Yet instead of the usual talk of entire countries withdrawing from the euro, we are increasingly faced with the prospect of individual countries splintering along regional lines. Consider the following:

• Leaders sign agreement on Scottish independent vote
• Belgian separatists advancing toward independence
• Spanish crisis revives call for catalan secession
• The return of the glorious Venetian republic?

One notable region is missing from this list: Bavaria. We have yet to hear widespread separatist cries from Germany’s richest region, despite its role in Germany’s internal transfer union and its growing dissatisfaction with the country’s role in the eurozone crisis. From the New York Times:

Bavaria is the victim of what Mr. Scharnagl [the author of “Bavaria Can Also Go It Alone”] calls “a double transfer union.” Long before they began bailing out Greeks, Portuguese and Irish, the Bavarians were bailing out the weaker states of their own country. As Germany is to Europe, Bavaria is to Germany: richer, more competitive and reluctant to keep footing the bill for the laggards.

Of Germany’s 16 states, only 4 make the adjustment payments intended to equalize living conditions in the country. Bavaria last year transferred nearly $3.66 billion, about equal to the total of the other three net contributors, Hessen, Baden-Württemberg and Hamburg. Often Bavaria charges its residents for services — parents for kindergarten, students for university — that some states receiving its largess offer free.

Given the decades-long partition of Germany and its relatively recent reunification, it would be quite surprising if a Bavarian separatist movement really took off. However, do keep an eye on the steady drumbeat of separatist sentiment coming from other European quarters.

While small investors often focus on stocks, professional asset managers, e.g. pension funds and insurance companies, are big on corporate bonds. This is especially true in an environment of historically low interest rates, where investments that offer extra yield are highly prized. For a long time these buyside asset managers have used banks as the middlemen to help them locate buyers and sellers of the bonds. To facilitate the trades banks would keep an inventory of bonds on hand. This served the sellers by allowing them to free up their funds without having to wait for a buyer to show up, as well as buyers who had a convenient one-stop shop for any bonds they might want to own.

And then the financial crisis happened. New rules passed in its wake are meant to ensure that banks never run out of capital or need taxpayer bailouts again. However these rules have also made it much more expensive for banks to “warehouse” the corporate bonds as they used to. At the same time, powerful computing and networked connectivity have given some nonbank institutions a real shot at the lucrative business of matching buyers and sellers. Tracy Alloway of the Financial Times explains:

BlackRock [a premiere asset manager-for-hire] is hoping to plug some of the gap left by retreating banks with a new electronic trading platform for corporate bonds known as the “Aladdin Trading Network”. The system will allow buyers and sellers of such debt, including buyside groups, to trade directly with each other instead of going through a bank.

Spotting an opportunity is one thing, having a realistic chance to exploit it is something else again. BlackRock has a few advantages that the average startup does not, including  its stellar reputation and its already existing relationships with precisely the sort of firms who might want to use the new trading network. Still, technology is the ultimate enabler for its new venture. A harsher regulatory environment that envelops the banks but mainly leaves the non-banks on the sidelines helps as well.

But look at what’s happened since then:

• Spain’s Protesters Encircle Parliament
• Portugal Finally Stands Up and Protests
• Greek State Tries to Stem neo-Nazi rise
  

The markets’ relief is apparently not shared by the people in the countries directly affected. How will the leaders of these countries be able to push through more austerity measures in the face of these political developments? Europe is a long way from being solved.

The buyers of the nine full-floor apartments near the top [of One57] that have sold so far — among them two duplexes under contract for more than $90 million each — are all billionaires, Gary Barnett, the president of the Extell Development Company, the building’s developer, said this week. The other seven apartments ranged in price from $45 million to $50 million.

Further

since late last year, the “trophy” end of New York’s real estate market has been recording eye-popping sales that seem to have little basis in reality.

(Thank you, Ben Bernanke.)

Actually, it seems like pricey real estate is popping up all over the place. In fact, compared to some other places, One57 looks more like a hillside shantytown. For there are three other locations in the running for the title of the Most Valuable Land on Earth.

