The Dark Matter of Financial Globalization

The Dark Matter of Financial Globalization

By: Nouriel Roubini
Re-Publish : Zulfikar

The recent turmoil in global financial markets – and the liquidity and credit crunch that followed – raises two questions: how did defaulting sub-prime mortgages in the American states of California, Nevada, Arizona, and Florida lead to a worldwide crisis? And why did systemic risk increase rather than decrease in recent years?

Blame should go to the phenomenon of “securitization.” In the past, banks kept loans and mortgages on their books, retaining the credit risk. For example, during the housing bust in the United States in the late 1980’s, many banks that were mortgage lenders (the Savings & Loans Associations) went belly up, leading to a banking crisis, a credit crunch, and a recession in 1990-1991.

This systemic risk – a financial shock leading to severe economic contagion – was supposed to be reduced by securitization. Financial globalization meant that banks no longer held assets like mortgages on their books, but packaged them in asset-backed securities that were sold to investors in capital markets worldwide, thereby distributing risk more widely.
What went wrong?

The problem was not just sub-prime mortgages. The same reckless lending practices – no down-payments, no verification of borrowers’ incomes and assets, interest-rate-only mortgages, negative amortization, teaser rates – occurred in more than 50% of all US mortgages in 2005-2007. Because securitization meant that banks were not carrying the risk and earned fees for transactions, they no longer cared about the quality of their lending.

Indeed, a chain of financial intermediaries now earn fees without bearing the credit risk. As a result, mortgage brokers maximize their income by generating larger volumes of mortgages, as do the banks that package these loans into mortgage-backed securities (MBS’s). Investment banks then earn fees for re-packaging these securities in tranches of collateralized debt obligations, or CDO’s (and sometimes into CDO’s of CDO’s).

Moreover, credit rating agencies had serious conflicts of interest, because they received fees from the managers of these instruments. Regulators sat on their hands, as the US regulatory philosophy was free-market fundamentalism. Finally, the investors who bought MBS’s and CDO’s were greedy and believed the misleading ratings. Nor could they do otherwise, as it was nearly impossible to price these complex, exotic, and illiquid instruments.

Similar reckless lending practices prevailed in the leveraged buyout market, where private equity firms take over public companies and finance the deals with high debt ratios; the leveraged loan market, where banks provide financing to private equity firms; and the asset-backed commercial paper market, where banks use off-balance sheet schemes to borrow very short term.

Small wonder that when the sub-prime market blew up, these markets also froze. Because the size of the losses was unknown – sub-prime losses alone are estimated at between $50 billion and $200 billion, depending on the magnitude of the fall in home prices, which is also unknown – and no one knew who was holding what, no one trusted counterparties, leading to a severe liquidity crunch.

But the liquidity crunch was not the only problem; there was also a solvency problem. Indeed, in the US today, hundreds of thousands – possibly two million – households are bankrupt and thus will default on their mortgages. Around sixty sub-prime lenders have already gone bankrupt.
Many homebuilders are near bankrupt, as are some hedge funds and other highly leveraged institutions. Even in the US corporate sector, defaults will rise, owing to sharply higher corporate bond spreads. Easier monetary policy may boost liquidity, but it will not resolve the solvency crisis.

There are two reasons for this:
1. massive uncertainty about the size of the losses. In part, the size will depend on how much home prices fall -- 10%? 20%? Moreover, it is hard to price losses on exotic instruments that are illiquid (i.e. do not have a market price).

2. thanks to securitization, private equity, hedge funds, and over-the-counter trading, financial markets have become less transparent. This opacity means that no one knows who is holding what, which saps confidence. When the repricing of risk finally occurred in September, investors panicked causing a liquidity run and a credit strike.

So what is to be done? It will be hard to reverse financial liberalization, but its negative side effects – including greater systemic risk – require a series of reforms.
First, more information and transparency about complex assets and who is holding them are needed. Second, complex instruments should be traded on exchanges rather than on over-the-counter markets, and they should be standardized so that liquid secondary markets for them can arise.

Third, we need better supervision and regulation of the financial system, including regulation of opaque or highly leveraged financial institutions such as hedge funds and even sovereign wealth funds. Fourth, the role of rating agencies needs to be rethought, with more regulation and competition introduced. Finally, liquidity risk should be properly assessed in risk management models, and both banks and other financial institutions should better price and manage such risk; most financial crises are triggered by maturity mismatches.
These crucial issues should be put on the agenda of the G7 finance ministers to prevent a serious backlash against financial globalization and reduce the risk that financial turmoil will lead to severe economic damage.

The Fed vs. the Financiers

The Fed vs. the Financiers

By : Kenneth Rogoff

Republish : Zulfikar

In his August 31 address to the world’s most influential annual monetary policy conference in Jackson Hole, Wyoming, United States Federal Reserve Chairman Ben Bernanke coolly explained why the Fed is determined to resist pressure to stabilize swooning equity and housing prices. Bernanke’s principled position – echoed by European Central Bank head Jean Claude Trichet and Bank of England head Mervyn King – has set off a storm in markets, accustomed to the attentive pampering lavished on them by Bernanke’s predecessor, Alan Greenspan.
This is certainly high-stakes poker, with huge sums hanging in the balance in the $170 trillion global financial market. Investors, who viewed Greenspan as a warm security blanket, now lavish him with fat six-figure speaking fees. But who is right, Bernanke or Greenspan? Central bankers or markets?
A bit of intellectual history is helpful in putting today’s debate in context. Bernanke, who took over at the Fed in 2006, launched his policy career in 1999 with a brilliant paper presented to the same Jackson Hole conference. As an academic, Bernanke argued that central banks should be wary of second-guessing massive global securities markets. They should ignore fluctuations in equity and housing prices, unless there is clear and compelling evidence of dangerous feedback into output and inflation.
Greenspan listened patiently and quietly to Bernanke’s logic. But Greenspan’s memoirs, to be published later this month, will no doubt strongly defend his famous decisions to bail out financial markets with sharp interest rate cuts in 1987, 1998, and 2001, arguing that the world might have fallen apart otherwise.
On the surface, Bernanke’s view seems intellectually unassailable. Central bankers cannot explain equity or housing prices and their movements any better than investors can. And Bernanke knows as well as anyone that none of the vast academic literature suggests a large role for asset prices in setting monetary policy, except in the face of extraordinary shocks that influence output and inflation, such as the Great Depression of the 1930’s.
In short, no central banker can be the Oracle of Delphi. Indeed, many academic economists believe that central bankers could perfectly well be replaced with a computer programmed to implement a simple rule that adjusts interest rates mechanically in response to output and inflation.
But, while Bernanke’s view is theoretically rigorous, reality is not. One problem is that academic models assume that central banks actually know what output and inflation are in real time. In fact, central banks typically only have very fuzzy measures. Just a month ago, for example, the US statistical authorities significantly downgraded their estimate of national output for 2004!
The problem is worse in most other countries. Brazil, for example, uses visits to doctors to measure health-sector output, regardless of what happens to the patient. China’s statistical agency is still mired in communist input-output accounting.
Even inflation can be very hard to measure precisely. What can price stability possibly mean in an era when new goods and services are constantly being introduced, and at a faster rate than ever before? US statisticians have tried to “fix” the consumer price index to account for new products, but many experts believe that measured US inflation is still at least one percentage point too high, and the margin of error can be more volatile than conventional CPI inflation itself.
So, while monetary policy can in theory be automated, as computer programmers say, “garbage in, garbage out.” Stock and housing prices may be volatile, but the data are much cleaner and timelier than anything available for output and inflation. This is why central bankers must think about the information embedded in asset prices.
In fact, this summer’s asset price correction reinforced a view many of us already had that the US economy was slowing, led by sagging productivity and a deteriorating housing market. I foresee a series of interest rate cuts by the Fed, which should not be viewed as a concession to asset markets, but rather as recognition that the real economy needs help.
In a sense, a central bank’s relationship with asset markets is like that of a man who claims he is going to the ballet to make himself happy, not to make his wife happy. But then he sheepishly adds that if his wife is not happy, he cannot be happy. Perhaps Bernanke will soon come to feel the same way, now that his honeymoon as Fed chairman is over.

