Oil hits $100 barrel

Oil has broken through the landmark $100 a barrel, driven by a slumping dollar, geopolitical instability and worries over a winter fuel supply crunch.

See how the price of oil has risen - and fallen - since 1970 against a background of key world events.


1973 ARAB-ISRAELI WAR

Fighting between Arab and Israeli forces sent jitters through the Middle East.

Alarmed by Israeli successes, the Organisation of Petroleum Exporting Countries (Opec) orchestrated the Arab oil embargo, sending prices soaring by 400% in six months.

It was the first time oil had been used as a political weapon, putting pressure on the US which, in turn, persuaded Israel to accept UN mediation on the crisis.


1979 IRANIAN REVOLUTION


Months of turmoil in Iran led to the exile of the Shah and the declaration of an Islamic republic.

It also led to a reduction in oil production and, at one point, the flow of crude oil from Iran was almost halted. Nervousness about the stability of Iran brought together the other major Arab oil-producing states to ensure supply and increase prices.


1980 IRAN-IRAQ WAR

Iran weakened by the revolution was invaded by Iraq in September 1980. By November, the combined oil production of the two countries was only one million barrels a day, 6.5m fewer barrels than the year before.

It meant a worldwide reduction in crude oil production of 10%. The combination of the Iranian revolution and the Iran-Iraq war caused crude oil prices to more than double from $14 in 1978 to $35 in 1981.



1986 OIL PRICE CRASH

Higher oil prices led to a reduction in demand as consumers and industry looked at ways of becoming more energy-efficient.

The price rise also led to increased exploration for new sources of oil outside the traditional oil-producing regions.

Saudi Arabia suffered from the reduction in revenue, made worse by new Opec quotas which meant it had also been forced to reduce production.

It responded by increasing production in early 1986.

Crude oil prices plummeted below $10 per barrel - but the Saudi revenue remained about the same.

1990 GULF WAR

The Iraqi invasion of Kuwait, partly prompted by the low price of oil, led to uncertainty about production and prices spiked.

Iraq wanted to gain control of the world's third largest oil producer to give it more control over the world market.

Following the Gulf war to liberate Kuwait, crude oil prices entered a period of steady decline, reaching their lowest level in 1994 for 21 years.


1997 ASIAN FINANCIAL CRISIS

The rapid growth in Asian economies came to a halt leading to lower consumption of oil - just at a time when Opec had begun increasing production.

The combination sent prices plummeting, through to December 1998.


2001 9/11


Oil prices suffered a downturn as Russian oil production increased, and the US economy went into decline.

Opec tried to stem the reduction by cutting production - but the terror attacks on 11 September sent oil prices plummeting again.

Prices were down by about 35% by the middle of November. Opec delayed cutting production again until early 2002, when prices began to move upwards once more.



2003 IRAQ WAR

The American-led invasion of Iraq led to the loss of oil production in the Gulf state. In mid- 2002, there were over six million barrels per day of excess production capacity and by mid 2003, this had dropped to below two million.

It dropped still further in 2004-5. A million barrels per day is not enough spare capacity to cover for any sudden drop in production and it led to an increase in prices.


2006 LEBANON CONFLICT

After Israel launched attacks on Lebanon, oil prices reached a new high of $78 per barrel.

Although neither Israel nor Lebanon are oil producers, the conflict increased tension in the Middle East sending prices soaring.


2008 $100 BARREL

Geopolitical tension in Kenya, Algeria and Pakistan, as well as the threat of US sanctions against Iran have played their part.

At the same time, there are fears of a cold winter in the US and Europe, and increased demand from China and India as well as the US.

The falling US dollar has also driven up oil prices as they have to gain to compensate for a slide in the currency.


Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7083015.stm

Published: 2008/01/02 18:39:19 GMT

© BBC MMVIII

March 19, 2008

Big Payday for Wall St. In Visa’s Public Offering

By ERIC DASH

In a boon for big banks and Wall Street, Visa, the credit card giant, went public Tuesday in the largest initial public offering in American history.

The company’s shares, priced at $44 each, will begin trading on Wednesday on the New York Stock Exchange under the ticker symbol V.

The $18 billion public offering was greeted with fanfare in the financial industry but was unlikely to unleash a new wave of initial stock sales given the turbulence in the markets.

Even so, the offering will generate a windfall for Visa’s thousands of member banks, which own the company. JPMorgan Chase is expected to reap about $1.25 billion, while Bank of America, National City, Citigroup, U.S. Bancorp and Wells Fargo are likely to receive several hundred million dollars each.

