholics view the issue.) I think there is a real sense, regardless, though, that history has started to heal itself. I watched the Irish evening news today and the news journalist, on a walk through Belfast, couldn’t find anyone who was skeptical of the peace process. The only people, it seems, who aren’t impressed by the progress in the North, are columnists for British newspapers. Despite popular reaction on the street to a meeting between not-long-ago sworn enemies, and the near elimination of sectarian violence, some in Britain don’t think that reconciliation between the communities has even taken place. This is unfortunate.

Martin McGuiness, for his part, has parlayed his leadership skills into the job of Deputy First Minister of Northern Ireland. By most accounts, he has done an outstanding job of not only administering the Northern bureaucracy but also of controlling radical, fringe republicans in his own party. With Europe facing a prolonged economic slump, it is not guaranteed that Northern Ireland will succeed in the near term, but the hard work done on mending fences has put it in a better position to do just that.
- Read more about it here: Irish Times and NYTimes

Fostering Creativity

In the late 90s, when it came time for Pixar to build a new campus for its ever expanding workforce, architects for the project presented Steve Jobs with a plan that envisioned a corporate headquarters laid out over three buildings. One of the buildings would hold computer engineers, another would hold animators, and the third would hold editors, directors and other employees. Jobs immediately threw the plan out. His own vision, which became a reality, encompassed a single large building that would hold everyone. He understood something about the creative process that many managers in large companies don't. Most people instinctively spend time with people who have similar interests. But in order to order to foster creative thinking in a corporate environment, employees need to interact with people who are different from themselves. In an effort to encourage this inter-company mingling, Pixar constructed a large atrium at the center of the new campus that had cafes, meeting areas, mailboxes, and a small store. Furthermore, Jobs insisted that the only bathrooms in the building be located in this central location. According to Jonah Lehrer, many Pixar employees now have a story of meeting someone while washing their hands and then using this initial conversation as a springboard to collaborating with that person on a company project.
- Read more about it here: NPR

Going Public

The public company club is an elite group. By listing its stock on NASDAQ, Facebook is now a member. The irony is that the website, with its mammoth share flotation, has joined the party at a time when the appeal of “going public” is waning considerably. By allowing companies to raise huge amounts of capital for expansion, the public company has, since the middle of the 19th century, been a basic building block of capitalism. And, to some extent, this still holds true. The statistics on IPOs in America, however, are telling: since the late 90s, the number of companies debuting stock on a public exchange has fallen precipitously (by about 38%). There are a number of reasons for the drop, but none more important than the introduction of the Sarbanes-Oxley Act of 2002. Written and implemented in response to the scandals at Enron, Worldcom and other U.S. listed companies, Sarbanes was intended to hold officers more responsible for their actions and to ensure that public companies had an adequate internal audit system in place. But the costs to meet the mandates of Sarbanes have been a headache for small and large companies alike.

The structure of public companies has, over the last few years, become a great concern for stockholders. While shareholders are supposed to monitor management decision making, the often splintered array of owners sometimes means that management is not punished for making poor choices on strategy. The granting of stock options (which was supposed to rectify this flaw by motivating managers to act in the best interests of the company) created a situation that rewarded managers who used fraud to pump up the company’s stock price.

Before listing stock, the pressure of market insistence on short-term profitability must also be considered. It’s no secret that public companies have a hard time generating breathing room for themselves as they invest in long-term projects. It you want a concrete example of this, look no further than the battle waged over the last number of years at Amazon between Jeff Bezos and investors.

The decline in IPOs is not only due to public companies becoming less attractive, but also because other corporate forms are starting to make more and more sense. Consider one of the main benefits of corporations: limited liability. Because of industry lobbying and government action, it is now easier than ever to set up limited liability partnerships. Partnerships also benefit from the fact that income passes directly to its owners and not through the corporate/dividend tax filter. Private equity firms, like Bain Capital, have also increased in number over the last number of years as global liquidity has become more fluid. (But the inevitable rise in interest rates over the next few years might make it harder and more expensive to raise capital privately than on the open market.)

Public companies are most definitely not going to disappear. What can be said, however, is that it can no longer be taken for granted that every hot, new company will be clamoring for their own ticker symbol.
- Read more about it here: The Economist

A Hedge Fund by Another Name

J.P. Morgan, and its gifted, somewhat overly confident CEO, Jamie Dimon, plowed through the Great Recession of 2008-09 relatively unscathed. With news, however, that Morgan lost $2 billion over the last number of weeks on a spectacular trade gone awry, Dimon’s sterling reputation for risk management has taken a beating. The stock, too, has been hammered, resulting in a market cap that is $25 billion lower than it was on Thursday evening. But despite the huge loss (and analysts are speculating that the final tally on the loss will be double what was reported), the bank, with a reported profit of $20 billion last year, is in no real peril.

So how did this happen? The bank hasn’t revealed the exact circumstances that led to this crisis - and with good reason. As the bank attempts to unwind its positions, it is keen to avoid letting the market know about the bets it has taken in the past, for fear that speculators will bet against it as it is exiting those positions. The big trades they have been making, however, haven’t exactly been going unnoticed. Rumors have been circulating for months about the outsize trades that a London investor, now nicknamed the whale, has been taking. The bets have been so big that they have been distorting the derivatives market for corporate debt. Those outsize bets in London are only part of the story, however. In order to understand what happened at J.P. Morgan, you have to understand what has happened to the bank’s structure and the economy more generally. J.P. Morgan, is, at its core, an old-fashioned corporate lender. When the financial crisis hit, it wade into riskier territory, snapping up Bear Stearns in a fire sale and then, later, taking over Washington Mutual. Those acquisitions, while bringing opportunity, also brought risk. The consumer deposits that came along with Washington Mutual posed a particular dilemma. With the mortgage market cratering, it would have been unprofitable for the bank to loan that money out to regular Americans. At the same time, corporate demand for loans was also weak. Enter the CIO. Ostensibly set up to hedge risks, the Chief Investment Office (CIO), based in London, became a huge profit center for the bank as it used excess cash to trade stocks, bonds, and derivatives. Consisting of only a few dozen people, the office produced 25% of the bank’s profit in 2010. Of course, huge rewards also bring huge risks.

J.P Morgan holds large amounts of long-term corporate debt. In 2011, as the world economic outlook looked grim, the CIO took positions to hedge against potential losses in the corporate debt market. Those positions, which are extremely expensive, turned out to not be needed: the European debt crises seemed to pass and the U.S. economy picked up some steam late in the year. The CIO, used only to dealing with profits, tried to offset those hedging “expenses” by selling up to $100 billion in derivatives, betting that Europe and America would continue the upward economic trend in 2011. Over the last few weeks, however, reports have indicated that the United States is on a slower growth trajectory than what economists had hoped, and the sovereign debt storm in Europe is starting to brew again. Altogether, this means that J.P Morgan is going to have a hard time explaining to shareholders what went wrong and the steps the bank is taking to make sure this doesn’t happen again. There is probably a lot about this debacle that we don't yet know.
- Read more about it here: Reuters and NYTimes