The Federal Reserve makes a bold cut in interest rates

The Federal Reserve makes a bold cut in interest rates

By : economist.com

Republish : Zulfikar, ST

IS THE Federal Reserve running scared of the financial markets—or the housing market? On Tuesday September 18th America’s central bank cut its target for the federal funds rate by half a point, to 4.75%, the first reduction for more than four years. Financial markets had thought a quarter-point cut a shade more likely, but prayed fervently for a half. Rejoicing, the S&P 500 jumped by nearly 3% after the Fed’s announcement and the Dow Jones index closed more than 300 points up.
Once the cheering stops, it may be worth reflecting on what the Fed’s action—and words—say about the state of the economy, especially the housing market. The “tightening of credit conditions”, said the Fed, “has the potential to intensify the housing correction and to restrain economic growth.” The Fed seems to be trying to act before things get worse: the cut, it said, “is intended to help forestall some of the adverse effects on the broader economy”.

This argument is close to that laid out by Frederic Mishkin, a Fed governor, at the Jackson Hole central bankers’ symposium a fortnight ago. If a central bank cuts rates swiftly, Mr Mishkin argued there, it can soften the effects of even a sharp drop in house prices—not least because falling house prices translate only slowly into lower spending. The arguments of Janet Yellen, head of the San Francisco Fed, also seem to have been persuasive, says Adam Posen of the Peterson Institute of International Economics in Washington, DC: “the San Francisco Fed is one of the only regional Feds to have independent full-scale forecasts”. She gave warning this week that “financial market turmoil seems likely to intensify the downturn in housing”.

The Fed will have been helped towards its half-point cut by benign data on both consumer and producer prices: the latter, released on the day of the Fed’s decision, showed a 1.4% fall in August. More bad news from the housing market, published the same day, will have added weight to the argument for a bigger cut. An index of homebuilders’ confidence fell to match the lowest level reached since its inception in 1991. And the rate of foreclosures has more than doubled in the past year.
To some, it will seem as if the Fed has caved in to Wall Street. The emphasis on the housing market may help to dispel that impression. So might the Fed’s insistence that “some inflation risks remain” and that it will “continue to monitor inflation developments carefully.” So too, notes Mr Posen, will recent data on inflation, housing and jobs. Even so, the Fed will have to keep choosing its words carefully in the months ahead.

FEAR OF FINANCE

FEAR Of Finance

By :J.Bradford D.Long

Re-publish : Zulfikar

Fear of finance is on the march. Distrust of highly paid people who work behind computer screens doing something that doesn’t look like productive work is everywhere. Paper shufflers are doing better than producers; speculators are doing better than managers; traders are doing better than entrepreneurs; arbitrageurs are doing better than accumulators; the clever are doing better than the solid; and behind all of it, the financial market is more powerful than the state.
Common opinion suggests that this state of affairs is unjust. As Franklin D. Roosevelt put it, we must cast down the “money changers” from their “high seats in the temple of our civilization.” We must “restore the ancient truths” that growing, making, managing, and inventing things should have higher status, more honor, and greater rewards than whatever it is that financiers do.
Of course, there is a lot to fear in modern global finance. Its scale is staggering: more than $4 trillion of mergers and acquisitions this year, with tradable and (theoretically) liquid financial assets reaching perhaps $160 trillion by the end of this year, all in a world where annual global GDP is perhaps $50 trillion.
The McKinsey Global Institute recently estimated that world financial assets today are more than three times world GDP – triple the ratio in 1980 (and up from only two-thirds of world GDP after World War II). And then there are the numbers that sound very large and are hard to interpret: $300 trillion in “derivative” securities; $3 trillion managed by 12,000 global “hedge funds”; $1.2 trillion a year in “private equity.”
But important things are created in our modern global financial system, both positive and negative. Consider the $4 trillion of mergers and acquisitions this year, as companies acquire and spin off branches and divisions in the hope of gaining synergies or market power or better management.
Owners who sell these assets will gain roughly $800 billion relative to the pre-merger value of their assets. The shareholders of the companies that buy will lose roughly $300 billion in market value, as markets interpret the acquisition as a signal that managers are exuberant and uncontrolled empire-builders rather than flinty-eyed trustees maximizing payouts to investors. This $300 billion is a tax that shareholders of growing companies think is worth paying (or perhaps cannot find a way to avoid paying) for energetic corporate executives.
Where does the net gain of roughly $500 billion in global market value come from? We don’t know. Some of it is a destructive transfer from consumers to shareholders as corporations gain more monopoly power, some of it is an improvement in efficiency from better management and more appropriately scaled operations, and some of it is overpayment by those who become irrationally exuberant when companies get their names in the news.
If each of these factors accounts for one-third of the net gain, several conclusions follow. First, once we look outside transfers within the financial sector, the total global effects of this chunk of finance is a gain of perhaps $340 billion in increased real shareholder value from higher expected future profits. A loss of $170 billion can be attributed to future real wages, for households will find themselves paying higher margins to companies with more market power. The net gain is thus $170 billion of added social value in 2007, which is 0.3% of world GDP, equal to the average product of seven million workers.
In one sense, we should be grateful for our hard-working M&A technicians, well-paid as they are: it is important that businesses with lousy managements or that operate inefficiently be under pressure from those who may do better, and can raise the money to attempt to do so. We cannot rely on shareholder democracy as our only system of corporate control.
The second conclusion is that the gross gains – fees, trading profits, and capital gains to the winners (perhaps $800 billion from this year’s M&A’s) – greatly exceed the perhaps $170 billion in net gains. Governments have a very important educational, admonitory, and regulatory role to play: people should know the risks and probabilities, for they may wind up among losers of the other $630 billion. So far there is little sign that they do.
Finally, finance has long had an interest in stable monopolies and oligopolies with high profit margins, while the public has an interest in competitive markets with low margins. The more skeptical you are of the ability of government-run antitrust policy to offset the monopoly power-increasing effects of M&A’s, the more you should seek other sources of countervailing power – which means progressive income taxation – to offset any upward leap in income inequality.
Eighteenth-century physiocrats believed that only the farmer was productive, and that everyone else was somehow cheating the farmers out of their fair share. Twentieth-century Marxists thought the same thing about factory workers.
Both were wrong. Let us regulate our financial markets so that outsiders who invest are not sheared. But let us not make the mistake of fearing finance too much.

Stock Markets’ Fear of Falling

STOCK MARKET'S FEAR Of FALLING

By : Robert J.Shiller

Re-Publish : Zulfikar

NEW HAVEN -- The sharp drop in the world’s stock markets on August 9, after BNP Paribas announced that it would freeze three of its funds, is just one more example of the markets’ recent downward instability or asymmetry. That is, the markets have been more vulnerable to sudden large drops than they have been to sudden large increases. Daily stock price changes for the 100-business-day period ending August 3 were unusually negatively skewed in Argentina, Australia, Brazil, Canada, China, France, Germany, India, Japan, Korea, Mexico, the United States and the United Kingdom.
In the US, for example, the Standard and Poor’s 500 index in July recorded six days of declines and only three days of increases amounting to more than 1%. In June, the index dropped more than 1% on four days, and gained more than 1% on two days. Going back further, there was a gigantic one-day drop on February 27, 2007, of 3.5%, and no sharp rebound.
The February 27 decline began with an 8.8% one-day drop in the Shanghai Composite, following news that the Chinese government might tax capital gains more aggressively. This news should have been relevant only to China, but the drop there fueled declines worldwide. For example, the Bovespa in Brazil fell 6.6% on February 27, and the BSE 30 in India fell 4% the next day. The subsequent recovery was slow and incremental.
In the US, the skew has been so negative only three other times since 1960: at the time of the 6.7% drop on May 28, 1962, the record-shattering 20.5% plummet on October 19, 1987, and the 6.1% decline on October 13, 1989.
Stock markets’ unusually negative skew is not inconsistent with booming price growth in recent years. The markets have broken all-time records, come close to doing so, or at least done very well since 2003 ( the case in Japan) by making up for the big drops incrementally, in a succession of smaller increases.
Nor is the negative skew inconsistent with the fact that world stock markets have been relatively quiet for most of this year. With the conspicuous exception of China and the less conspicuous exception of Australia, all have had low standard deviations of daily returns for the 100-business-day period ending August 3 when compared with the norm for the country.
The February 27 drop in US stock prices was only the 31st biggest one-day drop since 1950. But all of the other 30 drops occurred at times when stock prices were much more volatile. Thus, the February 27th drop really stands out, as do other recent one-day drops.
Indeed, one of the big puzzles of the US stock market recently has been low price volatility since around 2004, amid the most volatile earnings growth ever seen. Five-year real earnings growth on the S&P 500 set an all-time record in the period ending in the first quarter of 2007, at 192%. Before that, between the third quarter of 2000 and the first quarter of 2002, real S&P 500 earnings fell 55% – the biggest-ever decline since the index was created in 1957.
One would think that market prices should be volatile as investors try to absorb what this earnings volatility means. But we have learned time and again that stock markets are driven more by psychology than by reasoning about fundamentals.
Is psychology somehow behind the pervasive negative skew in recent months? Maybe we should ask why the skew is so negative. Should we regard it as just chance, or, when combined with record-high prices, as a symptom of some instability?
The adage in the bull market of the 1920’s was “one step down, two steps up, again and again.” The updated adage for the recent bull market is “one big step down, then three little steps up, again and again,” so far at least. No one is looking for a sudden surge, and volatility is reduced by the absence of sharp up-movements.
But big negative returns have an unfortunate psychological impact on markets. People still talk about October 28, 1929, or October 19, 1987. Big drops get their attention, and this primes some people to be attentive for them in the future, and to be ready to sell if another one comes.
In fact, willingness to support the market after a sudden drop may be declining. The “buy-on-dips stock market confidence index” that we compile at the Yale School of Management has been falling gradually since 2001, and has fallen especially far lately. The index is the share of people who answered “increase” to the question, “If the Dow dropped 3% tomorrow, I would guess that the day after tomorrow the Dow would: Increase? Decrease? Stay the Same?” In 2001, 72% of institutional investors and 74% of individual investors chose “increase.” By May 2007, only 48% of institutional investors and 59% of individual investors chose “increase.”
Perhaps the buy-on-dips confidence index has slipped lately because of negative news concerning credit markets, notably the US sub-prime mortgage market, which has increased anxiety about the fundamental soundness of the economy.
But something more may be at work. Everyone knows that markets have been booming, and everyone knows that other people know that a correction is always a possibility. So there may be an underlying sensitivity to price drops, which could fuel a succession of downward price changes, amplifying public concerns about problems in the economy and heralding a profound change in investor sentiment