1. The “secret” Russian diamond field

One never knows with Vladimir Putin, but Russia now claims to have a vast, asteroid-created diamond field of a “trillion” carats. They’ve known about it since the seventies but kept silent until now. Supposedly the “Popigai crypto-explosion structure” has enough diamonds in it to supply the world for 3,000 years. The Christian Science Monitor reports

the  type of stones at Popigai are known as “impact diamonds,” which theoretically result when something like a meteor plows into a graphite deposit at high velocity.

(How I’d love to see a gif of that.)

What are the gemstones worth? Is DeBeers quaking in its boots? Not exactly. The diamonds are not thought to be fit for jewelry; they’re more likely to be put to industrial uses. However Russian scientists say that these impact diamonds are of higher than usual quality, because they’re especially abrasive and have larger grains. Also, they might be from outer space

The Russians say most such diamonds found in the past have  been “space diamonds” of extraterrestrial origin found in meteor craters.

2. Senkaku / Diaoyou / Senkaku / Diaoyou / Senkaku / Diaoyou ∞

Don’t look now but China and Japan look perilously close to getting into a fistfight over these disputed islands. Joking aside, all is not well in the East China Sea. Diaoyou to China, Senkaku to Japan, these uninhabited rocks have been the cause of a decades long dispute between the two nations. After several tit-for-tat encroachments by both sides, the Japanese government recently took the bold move of buying some of the islands from the Japanese family that ostensibly had title to them.

The Chinese were not amused. Business Insider reports that protests against Japanese targets have spread to 85 Chinese cities, and their strength and vitriol is actually now starting to alarm the Chinese government, itself. China need not shout itself hoarse, it has plenty of business and economic screws in Japan to tighten. Yet neither country has shied away from agressive actions and reactions in the past.

Why do they even care? Partly because of the history of Japanese atrocities in 20th century. Also partly because countries just like to prove that they are right. However, much of the dispute is also probably due to the suspected reserves of natural gas and fossil fuels that are thought to be nearby. If China and Japan end up warring over the islands, there will be untold consequences for the world economy and some of its powers (like Japan’s ally, the United States.)

3. The Arctic

It’s melting. Scientists think that it has reached a new, record-breaking lowpoint for the summer. This is now the 6th summer in a row that records for the amount of ice cover have been broken. The arctic, as we know it, seems to be going away for good, traded in for shorter sea routes and unexplored mineral riches. Settle in for a long ride as the nations near the Arctic Circle, i.e. US, Russia, Canada, Denmark and their corporate champions jockey to lay claim. This might end up being like the colonization of the Americas and the scramble for Africa all tied up in one.

The Wall Street Journal reports on Hoenig’s objections to new international banking regulations known as Basel III:

In June, U.S. regulators in published draft capital requirements to comply with the Basel III standards. While bankers have been up in arms about the proposal, arguing that it will harm the economy, Mr. Hoenig argues that the rules should be rejected because they are too complex and rely on models that are subjective.

Bankers “will delegate the task of compliance to technical experts, and the most brazen and connected banks with the smartest experts will game the system,” he said. The rules use “highly arcane formulas, suggesting more insight and accuracy than can possibly be achieved.”

Here’s why Hoenig might be right.

Basel III, and its precursors Basel II and Basel I, were created by the Basel Committee on Banking Supervision. This is a Switzerland-based regulatory body that was established in 1974 by the central bank governors of 10 major nations. It has no formal treaty assuring its existence, nor does it issue binding regulation. It’s actually just an informal forum. Yet it’s also one of the world’s most credible multilateral institutions because it has largely succeeded in creating a set of common regulations that’s now applied to banks all around the world.