Wall Street firms, in the meantime, stand to collect upward of $500 million in underwriting fees from the sale.

“That is a good infusion of capital,” said John E. Fitzgibbon Jr., the founder of IPOScoop.com, a Web site that tracks the industry. “And it’s no secret that Wall Street is capital starved right now.”

Shares of Visa were priced above the expected range of $37 to $42. More than 406 million shares are being offered, with an option to add 40.6 million if there is demand. That means the size of sale could reach as much as $19.7 billion.

In going public, Visa is following in the footsteps of its smaller rival MasterCard, whose shares have risen more than 439 percent since its public offering in May 2006.

Many other companies, however, are struggling to sell stock given turmoil in the markets.

“There are just not the buyers out there in this environment,” said Scott Sweet, a partner at IPOBoutique, an industry research firm. “They are scared by the market volatility.” Just 10 companies went public during the first two months of 2008, according to Dealogic, a financial services research firm. That compares with 50 public offerings in the first three months of 2007.

Analysts say that the market has essentially been closed to companies outside the energy, natural resources and health care industries. Excluding Visa, roughly 190 deals, valued at a combined $37.7 billion, are still in the pipeline, according to IPO Scoop.com data.

Several high-profile initial public offerings have been scrapped or delayed in the last few months, including one for Kohlberg Kravis Roberts & Company, the big buyout firm. In all, about 77 percent of all public offerings have been withdrawn or postponed, according to bankers, including one this week by Pogo Jet, a jet charter service.

Many companies that have moved forward with sales have scaled back their offerings. CardioNet, a health care technology start-up which Citigroup is taking public on Wednesday, cut the number of shares it allocated in half and lowered the price after several big shareholders backed out of the offering.

Visa, however, is the biggest player in its industry and has a brand known to nearly everyone with a credit card. Wall Street also understands the company’s business.

Visa and MasterCard have prospered as Americans increasingly swipe their cards rather than use cash nearly everywhere. The companies have not been hurt by the credit squeeze, because they do not actually make credit card loans; they merely process transactions for banks that do.

Visa, whose offering is being led by JPMorgan and Goldman Sachs with 17 other banks contributing, has been contemplating such a move for more than two years. In that time, it has bolstered its management team and revamped the company.

Industry observers say investors are complaining that they are being given only a fraction of the shares they requested. “I hear that allocations are being given out with eyedroppers,” Mr. Fitzgibbon said.

Would you like a mortgage that lends you more than the value of your house?

Would you like it structured so that your first payments are extra low?

If the mortgage weren't structured that way, would you be unable to afford the payments?

Are you convinced that real estate prices will continue to rise?

Do you have a poor credit history?

Congratulations if you answered "Yes" to most or all of those questions! You're an ideal target for a subprime mortgage lender.

Of course, there is a downside amid all the fine print, as hundreds of thousands of American consumers are now finding out. Mortgage delinquencies and foreclosures are way up. Dozens of companies that lent money to anyone with a pulse have gone belly up. And suddenly, some economists are starting to worry that the whole mess could send the U.S. economy into recession.

How did this happen?

What makes a mortgage "subprime"?

The term "subprime" isn't well known in Canada because most of our mortgage lending is "prime," or conventional. In the U.S., however, rapidly rising house prices and a poorly regulated industry combined to create a mortgage monster that is now busy running amok.

"Subprime" refers to the risk associated with a borrower, not to the interest rate being charged on the mortgage. Typically subprime mortgages are offered at interest rates above prime, to customers with below-average credit ratings. Subprime mortgage lenders in the U.S. tend to target lower-income Americans, the elderly, new immigrants, people with a proven record of not paying their debts on time — just about anyone who would have trouble getting a mortgage from a conventional lender such as a major bank.

Their pitch is irresistible and it unfolds along lines like this: "You want to buy your first house? We'll make it happen! And don't worry about a down payment. In fact, we'll even lend you more than the house is worth. We'll even charge you a super low rate [the "teaser"] during the first year or two to keep your payments low. Sure, the loan will eventually reset at prevailing rates, but since housing prices are rising by 20 per cent a year, all you have to do is refinance your house to keep your payments low!"

Needless to say, the subprime bubble soon burst. After enjoying a short period at low fixed rates, people with subprime "bargains" suddenly found their loans were being reset at rates that were in the double-digits. U.S. housing prices, which had been soaring, started falling. People with subprime mortgages found they could no longer count on the increasing value of their homes to refinance their way out of the mess.