The Liquidity Puzzle

THE LIQUIDITY PUZZLE

By : Robert J. Shiller

Re-publish : Zulfikar

We increasingly hear that “the world is awash with liquidity,” and that this justifies expecting asset prices to continue rising. But what does such liquidity mean, and is there really reason to expect that it will sustain further increases in stock and real estate prices?
Liquid assets are assets that resemble cash, because they can easily be converted into cash and used to buy other assets. The idea seems to be that there are a lot of liquid assets lying around, and that they are being used to get money to bid up the prices of stocks, housing, land, art, etc.
That theory sounds as general and fundamental as the theory that global warming is melting glaciers and raising sea levels around the world. Rising sea levels would explain a lot of geological and economic events. Is rising financial liquidity really a similar force? What is this theory anyway?
Traditionally, “awash with liquidity” would suggest that the world’s central banks are expanding the money supply too much, causing too much money chasing too few goods. But if that were the problem, one would cause all prices – including, say, clothing and haircuts – to rise. That is what the Federal Reserve Chairman Arthur Burns meant when he said that the United States was “awash with liquidity” in 1971, a period when the concern was general inflation.
But the recent popular use of the term “awash with liquidity” dates to 2005, a time when many central banks were tightening monetary policy. In the US, the Fed was sharply raising rates. Central banks worldwide clearly have been behaving quite responsibly with regard to general inflation since 2005. According to the IMF, world inflation, as measured by consumer price indices, has generally been declining since 2005, and has picked up only slightly in 2007.
So it is something of a puzzle why people started using the term so much in 2005. It may have had something to do with the near-total lack of response of long-term interest rates to monetary tightening. If central banks are tightening and long-term rates aren’t rising, one needs some explanation. Liquidity is just a nice-sounding word to interpret this phenomenon.
Another interpretation is that people are saving a great deal, and that all this money is chasing investment assets, bidding up prices. Current Fed Chairman Ben Bernanke raised this idea a few years ago, alleging a world “saving glut.”
But, once again, the data do not bear this out. The IMF’s world saving rate has maintained a fairly consistent downward trend since the early 1970’s, and, while it has picked up since 2002, it is still well below the peak levels attained in the previous three decades. True, savings rates in emerging markets and oil-rich countries have been increasing since 1970, and especially in the last few years, but this has been offset by declining saving rates in advanced countries.
Another interpretation is that “awash with liquidity” merely means that interest rates are low. But interest rates have been increasing around the world since 2003. Hardly anyone was saying the world was “awash with liquidity” in 2003. The use of the term has grown in parallel with rising , not falling, interest rates.
Yet another theory is that changes in our ways of handling risk have reduced risk premia. The growth of the financial markets’ sophistication has allowed risks to be sliced and diced and spread further than ever before. Indeed, the much-vaunted market for collateralized debt obligations, which divides risks into tranches and places the different risk levels in different places according to the willingness to accept them, has plausibly played a role in boosting asset prices. But this is really a theory about risk management for certain kinds of products, not “liquidity” per se .
Hyun Song Shin of Princeton University proposed a theory of excess liquidity in a paper with Tobias Adrian that he presented last month at the Bank for International Settlements in Brunnen, Switzerland. He says that it merely reflects a feedback mechanism that is always present: any initial upward shock to asset prices strengthens the balance sheets of financial institutions, so in response they borrow more and bid up prices even more.
But if that is what the term “awash with liquidity” means, then its widespread use today is simply a reflection of the high asset prices that we already have. It could even be called an approximate synonym for “bubbly.”
The term “awash with liquidity” was last in vogue just before the US stock market crash of October 19, 1987, the biggest one-day price drop in world history. The reasons for that crash are complex, but, as I discovered in my questionnaire survey a week later, it would appear that people ultimately did not trust the market’s level. As a result, they were interested in strategies – such as the portfolio insurance strategies that were popular at the time – that would allow them to exit the market fast.
The term “awash with liquidity” was also used often in 1999 and 2000, just before the major peak in the stock market. So its popular use seems not to reflect anything we can put our finger on, but instead a general feeling that markets are bubbly and a lack of confidence in their levels. Under this interpretation, the term’s popularity is a source of concern: it may indicate a market psychology that could lead to downward volatility in prices.

China’s New Economic Model

China’s New Economic Model

By : Joseph Stiglitz

Re-publish : Zulfikar

China’s success since it began its transition to a market economy has been based on adaptable strategies and policies: as each set of problems are solved, new problems arise, for which new policies and strategies must be devised. This process includes social innovation . China recognized that it could not simply transfer economic institutions that had worked in other countries; at the least, what succeeded elsewhere had to be adapted to the unique problems confronting China.
Today, China is discussing a “new economic model.” Of course, the old economic model has been a resounding success, producing almost 10% annual growth for 30 years and lifting hundreds of millions of Chinese out of poverty. The changes are apparent not only in the statistics, but even more so in the faces of the people that one sees around the country.
I recently visited a remote Dong village in the mountains of Quizho, one of China’s poorest provinces, miles away from the nearest paved road; yet it had electricity, and with electricity had come not just television, but the internet. While some rising incomes came from remittances from family members who had migrated to coastal cities, the farmers, too, were better off, with new crops and better seeds: the government was selling, on credit, high-grade seeds with a guaranteed rate of germination.
China knows that it must change if it is to have sustainable growth. At every level, there is a consciousness of environmental limits and the realization that the resource-intensive consumption patterns now accepted in the United States would be a disaster for China – and for the world. As an increasing share of China’s population moves to cities, those cities will have to be made livable, which will require careful planning, including public transportation systems and parks.
Equally interesting, China is attempting to move away from the export-led growth strategy that it and other East Asian countries have pursued. That strategy supported technology transfer, helping to close the knowledge gap and rapidly improving the quality of manufactured goods. Export-led growth meant that China could produce without worrying about developing the domestic market.
But a global backlash has already developed. Even countries seemingly committed to competitive markets don’t like being beaten at their own game, and often trump up charges of “unfair competition.” More importantly, even if markets are not fully saturated in many areas, it will be hard to maintain double-digit growth rates for exports.
So something has to change. China has been engaged in what might be called “vendor finance,” providing the money that helps finance the huge US fiscal and trade deficits, allowing Americans to buy more goods than they sell. But this is a peculiar arrangement: a relatively poor country is helping to finance America’s War on Iraq, as well as a massive tax cut for the richest people in the world’s richest country, while huge needs at home imply ample room for expansion of both consumption and investment.
In fact, to meet the challenge of restructuring China’s economy away from exports and resource-intensive goods, China must stimulate consumption. While the rest of the world struggles to raise savings, China, with a savings rate in excess of 40%, struggles to get its people to consume more.
Providing better social services (public health care, education, and nation-wide retirement programs) would reduce the need for “precautionary” savings. More access to finance for small and medium sized businesses would help, too. And “green taxes” – such as on carbon emissions – would shift consumption patterns while discouraging energy-intensive exports.
As China moves away from export-led growth, it will have to look for new sources of dynamism in its growing entrepreneurial ranks, which requires a commitment to creating an independent innovation system. China has long invested heavily in higher education and technology; now it is striving to create world-class institutions.
But if China wants a dynamic innovation system, it should resist pressure by Western governments to adopt the kind of unbalanced intellectual property laws that are being demanded. Instead, it should pursue a “balanced” intellectual property regime: because knowledge itself is the most important input in the production of knowledge, a badly designed intellectual property regime can stifle innovation – as has been the case in America in some areas.
Western technological innovation has focused too little on reducing the adverse environmental impact of growth, and too much on saving labor – something that China has in abundance. So it makes sense for China to focus its scientific prowess on new technologies that use fewer resources. But it is important to have an innovation system (including an intellectual property regime) that ensures that advances in knowledge are widely used. That may require innovative approaches, quite different from intellectual property regimes based on privatization and monopolization of knowledge, with the high prices and restricted benefits that follow.
Too many people think of economics as a zero-sum game, and that China’s success is coming at the expense of the rest of the world. Yes, China’s rapid growth poses challenges to the West. Competition will force some to work harder, to become more efficient, or to accept lower profits.
But economics is really a positive-sum game. An increasingly prosperous China has not only expanded imports from other countries, but is also providing goods that have kept prices lower in the West, despite sharply higher oil prices in recent years. This downward pressure on prices has allowed Western central banks to follow expansionary monetary policies, underpinning higher employment and growth.
We should all hope that China’s new economic model succeeds. If it does, all of us will have much to gain.

