Russia Wants Syria to Join Chemical Weapons Convention

Logo of the Organisation for the
Prohibition of Chemical Weapons in
the Hague, the Netherlands.

As a possible outcome of President Obama's meeting with President Putin of Russia, Russia is proposing a UN draft declaration backing an initiative to put Syrian chemical weapons under international control.

France is independently seeking a UN response under Chapter VII of the UN Charter.

But Russian Foreign Minister Sergey Lavrov has said the initial French draft resolution is "unacceptable" because it simply holds the Syrian government responsible for the use of chemical weapons.

Obama, according to the NY Times, is prepared to pursue control of chemical weapons in Syria by working through the UN.

Besides Obama - for whom the Russian proposal provides a face-saving alternative to a military strike - French President Francois Hollande and British Prime Minister David Cameron have said they will review the Russian proposal seriously.

The UN Security Council is scheduled to meet in an emergency session at 4 p.m. to discuss Syrian use of chemical weapons. President Obama will address the nation on Syria this evening at 9 pm Eastern Time - at WH.Gov/Syria.

While little-mentioned in the Mainstream Media so far, Russia appears to want to give the Organisation for the Prohibition of Chemical Weapons (OPCW) more authority, and in particular wants Syria to join in the membership. He also told Russian television today that the United States and its allies should "pledge to renounce the use of force" as world powers work to deal with the Syrian chemical weapons issue. He said:

It is difficult to make any country -- Syria or any other country -- unilaterally disarm if there is military action against it under consideration.

According to Interfax (Russia's news agency), Syria's Foreign Minister Walid Moallem says that it is willing to disclose the location of its chemical weapons, stop producing more of it, and allow inspection by representatives of Russia, the UN, and other unspecified states, according to a report today from Russia's Interfax news agency. Reuters says Syria promises to give up chemical weapons, but there is no deal on the table yet at the UN.

The Ongoing LIBOR Scandal

One way New York City stimulates its residents is with hundreds of educational and cultural events, more in a day than anyone could attend in a year. Today I chose to be educated at a discussion offered by The Zicklin School of Business at Baruch College on the LIBOR scandal, headed "Are They Still Playing Games in London?"

First in the fall 2012 series of the Robert Zicklin Center for Corporate Integrity, the discussion is led  by David Rosenberg, Associate Professor of Law and associate director of the Center. He interviewed Peter Eavis, a business investigative reporter for The New York Times and before that a reporter for  TheStreet.com, Fortune and The Wall Street Journal. He won a Loeb Award for commentary in 2005 for articles spelling out the accounting troubles at Fannie Mae. He was early in spotting problems with Enron's books and he uncovered accounting issues at Conseco, Qwest and Amazon.com.  A British national, Mr. Eavis was born in Canada and graduated from Leeds University in the UK. Here are the highlights of the narrative, delivered mostly by Mr. Eavis:

LIBOR, the London Interbank Offered Rate, is supposed to be the interest rate at which banks lend to one another. Someone calls around in the morning and asks what rate each bank could borrow in different currencies and 15 different maturities, from overnight to 12 months. The "panel banks" are selected by the British Bankers Association. The highest and lowest 25 percent are eliminated and the other 50 percent are averaged by Thomson Reuters.

Trouble is, the loan market dried up in 2007. The concept depends on there being an active market for loans. In 2007, banks began worrying more about their balance sheets and put their money into government bonds instead of riskier loans.

Banks completely stopped lending to one another.  If a bank needed funds, it borrowed from the European Central Bank or the Bank of England. The LIBOR continued to be published, but the numbers were just made up. So what else is new? A lot of indicators are based on surveys that amount to opinions. But it gets worse.

During the banking crisis of 2008, LIBOR was systematically understated. In order to appear more solvent than they were, banks quoted low rates like 1 percent for the 3-month LIBOR whereas in fact they would have to pay a lot more assuming they could get a loan at all.