By late 2006, one subprime loan in eight was in default across the U.S. Foreclosures were soaring. More than 20 subprime lenders were bankrupt. And the National Community Reinvestment Coalition estimated that as many as 1.5 million Americans could lose their homes by the time all the damage is done.

Could it happen in Canada?

Subprime mortgages are available in Canada. But it's a different story up here. For one thing, the subprime market share is much smaller in Canada. About 20 per cent of all U.S. mortgages are of the subprime variety in 2007. That compares to just five per cent in Canada, according to industry figures.

All high-ratio mortgages in Canada — those with less than 20 per cent down — must be secured by mortgage insurance, through, for example, the Canada Mortgage and Housing Corporation. In addition, Canadian financial institutions do not finance more than 100 per cent of a home's purchase price, and that value must be verified with a separate appraisal.

Canadian mortgage lenders have been scrambling to assure the population that there are major differences between the subprime markets in the two countries. "We have not seen the aggressive lending practices common south of the border," said Paul Grewal, chair of the Canadian Association of Accredited Mortgage Professionals. The association says Canadian underwriting practices are "more prudent."

Outside analysis backs up that assertion. Benjamin Tal, an economist with CIBC World Markets, noted recently that "only 22 per cent of subprime borrowers in Canada use variable rate mortgages — half the rate seen in the U.S." Tal also says there is no evidence linking the use of subprime lending in Canada with the increase in house prices. In the U.S., there is a "very high correlation," he says.

"Our view is that the price appreciation in the U.S. housing market over the past two years was, in many ways, artificial — boosted by aggressive lending and irresponsible borrowing."

Overall mortgage arrears in Canada are at just 0.5 per cent, the industry says, near record lows.

That doesn't mean there's nothing to worry about in Canada. A drop in Canadian housing prices and increases in interest rates would pose problems for borrowers. But with Canadian real estate showing fewer of the warning signs, with fewer subprime mortgages in this country, tighter borrowing restrictions and fewer mortgages at floating interest rates, the risks do seem to be considerably lower.

But the U.S. subprime meltdown has recently shown signs of spreading to the wider U.S. economy and into Canada. General Motors cancelled a shift at a truck plant in Oshawa, throwing 1,200 out of work, because sales of pickup trucks have plunged in the U.S. Most of Oshawa's production goes south of the border.

Stock markets in Canada and the U.S. began moving lower in the summer of 2007 as investors reacted to signs that lenders were beginning to tighten credit, boosting fears of a slowdown. Many Canadian companies reported having millions in cash tied up in normally safe short-term debt products that suddenly became illiquid as no one wanted to buy investments perceived as being risky.

Central banks on both sides of the border are watching closely for further signs of subprime fallout in the months ahead, as interest rates in many more U.S. subprime mortgages reset at higher levels.

NICK LEESON: Let me tell you about losing billions - by the original rogue trader

When markets are going your way, the feeling is brilliant - more intoxicating than champagne, more exhilarating than sex.

A successful trade makes you feel invincible.

But when things start to go wrong, you hide your losses and blithely try to carry on in the hope that you can recoup them.

You can't tell your colleagues that you've lost money - the macho ethics of the trading desk do not tolerate admissions of failure. You certainly can't tell your wife that your high-end life is at an end.

It is as if you are slipping into a personal abyss as the panic begin to eat at you.

The only way back is to bet more, risk more - and lose more until there is no hope of return.

That's what I felt back in 1995. So I experienced a sickening twinge of recognition when I heard of Jerome Kerviel's £3.5billion loss at Societe Generale.

Here, I thought, was someone going through exactly what I had experienced.

When you are losing such vast sums of money, you try to carry on in the misguided belief that can beat the market for a couple of days. But, in the end, the market always breaks you.

Of course, you may have a few good days when the markets go in your favour and you are persuaded that you can make the money back.

You still think you can pull yourself out the nightmare and get back to a break-even position. But ultimately you are living on borrowed time.

To work in such fast-paced environments, the City attracts a certain obstinate and compulsive character - especially in the derivatives market where Kerviel and I worked.

The truth is that banks need people with confidence who enjoy taking risks - traders who are prepared to gamble by betting on futures which their rivals might be too to timid pursue.

Then there's the intensity of trading on electronic systems which hold you in a trance.

You are watching up to ten screens at a time for the smallest change in the numbers as they update themselves every second, as Kerviel would be doing monitoring the French and German indexes and their main stocks.