Schlumberger Second Quarter Earning Calls

Schlumberger Second Quarter Earnings Call

(Cases Study :Analysist Of Financial Strategic/Management Strategic)
Author: 123jump.com

Staff 123jump.com

Last Update: 3:20 PM EDT July 26 2007

Re-Publish & Analysist : Zulfikar

The oilfield services company reported earnings of $1.02 cents a share, exceeding analysts’ expectations of 96 cents a share. Oilfield Services pretax margins reached a new high of 30.4% led by strong performance in the Middle East and Asia, due to a continued favorable revenue mix from exploration services. In the North American market, higher activity on land and in the Gulf Coast was more than offset by a downturn in Canada.

Investors Question and Answers

Sequential Earnings Growth Quarterly Earnings by Year Quarterly Earnings Growth by Year

Source: Company filings Q1:March Q2:June Q3:September Q4:December

This summary is based on the second quarter fiscal 2007 earnings call conducted by Schlumberger Limited (SLB: chart) on July 20, 2007.

Vice President of Investor Relations: Malcolm Theobald

Chairman of the Board, Chief Executive Officer: Andrew F. Gould

Chief Financial Officer, Executive Vice President, Treasurer: Simon Ayat

Key Investors Issues

-EPS were $1.02 a share compared to 69 cents a share last year.

- Net income was $1.26 billion compared to $856.9 million a year earlier.

- Revenue was $5.64 billion compared to $4.69 billion in the same quarter a year earlier.

Second Quarter Highlights

Net income, before charges and credits, reached $1.26 billion, an increase of 7% sequentially and 40% year-on-year.

- Earnings-per-share, before charges and credits, were $1.02 versus 96 cents in the previous quarter, and 73 cents in the second quarter of 2006.

- Net income, including charges and credits, was $1.26 billion or $1.02 per-share versus 96 cents in the previous quarter, and 69 cents in the second quarter of 2006.

Oilfield Services revenue of $4.97 billion increased 5% sequentially and 21% year-on-year. Pretax business segment operating income of $1.51 billion increased 8% sequentially and 33% year-on-year.

WesternGeco revenue of $665 million decreased 6% sequentially but increased 18% year-on-year. Pretax business segment operating income of $216 million decreased 19% sequentially but increased 28% year-on-year.

During the first half of 2007, Integrated Project Management (IPM) was awarded an $3.8 billion of new and extended contracts that cover activities in GeoMarkets spanning Latin America, Russia, North Africa, Europe and Malaysia.

This figure includes revenues from project management, Schlumberger technology delivery and third-party services.In the short term, the future natural gas activity in North America remains uncertain as record imports of LNG, a slower-than-forecast decline in Canadian gas production, and the backlog of new wells stimulated and brought on line have all led to a rapid rise in gas storage levels. In this market, pricing erosion for pressure pumping stimulation services accelerated due to increasing equipment capacity. The company continues to believe that the high decline rates of existing fields and the poorer quality reservoirs now being drilled will ultimately lead to renewed activity in the Area.Global demand for oil remains robust while non-OPEC supply continues to disappoint due largely to acceleration in the decline rate of the existing production base, delays in the new and complex projects under development, and inadequate industry investment resulting from shortages of people and equipment. The company remains convinced that international activity will continue to increase as operators combat production shortfalls and continue to increase exploration budgets to renew reserves.

As part of the current 40 million-share buyback program approved in the second quarter of 2006, Schlumberger repurchased 2.2 million shares for a total amount of $172 million, at an average price of $78.23 per share.

Under this buyback program 20.9 million shares have been repurchased to date.Schlumberger completed the acquisitions of Geosystem and Tyumenpromgeofizika. Geosystem supplies land and marine electromagnetics and seismic imaging services and will become part of WesternGeco Electromagnetics. Tyumenpromgeofizika provides a wide range of geophysical and wireline logging services in Western Siberia.

As of June 30, net debt was $2.1 billion.

Liquidity events included $172 million for the stock buy-back program, CapEx, including multi-client, of $802 million. $396 million of series A convertible debentures were converted by holders into approximately 11 million shares of Schlumberger common stock. CapEx, excluding $61 million of multi-client surveys capitalized, was $741 million and is expected to reach approximately $3.1 billion for the year 2007.

Oilfield Services

- Revenue of $4.97 billion was 5% higher sequentially, and 21% higher year-on-year.

- Sequential revenue increases were highest in the US land, Brunei/Malaysia/Philippines, North Sea, Arabian and Eastern Mediterranean GeoMarkets.

- Double-digit growth rates were experienced in the East and North Russia, Indonesia, China/Japan/Korea and Qatar GeoMarkets.

- Across all areas demand was particularly strong for Drilling & Measurements, Schlumberger Information Solutions (SIS), Artificial Lift Systems, Wireline and Well Services technologies.

- Pretax operating income of $1.51 billion increased 8% sequentially, and 33% year-on-year. The sequential increase was mainly driven by higher activity and a favorable technology mix in the Brunei/Malaysia/Philippines, Venezuela/Trinidad & Tobago, US land, Eastern Mediterranean, Gulf Coast, Arabian, North Africa and China/Japan/Korea GeoMarkets, and by a favorable technology mix and higher product sales in the North Sea. These resulted in Oilfield Services pretax operating margins reaching 30.4%, a sequential increase of 90 basis points (bps).

- To adapt the existing Schlumberger GeoMarket structure to expanding activity levels worldwide, new GeoMarkets have been established in Russia, on land in the US, and Qatar, bringing the total number to 31. The GeoMarket structure brings together geographically focused teams to meet local needs and deliver customized solutions while enabling Schlumberger to deploy technology consistently on a global level.

- The Schlumberger Wireline InSitu Density service, the first in the InSitu Family of quantitative fluid properties measurements at reservoir conditions, made its commercial debut. This new service measures formation fluid density in open hole at reservoir conditions.- In a recent offshore exploration well in Norway, water samples for subsea pipeline flow assurance and field process equipment compatibility were acquired for Eni Norge using the InSitu Density service in conjunction with the Wireline MDT Modular Formation Dynamics Tester and Quicksilver Probe technologies to ensure low-contamination representative water samples measured under downhole conditions.

- SIS released the latest editions of the Petrel seismic-to-simulation software, the Eclipse reservoir simulation software, and the Ocean application development framework. These latest editions bring enhanced seismic performance and scalability for improved exploration workflows, extended simulation capability for both carbon dioxide injection and storage and for minimizing asphaltene deposition during production, and accurate modeling of pressure drop in extended-reach horizontal wells.

North America

- Revenue of $1.34 billion decreased 3% sequentially, but increased 6% year-on-year.

- Pretax operating income of $417 million decreased 3% sequentially but increased 11% year-on-year.

- Sequentially, revenue in the US land GeoMarkets grew through increased activity following the lifting of seasonal land access restrictions, and continuing service intensity for Wireline, Drilling & Measurements and Well Services technologies on horizontal wells in unconventional gas reservoirs.

- Growth was also recorded in the US Gulf Coast driven by higher demand for Drilling & Measurements, Well Services and Well Testing technologies in deep-water reservoirs, and in Alaska as a result of higher exploration-related demand for Wireline, Well Testing and Well Services technologies.