Reuters journalist Carrick Mollenkamp in April 2008 noted the low-balling problem.  He said it was widely known on Canary Wharf that the LIBOR was fictional. The bank regulators (especially the British financial overseers and the Federal Reserve Bank of NY) started investigation. The low quoted rates gave people confidence that the banks were in better shape than they really were. This bought some time and is the positive side of what happened. Some argue that this was like moving the lines of the football field - it was still a fair game. But people made decisions relying on information that many other players knew was false. And it gets worse.

A much worse problem is that traders were influencing the LIBOR estimates to make profits. The U.S. Commodities Futures Trading Commission suspected something was amiss and demanded an investigation by Barclays. Complying fully with the request, Barclays provided emails of traders talking with one another about modifying the LIBOR to help interest-linked derivatives (options, swaps, futures) make a profit when they came due. When the Barclays report was released it caused a firestorm in the UK. Barclays paid a $450 million fine and senior managers were forced out.

How was corporate integrity compromised so broadly? "Everyone was doing it." (Rosenberg)
"Small differences in rates, no one seemed to be hurt." (Eavis) But others ask: "Why has no one gone to jail?" (Eavis)

Some "very strange" outcomes and messages.
1. LIBOR continues to be published. A commission to replace it hasn't done it yet.
2. The major message for traders - use the phone, not emails. 
3. Another message - maybe don't comply with data requests so energetically. On the other hand, Barclays might have been treated even more harshly if they had not been cooperative.
4. Some feel the crime was victimless, but by creating winners they also created losers. U.S. municipalities are figuring out how they were hurt; in some cases it is obvious and big-time.

What lies ahead.
1. More lawsuits and government action. The NY State Superintendent of Financial Institutions broke from the pack and went after Standard Chartered, sponsor of the Liverpool Football team. He won't be the last.
2. Dodd-Frank requires more transparency. Derivatives will have to be on more transparent platforms.
3. LIBOR will be replaced.

NYC and NY State Fiscal Problems

A Reuters story on Tuesday by Joan Gralla reports that New York City fears return to 1970s. The fear then was that the City couldn't get out from under its heavy load of short-term debt. In fact the City recovered as soon as the economy came back.

The more serious problem today is NY State's fiscal stress. Back in the 1970s NY State was not in such trouble, and it was able to bail the City out in conjunction with support from Sen. Richard Lugar (R-IN) to provide federal guarantees to the pension funds to buy the City's bonds (his help in getting these guarantees has never been properly acknowledged by the City).

Gov. David Paterson is now raising many taxes and cutting aid to local governments. The problems this creates for NYC are tacked on top of the City's own loss of tax revenue and rising requirements from the NYC employee pension funds for money to make up for their losses when an 8 percent annual return has been built into their actuarial assumptions. In addition, the volume of new tax abatements to spur development has contractually reduced the City's ability to raise taxes on some new developments. Gralla says:

While many U.S. cities worry that their economies are deteriorating to the level of the 1930s Great Depression, New York City fears reliving a more recent decade that features strongly in city lore.

But the better comparison is with 1989-1992. Gov. Paterson’s array of tax increases is reminiscent of the 22 forms of NYC tax increases during these recession years. The large number of increases, and the nuisance nature of some of them, were the subject of many news stories at the time.

A major advantage that NYC has over the state today is that property tax revenues are more stable than other taxes during an economic decline because NYC's assessed values are averaged over five years. NYC's property tax revenues continue to rise for a couple of years into a recession even though market values of property are falling. Property owners may sell and move away, but the property continues to be paid by the new owner.

All the taxes can be avoided by moving completely out of NYC. Charles Tiebout introduced the concept of “foot voting” or “voting with feet”. IU would argue that it's more serious when businesses leave town than when individuals arbitrage among residential options based on differences in property taxes.

The two explanations I have heard most widely regarding the exodus of businesses in 1989-1992 are (1) high crime rates and (2) higher taxes on incomes and businesses. It would have been better, in retrospect, to have increased NYC property tax rates more during those years to avoid increasing other taxes and to beef up spending on the police earlier than the City did. NY State doesn't have a property tax to rely on, although I am advised by a former employee of the Assembly Ways and Means Committee that NY State used to have a statewide property tax and there would be no constitutional problem with reintroducing it.