Hoenig is critical because Basel II and III have allowed the largest and most sophisticated banks to use their own computer models to determine how risky their assets are, and therefore how much capital they must keep on hand to cover unexpected losses. This is like allowing each driver to use his own model to calculate what a “mile” is when trying to keep to the speed limit. Sure, the models would have to be approved by each country’s banking regulator before they can be used. Yet this might still allow for an unacceptable amount of latitude — especially given the bank-induced trauma from which the global economy is still recovering. Rest assured — the largest, most well-funded banks will choose a model that lets them escape with holding as little capital as possible. While the underfunded and overwhelmed regulators will, as usual, remain several steps behind.

Mr. Hoenig said the Basel rules should be replaced with a more simple formula of the ratio of “tangible equity” to “tangible assets.” This would measure a bank’s equity without goodwill, tax assets or other accounting entries. Tangible assets include a bank’s assets minus intangibles.

Mr. Hoenig’s measurement, unlike the Basel rules, wouldn’t rely on banks to measure the riskiness of their assets.

“This simpler but fundamentally stronger measure reflects in clear terms the losses that a bank can absorb before it fails and regardless of how risks shift,” Mr. Hoenig said.

Listen to the man.

China has given the green light for 60 infrastructure projects worth more than $150 billion [...] Shares and steel futures contract prices jumped on the plans to build highways, ports and airport runways which are among the most ambitious unveiled in China this year.

This is a departure from script. Before now China was more concerned with re-shaping its economy to focus less on infrastructure investment and more on getting its citizens to become consumers in the Western mold. After all, its size notwithstanding, how many airports does one country need?  Barry Eichengreen explains:

Restructuring meant redirecting Chinese output from foreign to domestic markets, which implied a change in the product mix, given differences in Chinese and foreign spending patterns.  Restructuring meant rebalancing domestic spending from investment to consumption. The investment rate would be lowered from a stratospheric 50 percent, given that no economy can productively invest such a large share of its national income for any length of time. There would be no more construction of ghost towns and no more bullet trains running off the rails, in other words. As wages rose, the share of consumption would be allowed to rise from 1/3 of GDP toward the 2/3 that is the international norm. Bank balance sheets would be strengthened by holding financial institutions to stricter reserve requirements and higher lending standards. The result was to be a better balanced, more stable, and less financially vulnerable Chinese economy.

Now it looks like these plans will be put on hold. Why, exactly? Perhaps China’s politicians are being extra careful to not upset the applecart in advance of its once-in-a-decade leadership transition. Political stability is being bought at any cost and heavy infrastructure investments will put labor-intensive industries back to work and keep bread on the table of vulnerable, low-skilled workers.

Isn’t this precisely what a government should do when faced with a slowdown — implement policy that will help protect the most vulnerable? Yes. But. The very best policy would see investments made in projects that provide actual, long-term benefit. That means concentrating projects in population areas that have the greatest economic viability, or making sure that what’s constructed today is free from defect and built to last. China’s record on these metrics is questionable, at best.

The first is the return of Myanmar, or Burma, to polite society. It’s hard to believe now, but there was once a time when everyone thought that Burma would be the next economic powerhouse in Southeast Asia. Kyle Brown of Global Edge reminds us why:

The nation is rich in many natural resources, including rare minerals, timber, and agricultural products. It also has one of the world’s largest natural gas reserves. With ports on the Indian Ocean and Andaman Sea, and a geographic position between India and China; Burma is very well positioned for international trade. As Maung Zarni, of the Burma and Myanmar Research Initiative at the London School of Economics, says, “Burma is basically the backdoor to the Chinese and Indian Markets and economies”. This holds very true, as most of the country’s trade comes from Thailand, Singapore, India, and China.

Then in 1962 the military overthrew a government that had only won independence from Britain in 1948. The military has been in power ever since. After the coup Myanmar entered a long pariah period, marked by its multi-decade persecution of Nobel Peace Prize winner Aung San Suu Kyi.