- Higher SIS product sales were recorded across the US GeoMarkets.

- Growth in the US was more than offset by the activity slowdown in Western Canada that resulted from the early onset of the spring break-up together with the lower prices for natural gas.

- Pretax operating margins for the area declined 21 bps to reach 31.2% primarily due to the activity slowdown in Canada and to pricing erosion in pressure pumping stimulation services in North America due to increases in equipment capacity. This decline was offset by higher operating leverage in the US land GeoMarkets and a favorable exploration-driven activity mix in the US Gulf Coast and Alaska GeoMarkets.

- In West Texas, Schlumberger used an integrated design approach to optimize stimulation and completion in a new shale gas play. This integrated approach included Schlumberger Wireline logging services and the new Sonic Scanner technology, in conjunction with TerraTek advanced core analysis, to yield a comprehensive characterization of the reservoir. The study led to customization of the fracturing fluid most suited to the reservoir mineralogy and to selection of the optimal perforating technique. The results indicated the absence of barriers within the formation. This was later confirmed by micro-seismic monitoring during the stimulation treatment.

- In Western Canada, the PowerDrive Xceed rotary-steerable system was run in the Chinook Ridge field where it enabled the drilling of a horizontal well with consistent build rates in a complex and technically challenging reservoir. The deployment of this advanced directional-drilling technology enabled the operator to enhance the well''s productivity.- In northwestern Louisiana, AbrasiFRAC technology, a member of the new Contact family of intervention services, was used to complete a well where six stages were successfully placed in one day in the highly laminated reservoir where normally pressured zones alternate with highly depleted zones. The well, which was completed three days faster than wells using conventional technology, is outperforming offset wells and yielding the lowest water production rate in the field.

- In the Barnett Shale of North Texas, Schlumberger recently completed three horizontal wells for Devon Energy. New production improvements were achieved through the added dimension that Sonic Scanner advanced measurements bring to the understanding of formation stress during the completion process in this complex tight gas environment. In addition, the use of MDT technology is enabling the customer to measure the in-situ stress in an effort to understand hydraulic fracture-height growth.

Latin America

- Revenue of $761 million increased 5% sequentially, and 14% year-on-year.

- Pretax operating income of $179 million increased 10% sequentially, and 40% year-on-year.

- The two remaining contracts associated with the drilling barges in Venezuela were finalized. The resulting recognition of certain previously deferred revenues and related costs had a marginal impact on the Area''s sequential revenue and pretax operating income growth.- Sequential revenue growth was driven by increased demand for Wireline and Well Testing technologies together with higher Artificial Lift Systems product sales in the Venezuela/Trinidad & Tobago GeoMarket; strong demand for Wireline, Well Services and Well Testing technologies together with SIS and Completions product sales in Latin America South.

- Continued strong exploration-driven Wireline activity and increased demand for IPM services in Peru/Colombia/Ecuador; and stronger Well Services activity in Mexico.

- Pretax operating margins increased by 118 bps to reach 23.6% as a result of the more favorable activity mix in Venezuela/Trinidad & Tobago and Peru/Colombia/Ecuador. This performance was partially offset by project start-up costs in Mexico.

- In Brazil, Petrobras awarded Schlumberger a contract for work on the Marlim field which includes the construction of a collaborative decision center together with implementation of Schlumberger production software and workflow process optimization. This project is an extension of the Carapeba pilot development.

- In Colombia, Petrobras selected Schlumberger to provide logging-while-drilling, wireline logging and directional-drilling services for the first-ever deep-water well to be drilled in the region. This award was based on the successful track record of PowerDrive rotary-steerable and Scope advanced measurements-while-drilling technologies in Brazil.

- In Venezuela, PDVSA has achieved exceptional results using a combination of Wireline PURE and PowerJet Omega perforating technologies in new well completions and old well re-perforations. Using an engineered approach to design the system best suited to the formation for maximum productivity, a team of PDVSA and Schlumberger engineers increased the productivity index in a number of wells across the country. In one specific case, a group of 10 wells was re-perforated with production increasing by more than 14,000 BOPD.

- In Argentina, Repsol YPF awarded Schlumberger a multi-year contract extension for Artificial Lift Systems services onshore. This extension was awarded based on service quality performance, rapid product delivery and advanced technology offerings provided under the existing five-year contract.

Europe/CIS/Africa

- Revenue of $1.61 billion increased 6% sequentially, and 30% year-on-year.

- Pretax operating income of $462 million increased 7% sequentially, and 46% year-on-year.

- Sequential revenue growth was driven by the higher rig count in the East Russia, Continental Europe, Libya and North Africa GeoMarkets; strong demand for exploration-related Wireline, Drilling & Measurements and Well Testing technologies together with higher Artificial Lift Systems and Completions product sales in the North Sea, and increased demand for Well Services technologies, higher Artificial Lift Systems product sales and higher IPM activity in North Russia. This growth was partially offset by seasonal weather-related effects in South Russia.- Pretax operating margins reached 28.7% driven primarily by a more favorable activity mix in the North Sea, North Africa and Russia GeoMarkets. This performance was partially dampened by the weather-related seasonal effects in South Russia.

- In Algeria, the Schlumberger Wireline PressureXpress service was run for CNPC International Algeria Exploration to determine fluid contacts and gradients in order to improve reservoir understanding. Job execution was optimized in real time using the InterACT web-based service.

- StageFRAC multistage fracturing technology, a member of the Contact family of fracturing and completion services, was deployed on three offshore oil wells for Eni Congo. The technology, resulting in increased well productivity, proved highly effective for the customer''s stimulation campaign. StageFRAC will be used by Eni Congo on additional offshore fields, reflecting the growing acceptance of this advanced technology.

- PeriScope and EcoScope, members of the Scope family of advanced-while-drilling services, were deployed for Chevron Nigeria Ltd. in an offshore field. Results showed that the horizontal well''s oil-water contact was dipping due to down-slope water injection. The use of conventional technologies would have led to the incorrect assumption that the transition from oil to water was due to faulting. The results prevented an unnecessary sidetrack and modified the field development plan.

- Elsewhere in Nigeria, a screening study of 1,700 reservoirs was conducted for Chevron Nigeria Ltd. to identify potential candidates for water-flooding to improve production and recovery. The ranking of the reservoirs, each described by more than 200 parameters, was performed using Schlumberger DECIDE! data management software, which reduced the processing time to three months, less than with previous methods.

Middle East & Asia

- Revenue of $1.21 billion increased 11% sequentially, and 32% year-on-year.

- Pretax operating income of $428 million increased 14% sequentially, and 43% year-on-year.

- The sequential growth in revenue resulted from higher activity in the Brunei/Malaysia/Philippines, Indonesia, Qatar, Australia/Papua New Guinea and China/Japan/Korea GeoMarkets, stronger exploration-driven deep-water activity in Eastern Mediterranean, and higher demand for Wireline, Completions and Artificial Lift Systems technologies in the Arabian GeoMarket. This growth was partially offset by the lower rig count in Thailand/Vietnam.

- Pretax operating margins grew sequentially by 103 bps to reach 35.3%, driven by a more favorable deep-water exploration-driven activity mix in Brunei/Malaysia/Philippines, demand for higher-margin Wireline technology in China/Japan/Korea, and higher-margin Completions and Artificial Lift Systems product sales in the Arabian GeoMarket. This growth was offset by the slowdown in Thailand/Vietnam and lower deep-water activity in India.

- Saudi Aramco awarded Schlumberger Well Testing an order for 240 PhaseWatcher Vx multiphase flow meters for the Khurais field in Saudi Arabia, confirming Schlumberger leadership in production well testing.

- Elsewhere in Saudi Arabia, the Wireline MaxTRAC open-hole tractor conveyance system has overcome the soft formation tractoring slippage experienced in this area. In one application, the MaxTRAC technology enabled the Schlumberger Wireline Flow Scanner production logging system to be deployed in deep horizontal wells providing real-time diagnosis of oil and water entries.

- Schlumberger Well Services Coiled Tubing Catenary technology was deployed for the first time in Asia for Shell Malaysia Exploration & Production to enable coiled-tubing operations from a floating barge. This new technology increases access to wells located on lightweight or congested platform jackets.

- In India, Schlumberger Wireline performed the first P4 post-perforation propellant pulse service for extensive formation fracturing. The combination of the Wireline Sonic Scanner service with an oriented perforation technique identified the preferred fracture plane making it possible to reduce fracture pressure below the maximum limit for this particular completion.

