FINANCIAL WIZARDS DIG FOR PROFITS

WATER SHORTAGES MAY BE GREAT BUSINESS FOR BANKS?
I found an interesting article today in Bloomberg about why the world should care about China's water problems.  Unlike what I first thought when glancing at the title, the author doesn't suggest that China will attack neighbors for their water rights or anything close to this.  The article's author suggests that some financial alchemy would be the prescription for solving the world's water problems.

http://www.bloomberg.com/news/2011-07-06/why-we-care-about-the-price-of-water-in-china-peter-orszag.html

I won't go into depth into what Peter Orszag highlights as reasons for the water issues, but they are the same ones we hear about China all the time.  They have polluted everything, including their water supply.  They are using all energy sources and burning them takes a bunch of water.  Oh yes, there is also a terrible drought as well.  All of these things are reasons that the world should assist China in fixing their situation.

WHAT TYPE OF HELP SHOULD THE WORLD PROVIDE?
1)  You knew it would be long to find that if the "global village" was going to get involved that the first answer had to be that we need to fix CLIMATE CHANGE!  I mean it is simply stunning that in one sentence Orszag links that we need to reduce water pollution and then somehow jumps to the notion that we must address climate change.  Can it be that simple?  What specifically does global warming have to do with polluting streams, rivers, and aquifers?  Are we heading somewhere?  Does this sound familiar?

2)  The second recommendation is one that seems reasonable.  We should provide more potable water.  I get this and I'm for it.  Let's get more desalinization plants and cook up some drinkable water.  No argument here.

3)  Finally, we get to the meat of the posting.  We need to let the "market" begin pricing water to effectively manage usage of supplies.  Here is the quote;

"Water is Earth’s most valuable commodity, and yet in most countries it is given away free -- as if it had no value at all.

If China moved more aggressively to price water in a manner that reflected demand and supply, it could teach the U.S. a lesson in using market economics to address environmental issues. As a colleague of mine at Citigroup Inc., the analyst Deane Dray, has written, “water has never been priced efficiently.” In the U.S., water is generally heavily subsidized, and prices aren’t adequately linked to usage levels.
Just as we need to price carbon in order to avoid a climate crisis, we need to price water to avoid a water crisis. Market forces can work wonders for the environment, but only if we have the political courage to create them. "

THE REAL AGENDA
Here is the takeaway from all of this nonsense.  Peter Orszag is a Vice Chairman of Global Banking at Citibank and also a former official in the Obama Administration.  Mr. Orszag probably has several main goals here, so I'll assume his motivations fall into just a few camps.

First, market based pricing for a necessary commodity like water would be a great place for a bank like Citi and JPM to completely dominate.  That is all we need is another situation where banks hold and trade valuable commodities (like oil) rather than provide lending services.  (What business are they in again?)  As a Vice Chairman, I can guess that he's in the business of business development.  Is there any doubt this is the angle he's playing here?

Second, this all comes back to Orszag as an excuse to wage war on Global Warming, errr, I mean Climate Change.  Actually a better word for this would be a market mechanism for pricing carbon emmissions throught the creation of related credits based on the fiction of climate changes due to man.

Last, as a former senior administration official, I suspect that Mr. Orszag would identify himself as a senior believer in the Global Village concept where we collectively should jump in and solve all of the problems in the world without concern for national sovereignty.  I'm not so sure China is quite so open to the UN's type of help and doubt seriously that they would comply with any rules related to water pricing or carbon trading at all.  So if China doesn't participate could we really be looking to get into pricing of water here in the USA as well?

WHEN FINANCIAL WIZARDS GET COOKING THEY MAKE A MESS
As a Financial Analyst at a large firm many years ago I was a financial wizard.  My firm had many offices throughout the world and as each location became connected over the years, communication and connectivity costs grew significantly.  In my younger days managing corporate spending I led a team that intended to allocate and charge out these costs because the parent company was subsidizing all of the expenses and we needed to look more profitable at the core business. 

With an enthusiasm that is unmatched in the finance world I created an amazing soup of allocations and charges to all of the global offices for everything from executive leadership to T-1 lines and GWANs (Global Wide Area Networks ---- big, big, Internet pipes!).  The executive team and board bought my allocation strategy and I looked great and on paper, our corporate offices gained $15 to $22 million a year simply by waving a wand in front of an excel spreadsheet. 

Clearly the home office saw me as a hero and the global offices saw me as a.....goat.  What really happened was that the entire scheme was a bunch of garbage.  The company didn't make any more money than it did previously, and you had about 10 global local CFOs that were angry every single month when we reviewed these communication and technology related charge outs.

My wizardry added absolutely no value to the bottom line, but some executives in the home office looked much better.  Perhaps I made them more bonus money at the expense of some to those in other locations?  When an excel guru starts trying to price your IT costs or your carbon credits or your water, you must recognize that you are not going to benefit one bit.  Things will get very complicated and someone might earn a bonus, but it isn't going to make much difference in the long run.

GOATMUG 

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/