Now Burma’s government (in which the military continues to call the shots) is trying to rehabilitate itself on the world stage. It’s succeeding, as marked by Hillary Clinton’s recent visit there and her announcement that travel and financial sanctions would be relaxed. For large, international financial institutions this diplomatic manoeuvre was akin to a green flag being waved at the start of an F1 race. As the Wall Street Journal reports in Card Giants Lead Rust to Myanmar:

…international financial firms are lining up to get back into Myanmar, which has become arguably the world’s sexiest new frontier market. Standard Chartered PLC, Citigroup Inc., Australia & New Zealand Banking Group Ltd. and a host of other Western and Japanese financial firms have expressed interest in Myanmar. The potential prize is access to one of the world’s last undeveloped financial markets, with some 60 million residents, of whom only one million use banking services after decades of living under an oppressive regime. Millions more Myanmar citizens live overseas, creating a potentially giant remittances trade. And there are opportunities to serve multinational firms as they return to the country and set up offices or factories.

It remains to be seen how the government of Myanmar will handle the country’s sudden popularity. Will it throw the doors wide open or will it give local bank institutions time to catch up before forcing them to compete with the big boys? However it proceeds, providing the people of Myanmar with wider access to financial services is a positive development. Unfortunately, a second growth area for international banks is not an indisputable net good for the rest of us.

Commodities prices have been rising over the past months, especially for soft commodities like corn and soybeans. The root cause is unfavorable weather, with one of the most salient examples being the drought that has covered the majority of US farmland this summer and has given rise to comparisons with the disastrous Dust Bowl of the prior century. This price action has resulted in more interest in the sector on the part of investors and speculators. It also translates into an area of lucrative promise for large banks like Citigroup, which has just announced its intention to scale up in commodities-focused businesses. From Reuters:

U.S. bank Citigroup has launched a commodity trade finance unit, expanding into a sector once dominated by European lenders who have been shrinking their activities to cope with the euro zone debt crisis.

Banks make money by taking calculated bets on the future. Right now they are telling us that a) the future for Myanmar might be bright, indeed. And b) that the third spike in international food crises in five years still has plenty of room to run.

The first thing one notes is that none of the new four have ever worked for a bank. Until her retirement in 2010 Sharon Allen was the first independent chair of the board at Big 4 accounting firm Deloitte LLP. Of course, Deloitte does have many banks as its clients. After all, it was the auditor that gave Standard Chartered the all clear as the bank went on to process at least a quarter of a trillion in illegal transactions with Iranian entities. Francine McKenna describes Deloitte’s role as noted in the damning report from the New York Department of Financial Services:

As a “service provider” Deloitte apparently aided and abetted the bank’s continued illegal activities by sharing confidential information about other clients’ similar illegal activities and “watering down” reports to the regulators.

This happened in 2005, during Allen’s tenure.

The other new board members have considerably less experience with banks. They do, however, hail from industries whose fortunes are closely tied to the federal government’s budget priorities. Jack Bovender is the former CEO of the Hospital Corporation of America (HCA). R. David Yost headed AmerisourceBergen, a large pharmaceutical distributor. Finally, Linda Hudson is the current CEO of BAE Systems, which is the world’s second-largest defense contractor. We can assume that all three have experience in running a business while keeping close tabs on which way the political winds were blowing. How serious are the perpetual calls to drive down healthcare costs? Will budget sequestration go through and how would that affect the government’s defense spending? You can bet that some amount of lobbying has played a role in each of these companies’ business strategies. (See this for example.) This experience will surely help Bank of America as it continues to operate in a highly politicized environment and tries to fend off efforts to better regulate it and its Too Big to Fail brethren.

New rules implemented under Dodd-Frank will now require “private funds”, i.e. hedge funds, private equity funds and liquidity funds  to report their most intimate details to the SEC. They will do so using a 42-page form PF. Small investment advisers will have to report annually, large ones will have to dish the goods on a quarterly basis. BusinessWeek describes some of the info that Form PF requires:

Among the queries: What are your long and short positions on corporate bonds issued by financial institutions? How about credit-default swaps, both single-name and exotic? Crude oil? Gold? What is the geographical breakdown of your investments? Who do you trade with? If investors wanted to, how quickly could they remove their money? There is even space for firms to add detail and explanation to their answers. 