When things start to go wrong, the creeping, paralysing panic takes hold. At first, you just shut down your browsers and walk away and seek a bit of light relief.

It's as if you are in a parallel universe. In the false world outside your head, all is well; everyone's celebrating their good times, your wife and family are enjoying the fruits of your success.

in your private world of mental turmoil, there is only a gnawing fear.

You realise you are going to lose your job and everything that goes with it.

You are going to lose the respect of your family. You're probably facing time in jail.

You are juggling two totally opposite worlds, trying to keep the positive things alive.

Drink often becomes a way to escape, although not in my case.

A marriage ought to bring you back to reality. But the danger is that your wife is too heavily committed to the success story and the enjoyment of all its trappings.

How can you break it to your partner - and your kids if you have them - that the car's going to be returned, the house is going to be repossessed and that your name will be a byword for failure around the world?

You don't want to let them down - which makes it harder to face up to the truth and stop trading.

Fortunately, I didn't have kids at the time, but I lost my wife.

I have since remarried and I'm grateful that my children grew up knowing the real me rather than the newspaper and film image.

One of the problems with success is that it creates a feeling of unthinking omnipotence.

Not only have you made millions for your bank and earned the admiration of your peers on the trading desk but you have also beaten hundreds of the smartest financial brains on the planet.

But at the back of everyone's mind who works the financial markets is an unspoken fear of failure.

Indeed, there are plenty of traders who go on to the trading floor after smoking cannabis to calm themselves down.

Equally, the bank bosses never want to talk about risk systems or how they might avoid mistakes and save money.

They simply want to know how traders are going to make more millions.

A bank's trading desk is like a tribe - the smartest and most powerful tribe in the financial house's building.

A perfect example of this sense of teamwork was the case of John Rusnak, a trader with a U.S. subsidiary of Allied Irish Banks who placed large oneway bets that the yen would rise against the dollar and lost £345million.

At the time, everyone bought into his success story and failed to spot the danger signs.

But the tribal loyalties are very frail. When in trouble, you cannot turn to someone close to you in the office for support.

At the height of my losses while working for Barings, I remember coming back from Singapore to England and having a family dinner.

No one knew what was going on at that point. I kept sneaking away to be sick out of pure fear.

Telling my family the truth, I thought, would be far worse than returning to face the markets.

Although I eventually fled to Malaysia, Thailand and finally to Germany, I had still never admitted to anyone by the time I got off a plane at Frankfurt airport what I'd done.

I never even told my wife, Lisa. Everyone had to read the truth in the newspapers.

This latest loss of £3.5billion is an awful lot of trouble to get yourself into. I do not believe that the losses were racked up over a short period. It took me three years.

I also don't believe that no one knew that it was going on. For the bank to ignore that degree of exposure stretches credibility.

For me, I took 100 per cent of the blame for what happened at Barings. I knew what I was doing and I realised that I shouldn't be doing it.

Traders are highly intelligent people and anyone who makes a mistake and claims they didn't know what they were doing is not being honest.

Of course I didn't know how catastrophic my actions would be for Barings and that I would destroy the bank.

It was simply a case that the losses that I had incurred got so big that it was impossible to unwind.

It took me a long time to return to normal, to look at people I respected in the eye.

For years I avoided looking at stories about firms losing large sums of money - I just couldn't bear being reminded of the horror I'd been through.

Only now I can look back and try to understand what happened. It will, I predict, be a long time before Kerviel will be able to do the same.

In February of 1995, one man single-handedly bankrupted the bank that financed the Napoleonic Wars, Louisiana Purchase and the Erie Canal. Founded in 1762, Barings Bank was Britain’s oldest merchant bank and Queen Elizabeth’s personal bank. Once a behemoth in the banking industry, Barings was brought to its knees by a rogue trader in a Singapore office. The trader, Nick Leeson, was employed by Barings to profit from low risk arbitrage opportunities between derivatives contracts on the Singapore Mercantile Exchange and Japan’s Osaka Exchange. A scandal ensued when Leeson left a $1.4 billion hole in Barings’ balance sheet due to his unauthorized derivatives speculation, causing the 233-year-old bank’s demise.

Nick Leeson grew up in London’s Watford suburb, and worked for Morgan Stanley after graduating university. Shortly after, Leeson joined Barings and was transferred to Jakarta, Indonesia to sort through back-office mess involving £100 million of share certificates. Nick Leeson enhanced his reputation within Barings when he successfully rectified the situation in 10 months (Risk Glossary).