WesternGeco

- Revenue of $665 million was 6% lower sequentially, but 18% higher compared to the same period last year.

- Pretax operating income of $216 million decreased 19% sequentially, but increased 28% year-on-year.

- Sequentially, Marine increased due to higher production and pricing despite seasonal transits and scheduled dry dock inspections.

- Data Processing revenue also increased driven primarily by higher sales in North America, Europe, Africa and the Middle East while Land revenue remained flat.

- The improvement in Marine and Data Processing revenues was more than offset by the normal seasonal decline in Multiclient revenues.

- Pretax operating margins declined to 32.5% due to the lower Multiclient sales and to crew costs associated with certain Land projects.

- The seventh Q-Marine vessel, the Western Spirit, was launched near the end of the quarter. Equipped with DSC Dynamic Spread Control, the new WesternGeco automated vessel, source and streamer steering technology that enables more accurate survey positioning, the Western Spirit began 4D survey work in the North Sea for Statoil.

- Offshore India, ONGC awarded WesternGeco an integrated Q-Marine acquisition, processing and post-stack inversion contract through the 2009-2010 field seasons. This fourth long-term Q-Marine contract for ONGC underscores their commitment to the value delivered by Q-Technology.

- Offshore Angola, Sonangol Pesquisa & Producao awarded WesternGeco a contract for a Q-Marine acquisition and processing survey over 1,800 km2. This is the first Q-Marine survey to be acquired for Sonangol.- In North Africa, Q-Land activity saw further success with the award of a second 350-km2 survey for Sirte Oil Company in Libya, and a 300-km2 survey for First Calgary Petroleum in the Berkine basin in Algeria.

- Three new technologies for land operations were introduced. The Desert Explorer DX-80 vibroseis unit complements the Q-Land integrated acquisition and processing system with low distortion across a broad bandwidth. The MD Sweep design methodology enables a vibrator to produce higher energy at low frequencies, and the SHARP technique increases productivity of slip-sweep data acquisition without suffering quality degradation due to harmonic noise.

- Under a technical collaboration agreement with Petrobras, WesternGeco has started acquisition of a controlled source electromagnetics survey in the Santos basin offshore Brazil. This survey will include both 2D and 3D acquisition, processing and interpretation.

- The third phase of the E-Octopus wide-azimuth survey commenced in May and now extends to cover approximately 10,540 km2 of the Green Canyon area in the US Gulf of Mexico. This phase, which is prefunded, has deployed a total of 20 streamers from two Q-Marine vessels, with the data processed using the proprietary Q-Xpress technique to produce the world''s largest onboard prestack depth migration. MMCI Multimeasurement-Constrained Imaging workflow technology will be applied to selected areas of the survey to improve delineation of base-of-salt events for enhanced subsalt imaging. MMCI is a WesternGeco proprietary workflow that integrates marine magnetotelluric, gravity and seismic measurements. The E-Octopus project is part of the family of E-surveys that benefit from the most advanced acquisition and processing technologies in the industry.

Fiscal 2007 Outlook

- Based on the projected geographic mix of earnings within OFS and WesternGeco for the remainder of the year, the full-year ETR is expected to be lower than last year and above the second quarter levels.

- The company expects expense to be approximately $140 million, a $26 million increase over 2006.

- CapEx, is expected to reach approximately $3.1 billion.

Schlumberger Makes Itself The Go-To Oil Services Firm

Schlumberger Makes Itself The Go-To Oil Services Firm

Jul. 31, 2007 (Investor's Business Daily delivered by Newstex) --

Republish : Zulfikar

He who controls the past controls the future. Schlumberger's (NYSE:SLB) efforts to build up its business over the last 30 years have set it up for future dominance.
The oil field services giant SLB has established itself in local markets around the world. It is truly a global company.
The Houston-based firm offers project management services and searching techniques to national oil companies as well as international and domestic energy firms.
It has set up local centers for its products and services around the world. It uses local employees from the country where it operates.
The three-decade effort allowed Schlumberger to penetrate new markets as well as win some of the oil industry's most lucrative contracts.
With 70% of its business staked overseas, Schlumberger is poised to take advantage of increased demand for oil services abroad.
Analyst David Rewcastle of Argus Research expects worldwide spending on oil services to grow more than 10% this year and in 2008.
He says spending should hit well over $600 million for the next two years.
"Though this is slower than the growth in 2005 and 2006," Rewcastle said, "it continues an expansion not seen in more than a quarter century, due to a shortage of services to satisfy demand."
Schlumberger (it's pronounced SHLUM-ber-ZHAY) is the company that can fulfill the starving needs of the oil industry.
It has two business segments, Oilfield Services and WesternGeco. Combined, the units helped Schlumberger increase its second-quarter sales 21% to $5.64 billion. It was the 10th straight quarter of 20% or better sales growth.
Earnings Growth
The company earned $1.02 a share in the quarter, up 40% from last year. Analysts were expecting 95 cents.
The Oilfield Services segment had sales of $4.97 billion, up 21%. The unit provides exploration and production, well completion and geological evaluation. It also offers consulting, software and technology services.
The WesternGeco unit does reservoir imaging, monitoring and seismic surveys. Sales rose 18% to $664.6 million in the quarter.
The company continues to see strong demand for its services. National oil companies from Russia to Malaysia have paid top prices for seismic exploration services in an effort to expand capacity.
Schlumberger's seismic imaging is some of the world's best, said analyst Stephen Gengaro of Jefferies (NYSE:JEF) & Co. Its Q-Technology searches and finds new reserves. It can also tell the quality of the oil or gas.
The world is in constant demand to find new reserves. Analysts agree that seismic spending will continue to grow over the next few years.
CEO Andrew Gould told analysts in a conference call that second-quarter results were driven by the increasing pace of international activity.
The company signed contracts worth $3.8 billion over the last six months, Gould said. The contracts and a backlog of $1.2 billion will cover its business in the Middle East, Latin America, Russia, North Africa, Europe and Malaysia, he said.
"Sequential revenue growth for Oilfield Services accelerated in all areas except North America, where higher activity on land and in the Gulf Coast was not sufficient to completely offset a significant downturn in Canada," Gould said in the call.
The Canadian rig count in the second quarter fell 74% to 139 from last year, according to Baker Hughes (NYSE:BHI) BHI. The oil field services firm tracks global rig counts.
The firm said the U.S. was up nearly 8% to 1,757 rigs last quarter. But most of the demand for the company lies overseas.
"What's impressive is management's ability to minimize margin erosion in North America in light of sluggish Canadian activity," Gengaro said. "But international demand is what's driving the bus as far as growth for Schlumberger."
The global rig count rose 10% to 1,002 rigs last quarter. Baker Hughes found that rig activity is the strongest in Africa and the Middle East. Europe and Asia-Pacific had solid rig growth as well.
All of this bodes well for Schlumberger. Its geographic footprint in these regions places it right in the middle of the action.
The company has outspent rivals on research and new products, Rewcastle says. This has paid off for Schlumberger, whose clients range from national oil companies to big guns like Exxon Mobil (NYSE:XOM) XOM.
"It's a powerhouse," said Rewcastle. "Its services are useful to any party in search of oil or gas. It can find the sweet spot almost anywhere and help the client extract it."
World Domination
Schlumberger is a dominant force all over the world. But it still faces several risks.
First, a recession could force the price of oil to plummet. Then drilling activity would drastically slow down.
"Oil prices in the 60s and 70s are not crucial to the profitability of oil service firms," Rewcastle said. "Sustained prices around $35 per barrel are necessary to stimulate projects with an adequate return. I expect the current environment of high prices to continue."
But with robust outlooks for the industry expected for next few years, there is a more imminent risk for the oil services giant.
Schlumberger operates in some politically unstable countries. These nations are heavily dependent on oil exports. It could be forced to close down business due to sanctions or volatility.
In the early 1940s, Texaco paid for its own dealings with hostile regimes such as Nazi Germany and Imperial Japan. And there are similarities with Schlumberger's business in Sudan, Iran and Venezuela, Rewcastle says.
Schlumberger is the only major E&P company left in Iran and Sudan, he says.
But its operations are well-diversified throughout the world. Its business sprawls over regions where drilling demand is surging, Gengaro says.
"Part of the cost of doing business is the political risk," he said, "But there are other state oil companies with sufficient capital to keep Schlumberger busy, such as Russia. Its positioning in the world and its technological innovation will keep it dominant

7 HORRIBLE HIRING MISTAKES

7 Horrible Hiring Mistakes

By :Michael Mercer, Phd

Republish : Zulfikar, ST (Industrial Engineer, Degree)

You need to hire the best employees. You undoubtedly hired some employees who were losers.Oops! Well, let’s be more diplomatic. Let’s just say you hired some “underachievers” you would have been better without.