Wow, what a great idea. Not.

Of course, the regulators mean well. Having all of this information sounds great, in theory. However, what are regulators actually going to do with all of this data? How are they going to the information off the forms and into a format that’s actually useful? What will be their process for analyzing it? What methods will they use to compare data across firms? How are they going to draw any useful conclusions that will allow them to spot and nip a problem in the bud, as opposed to waiting until after it has blown up? In other words, what’s the plan?

Consider some recent history that should give pause.

The London Whale made big waves when a series of gigantic, risky derivatives trades blew up earlier this year and cost JPMorgan Chase over $5.8 billion in losses. The question on everyone’s lips (including mine) was, “How on earth could Jamie Dimon not know what was going on?” Yet Lisa Pollack of FT Alphaville pointed out that regulators had access to data that, had they looked at it, would have shown very clearly that something fishy was going on:

The question going on around and around our heads is: how does the regulator miss a bank seemingly corner a market? If not the OCC, then why not another regulator even?

Here’s one of the graphs Pollack refers to, with more commentary:

We told you this could have been spotted. More bluntly: when risk on a single credit derivative index doubles like this in a relatively short period of time, does it maybe make sense to log into the regulatory portal of DTCC [the world's largest securities clearance and settlement organization] to see if the exposure is overly concentrated in a single bank? Hmmm?

Regulators already have access to a wealth of raw data, not to mention the occasional on-a-silver-platter whistleblower packages from the likes of Harry Markopoulos. Time and again we’ve seen that the regulators don’t know what to do with the reams of data they already have. So what’s the point of giving them more with Dodd-Frank’s Form PF? This may be worse than doing nothing, for it lulls us into a false sense of security.

It’s time to get serious about regulating our out-of-control financial system, and that means rethinking it entirely, not piling more data on top of the same broken oversight structure. What do you think about Form PF?

Belize is insisting that creditors forgive 45% of what they are owed, or allow it to delay any debt payments for 15 years. Otherwise, it says it won’t make its next payment of $23.1 million due on Monday. And if Belize and its bondholders don’t reach a deal by Sept. 19, the country will default on its $543.8 million in outstanding debt—making it the first sovereign default since Greece forced creditors to take a 53.5% loss in March.

Like a callous teenager, Belize didn’t even bother to call. The bondholders’ butthurt is palpable.

Creditors say Belize didn’t tell them directly that it planned to skip a payment. The country simply posted its intention on the Central Bank of Belize’s website.

Here’s an excerpt from that Central Bank press release.

“The Step-Up Bond alone represents approximately one-half of Belize’s total recorded public indebtedness”, said Dean Barrow, Prime Minister of Belize and Minister of Finance and Economic Development. “The annual interest rate on this bond stepped up earlier this year to 8.5%. We simply cannot afford this coupon payment given the financing shortfalls and other challenges we face. Our hope, however, is that we can move quickly toward a sensible restructuring of the instrument.”

As Barrow alludes to, the annual interest on the SuperBond is set to increase from the 4.25% rate that the country has been paying since 2007 to an 8.5% rate that is set to kick in with this month’s payment.

Here’s what the Belize Chamber of Commerce and Industry had to say about the decision to play hardball:

In relation to the current debt restructuring of the “Super Bond”, the Belize Chamber of Commerce and Industry (BCCI) believes that, without exception, debts must be paid and that we must be financially responsible citizens. However, where the economic viability of our country is at stake, the terms of repayment should not be so onerous as to strangle or deter the country’s economic growth.  It is in this vein that the BCCI, in principle, supports the renegotiation of the bond with the goal of making debt repayment more manageable. Our debt burden must be restructured so that it is sustainable in the long term thereby enabling Belize to honor its financial obligations without further damage to the economy.

First Greece, now perhaps Belize. It seems that sovereign debtors are finally waking up to the full implications of what it means to be, well, sovereign.