In 1992, after his initial success, Nick Leeson was transferred to Barings Securities in Singapore and was promoted to general manager, with the authority to hire traders and back office staff. Leeson’s experience with trading was limited, but he took an exam that qualified him to trade on the Singapore Mercantile Exchange (SIMEX) alongside his traders. According to Risk Glossary:

"Leeson and his traders had authority to perform two types of trading:

1. Transacting futures and options orders for clients or for other firms within the Barings organization, and

2. Arbitraging price differences between Nikkei futures traded on the SIMEX and Japan's Osaka exchange.

Arbitrage is an inherently low risk strategy and was intended for Leeson and his team to garner a series of small profits, rather than spectacular gains."

As a general manager, Nick Leeson oversaw both trading and back office functions, eliminating the necessary checks and balances usually found within trading organizations. In addition, Barings’ senior management came from a merchant banking background, causing them to underestimate the risks involved with trading, while not providing any individual who was directly responsible for monitoring Leeson’s trading activities (eRisk). Aided by his lack of supervision, the 28-year-old Nick Leeson promptly started unauthorized speculation in futures on Nikkei 225 stock index and Japanese government bonds (Risk Glossary). These trades were outright trades, or directional bets on a market. This highly leveraged strategy can provide fantastic gains or utterly devastating losses; a stark contrast to the relatively conservative arbitrage that Barings had intended for Leeson.

Nick Leeson opened a secret trading account numbered 88888 to facilitate his furtive trading. Risk Glossary says of Leeson:

He lost money from the beginning. Increasing his bets only made him lose more money. By the end of 1992, the 88888 account was under water by about GBP 2MM. A year later, this had mushroomed to GBP 23MM. By the end of 1994, Leeson's 88888 account had lost a total of GBP 208MM. Barings management remained blithely unaware.

As a trader, Leeson had extremely bad luck. By mid February 1995, he had accumulated an enormous position—half the open interest in the Nikkei future and 85% of the open interest in the JGB [Japanese Government Bond] future. The market was aware of this and probably traded against him. Prior to 1995, however, he just made consistently bad bets. The fact that he was so unlucky shouldn't be too much of a surprise. If he hadn't been so misfortunate, we probably wouldn't have ever heard of him.

Betting on the recovery of the Japanese stock market, Nick Leeson suffered monumental losses as the market continued its descent. In January 1995, a powerful earthquake shook Japan, dropping the Nikkei 1000 points while pulling Barings even further into the red. As an inexperienced trader, Leeson frantically purchased even more Nikkei futures contracts in hopes to gain back the money already lost. The most successful traders, however, are quick to admit their mistakes and cut losses.

Surprisingly, Nick Leeson effectively managed to avert suspicion from senior management through his sly use of account number 88888 for hiding losses, while he posted profits in other trading accounts. In 1994, Leeson fabricated £28.55 million in false profits, securing his reputation as a star trader and gaining bonuses for Barings’ employees (Risk Glossary). Despite the staggering secret losses, Leeson lived the life of a high roller, complete with his $9,000 per month apartment and earning a bonus of £130,000 on his salary of £50,000, according to “How Leeson Broke the Bank.”

The horrific losses accrued by Nick Leeson were due to his financial gambling, as he placed his trades based upon his emotions rather than by taking calculated risks. After the collapse of Barings, a worldwide outrage ensued, decrying the use of derivatives. The truth, however, is that derivatives are only as dangerous as the hands they are placed in. In this case, Nick Leeson was reckless and dishonest. Derivatives can be tremendously useful if used for hedging and controlling risk or even careful trading.

After a series of lies, cover ups and falsified documents, Leeson and his wife fled Singapore for Kuala Lumpur, Malaysia. By then, Barings’ senior management had discovered Nick Leeson’s elaborate scheme. The total damage suffered by Barings was £827 million, or $1.4 billion. In February 1995, England’s oldest, most established bank was unable to meet SIMEX’s margin call, and was declared bankrupt. Leeson and his wife were arrested in Frankfurt, Germany on March 3 rd , 1995. That same day, the Dutch bank, ING, purchased Barings for a mere £1 and assumed all of its liabilities (eRisk).

Nick Leeson was placed on trial in Singapore and was convicted of fraud. He was sentenced to six and a half years in a Singaporean prison, where he contracted cancer (Risk Glossary). He survived his cancer, and while imprisoned, wrote an autobiography called “Rogue Trader”, detailing his role in the Barings scandal. “Rogue Trader” was eventually made into a movie of the same name. Nick Leeson