Or maybe you have the curse of hiring only “average” employees – people who are average in productivity and average in producing profits.

Question: Who wants to hire “average” (or “below average”) employees?

Answer: No one!To hire the best, you need to avoid the problems that plagued your previous hiring decisions. So, let me reveal seven horrible hiring blunders or mistakes you may have made.

1st Horrible Mistake: Interviewers typically do a lousy job at predicting job success.

This is a proven fact, verified by a lot of research. Statistically, most interviewers do about as well as flipping a coin!

2nd Horrible Mistake: Reference checks fail to tell you what you really need to know.

Most employers are so freaked out about giving reference checks that they tell you nothing or barely anything useful about how an applicant performed on-the-job.

Another way to put that is most reference checks are about as non-useful as simultaneously (a) flipping a coin while (b) rubbing a rabbit’s foot!!

3rd Horrible Mistake: You relied on your “gut feel” or “intuition” & you were W-R-O-N-G.Later, as you moaned about the mistake you made by hiring the wrong person, you asked yourself, “I knew what I was feeling. But, what was I thinking?”

4th Horrible Mistake: You used subjective prediction methods to make hiring decisions.

For example, you relied on subjective interviews, subjective reference checks, objective “impressions “ of the applicant. Wow! Were you ever off-base. And then you and your company needed to pay for your incorrect hiring decisions. That is expensive, time-consuming, and frustrating.

5th Horrible Mistake: You used NO objective AND customized prediction method.

Important: Research shows pre-employment tests are the most objective method to make predictions. But, make sure you use a test customized for specific jobs in your company!If you have not used tests customized for specific jobs in your company, then you really have missed out on the most objective and customized prediction method you could use.

6th Horrible Mistake: You [stupidly] told the applicant what you were looking for!!Then, lo-&-behold, the applicant spent your entire interview telling you s/he just happens to possess all the skills, talents and qualities you – stupidly – told the applicant you want in an employee.For example, let’s say you – stupidly – told the applicant you need to hire an employee who excels at teamwork, customer-service, and correctly handling small details.

I bet I can predict what that applicant told you in the interview: The applicant told you – with a serious yet pleasant expression – that s/he excels at teamwork, customer-service, and correctly handling small details.And then, when you hired the person who gave you all the answers you – stupidly – told the applicant you want, you pay the price of having an employee who may not REALLY be talented at teamwork, customer-service, or handling small details. You got fooled – and you have only yourself to blame.

7th Horrible Mistake: You terribly harm any person you should not have hired.Let’s be humanistic about it. If you hire the wrong person, the applicant also loses.People crave to work in a job where they will do well and enjoy it. People hate a job where they will perform only average or below average, and not enjoy the work. So, you actually benefit the applicant you carefully evaluated using customized, objective hiring methods.

Summary: When you hire . . .1. high-achieving “superstar” employees, both you and your company win.2. underachieving employees, (a) you lose and (b) your company loses.So, make sure you use customized and objective prediction methods, like pre-employment tests, biodata and more, to make sure you hire employees who are(a) productive, (b) profitable, and (c) low turnover.

__________Michael Mercer, Ph.D., is nationally recognized as America’s Hire the Best Expert™.Dr. Mercer created widely used pre-employment tests – Abilities & Behavior Forecaster™ Tests – which many companies use to evaluate job applicants. He also invented the groundbreaking “7-Step Method to Hire the Best™.” His 5 books include “Hire the Best -- & Avoid the Rest™” & “Turning Your Human Resources Department into a Profit Center™.” Get his free 14-page Special Report on “Hiring Productive, Profitable, & Honest Employees”, plus a free subscription to his Management Newsletter at www.Pre-EmploymentTests.com

Importance Of Values

Importance Of Values

By : Muhammad Hatta

Republish : Zulfikar, ST (Industrial Engineer)

What is Values? Corporate values is often defined as set of distinctive or fundamental beliefs the corporation stands for (Quingley, 1994). It serves as guidelines in making decision within corporation.

If you find it too conceptual and difficult to grasp, let`s take analogy of our childhood times. Recall what your parents always taught you during that time: Say thank you.., Don`t lie.. or Ask permission if you want to use someone`s stuffs... Those are the guiding principles that they tried to indoctrinate within our life, as if we embraced those principles, then we would never play with the abandoned toys, for example, because it opposed what we valued during that time.

Similar to these values that we learned from our childhood times, corporate values is a fundamental element for a company. Because, as corporation becomes an institution, and thus a society in itself, a set of values becomes a necessity. It helps employees to learn and grow within the corporation, just like what we all experienced with our parents during our lives.

Soft Values Generates Hard Result

One empirical study done by James C. Collins and Jerry I. Poras (1993) as written in their book Built to Last, showed that most visionary companies,--- premier institutions in their respective industries which are widely admired by their peers and have long track record of making significant impact on the world around them---, are characterized by having a set of strong and deeply believed core values. Strongly hold to this set of ideology, these visionary companies, Citicorp, IBM, Nordstorm and Sony alike, outperformed their rival companies, such as Chase, Burroughs, Melville and Kenwood in terms of cumulative stock returns, as shown on the graphic: What`s the relation between the success of these companies to their set of values? Good question. Let`s take Sony for example. Sony is widely known for their values on innovation. This belief is clearly stated on their as their management guidelines, which part of it are read as follows:
Purpose of Incorporation:To establish a place of work where engineers can feel the joy of technological innovation, be aware of their mission to society, and work to their heart`s content. Management Guidelines: We shall welcome technical difficulties and focus on highly sophisticated products that have great usefulness in society, regardless of the quantity involved
Indeed a very strong message to support the innovation within corporation. A deep sense of purpose which aims far more beyond profits. But does it all what it takes? I witnessed a lot of corporations put those words nicely on their annual report, and nothing reflects the reality. Again, very good point. Remember, people won`t embrace words. They will be only highly influenced by actions, real actions.

This is what differentiates visionary companies with their comparisons. The set of values was deeply practiced into their day-to-day activities. In case of Sony, the innovation spirit is solidly cultivated that made them came with a series of decisions to launch products for which there was no proven demand, including the first all-transistor radio (1955) or the Sony Walkman (1979). As we know then, these products were very successful in the market, and had proven Sony`s innovation values lead them to be ahead in the competition. Moreover, on a case where values become deeply ingrained on each individual within organization, it creates a “cult-like environment which enable people who enter into organization to feel either fit or ejected like virus. It becomes a natural selection process that eliminates inappropriate behaviours or even people who don`t fit into corporation values. In case of Nordstorm, a giant retailer in the US, where customer satisfaction is their most sought after values, there are lot of people who were smart and technically excellent but in the end left the corporation within short period of time. This happened because they were not willing to “…not get irritated when facing a irrational customer, or start their career by being a gift wrapper. They left not because they are not good. Actually they`re among the best graduates in the country. They just don`t fit with the corporation values. And that`s already been a powerful mechanism to build a strong corporation. In a nutshell, company with strong values like the visionary companies, have such clarity about who they are, what they`re all about, and what they`re trying to achieve, and they tend to not have much room for people unwilling or unsuited to their demanding standards.

How to Build the Strong Values?

Of course, after all these facts, the next question is How could we cultivate and build the strong values and eventually culture in our organization?
Based from Arthur Andersen experiences in several significant change within Indonesian companies or around the globe, there is actually no one size fits all approach. Each company is unique, and each of them needs a tailored approach that fit with their current culture. However, we noted that there are several common elements in the process that are critical to the success of the cultural change or values building programs. The remaining part of this article will discuss about these elements. It starts from the TopValues have to be driven by the top management team. The top management team are the role models for the rest. In the paternalistic culture like Indonesia, it is commonly cited that “organization is the shadow of their leaders. When leaders demonstrate the required behaviours that fit with the preached values, people got the message clearly. The leader is the message. Once the leaders are not committed or consistent with the so preached values, people quickly come into conclusion: It`s a lip service, it ain`t gonna change anything!

One experience came from a major mining company in Indonesia which experienced dramatic change during the early 90`s. To eliminate the culture of feudalistic in the company, the first step that the new CEO took, was demolishing all visible symbol of this culture. He traded his official luxury car with the most commonly used type of vehicle, Toyota Kijang. He prohibited person`s position level to be stated on both their name cards or room signs. And he refused to wear Safari, on that time was the suit of state top officials, and instructed all employees, from directors to the miners, to wear the same work uniform. And it did work out. The people got the message that the organization was serious to change as demonstrated visibly by the leaders. There`s Nothing Soft about Changing CultureEven though values and culture tends to be more soft issues, meaning that they`re more intangible in nature and deals more with hearts and less with head, the interventions for changing culture or building values are nevertheless hard stuffs.

Based on Peter Senges Fifth Discipline (1992) concept of Systems Thinking, we understand that structure drives behaviours For example, to change values and culture we need a reconstruction of organization structure. The old organization structure which tend to support the bureaucratic culture in one of our client, were reconstructed to become leaner and have element of matrices. Take a look on the case of Wainwright, a US company that has successfully transformed their company into customer focused organization. Before begun the era to promote their customer satisfaction philosophy, the organization had several hard systems in place that supported their philosophy, such as Internal and External Customer Satisfaction Process, a Continuous Improvement Program and a Performance Measurement system. These hard structures and systems are nonetheless the primary drivers in changing the behaviours. (Jay Fedora and Viki Welding, 1999).

For the same purpose, we have attempted to revise an Indonesian client`s HR system. The client`s Performance Appraisal system is realigned to more values-based, where people`s performance is partly rated by their peers, superiors and subordinates, on how well they have demonstrated the required behaviours on the work place. And to create such “motivation and drivers, it was directly linked to the employee`s compensation and career path. People started to listen, paid attention, and took actions. Their behaviours changed. The question of sustainability of this behaviour change is then lied on the application of the system and also how the company reinforce it with leading with the heart efforts described on the next element. But for sure, to successfully lead with the heart, organization must be healthy throughout. It requires a lot of TalkEven though most interventions are hard stuffs, the efforts of reminding and encouraging the appropriate behaviours are still needed as reinforcement. However, from our experience, it should come after people have seen the changes in hard stuffs. Communicating and preaching what are not visible is like hearing a fictional story from unpopular story teller. During the major transformation of the above mentioned major mining company in Indonesia, the leaders never get bored in preaching the employees about the new values and culture. Almost no single corporate meetings, gatherings or trainings were adjourned without mentioning or discussing about the new values and culture. Even the company invested 5 billion rupiahs to install a 120 hectares outdoor-experential learning activities, as a media to reinforce and indoctrinate the set of new values to every single of their employees. It is consistent with another finding came from the same book, Build to Last, suggested that visionary companies tend to employ stronger indoctrination of their employees into their core ideologies. This indoctrination is achieved through training, employee orientation, corporate mottos or slogans, and even singing company`s mars. In the end, nobody in the world dare to say that developing values and changing culture is easy. Actually it has been extremely difficult. But having seen the dramatic improvement resulted from both efforts, and how it sustained the competitiveness of the company over the long period of time, as what visionary companies on Built to Last benefited, every company should be tempted in moving to this direction. If you`re one of the many who haven`t, start to think about it! You don`t want to be outperformed in the end, do you? Ibnu A. Mulyanto, Arthur Andersen Business Consulting)

References:

James C. Collins and Jerry I. Porras (1994), Built to Last, p. 47-90, Harper Business Joseph V. Quigley (1993), Vision: How Leaders Develop It, Share It, and Sustain It, p.15-23, McGraw-Hill Peter Senge (1992), Fifth Discipline, Jay Fedora and Vicki Welding (1999), There is Nothing Soft About Changing Culture, Arthur Andersen BC Journal, June 1999

Assessment of Performance and Potential using the right tools the right way

Assessment of Performance and Potential using the right tools the right way

By : Muhammad Hatta

Republish : Zulfikar, ST (Industrial Engineer)

We also use assessment for many of the HR activities such as: recruitment & promotion, early identification of potential, diagnosis of training & development, organisation/ succession planning, management audit (in organisation restructuring) and career guidance/ counseling.
Some people will query the need to assess for internal candidates since companies already have their annual performance appraisal. In fact, an objective assessment process provides complementary information to the performance appraisal. While performance appraisal measures an individuals current performance, an assessment process is able to predict future potential, something which is critically important for companies to face the challenge of todays business environment.

From both angles performance appraisal and assessment of potential, companies can identify: The high fliers with particular potential and those with particular weaknesses · Individual development needs and their respective personal development plans · Suitable candidates for certain positions based on the assessment of current performance and future potential.
This will provide companies with a management audit, facilitate development action planning and facilitate succession planning.

To implement an assessment process in the organisation, there are some key steps that companies have to go through:

Job analysis and Competency identification:

Job analysis is a systematic process for defining the content of a particular job, position or level within organisation. This process should be comprehensive, detailed and should result in thorough definitions of the tasks to be performed, descriptions of the skills, behaviour, knowledge, personality and motivational characteristics required by job holders in order to perform these specific tasks. The common language for the above description is what we call COMPETENCIES, which is a structured way of describing effective job behaviour.

Select appropriate tools:
Assessment tools should answer our question about an individual: the CAN, the HOW and the WILL factor.

The following are examples of assessment tools:

Interview: This is probably the most popular method adopted by many organisations as it can be conducted inexpensively and provides an opportunity to assess the “chemistry factor as well as gain an insight to an individuals expectations and motivation. However, interviews are also one of the least reliable methods of assessment if not properly conducted. Studies have repeatedly demonstrated that interviews are conducted inconsistently, giving rise to perceptions and judgements about people which are inaccurate and lead to decisions which proved to be effective in the long run. In fact, it is precisely because they allow an opportunity to see people face-to-face that they are so unreliable. Because of their limited human capacity, people are notoriously subjective in their opinions and judgements about others and rarely make HR-related decisions on the basis of relevant characteristics such as actual ability to perform a particular job. So, often in the interview, articulate candidates who are able to project a good image would have a much better chance of doing well in the the interview.

A more structured way of conducting the interview, such as the competency-based approach, is significantly more reliable. This method of interview uses task-oriented and behaviourally defined job criteria to increase the accuracy of the assessment. However, the interviewer needs to be properly trained to carry this out effectively. Ability or Aptitude Tests: These tests measure an individuals skills and abilities in specific areas, such as spatial, numerical, mechanical or verbal skills. Ability tests answer the question of whether an individual can perform a specific task in a discrete skill area and if so, how does the score compare with similar individuals in relevant comparison group. Such tests provide an objective comparison of candidates on a specific ability within a short time scale and directly compare the individual with a relevant comparison group. However, the skill in the administration and interpretation of such data will play an important role in the implementation.

Personality Questionnaires: These are self report questionnaires which measure an individuals preference for certain styles of behaviour in a work setting. They answer the question of how an individual is likely to behave at work. Important factors to be considered in using these questionnaire are whether the questionnaires are designed to be job-relevant, equipped to anticipate faking and conducted by trained practioners.

Assessment Centres: This is a multiple method of assessment, using a range of job simulation and psychological tests to measure an individuals performance against core job competencies. It answers the questions of whether an individual CAN do the job and HOW he or she does the job. Because assessment centres involve several assessors and participants, as well as using several different tools, this method provides the highest prediction among all assessment tools. As a direct outcome of assessment centres, an individuals strengths and weaknesses will be clearly identified and fedback to participants for development action planning. While this approach is becoming more and more popular, the implementation process incurs significant amount of costs and management commitment.
Set Up The Assessment Policy It is very important to set up the Company Policy on Assessment Procedure before implementing it in the organisation. This policy will ensure the standard quality used for the assessment, its objectivity and fairness. It is also important from an ethical and legal point of view, especially in a country where these are potential issues.
The following are key points that need to be considered prior to the implementation of an assessment process in the organisation: · Objective of the Assessment · Procedure of the Assessment · Responsibility of Assessment Standard · Requirement of the Assessors · Confidentiality of Results · Lead time for re-assessment of employee · Monitoring of the tools, and the assessment result · Copy Right issues Clear Communication The communication process is very important, especially in the assessment of incumbents for development. The objectivity and fairness of its implementation as well as management support towards the programme will increase an employees motivation to undergo the assessment, as well as to reduce suspicion and skepticism.
Involve Line Managers Many HR professionals are finding it difficult to convince line managers of the value of objective tests, while the lack of line managers support not only threatens the use of psychometrics and the benefits it offers to the organisation. The most important thing is to recognise that line managers might object to testing for a wide range of different reasons and each is best tackled using a different approach. Examples could be to involve line managers in the initial discussions, conducting an assessment awareness workshop to emphasise the advantage of objective tests, and even to train line managers in the process are some of the ways to get the support of line managers.
Follow Through Following through an assessment process with development activities is something that many organisations do not emphasise on. Based on the outcome of an assessment process, training and development activities for individuals can be put in place. A structured development programme will provide immense benefit for both employees and the organisation.

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