The Buzz

Handheld butler

by Executive Staff
written by Executive Staff

There has been a lot of hype surrounding the Vertu mobile phone, arguably the ultimate in personal communication. The phone also comes with what it calls a Concierge service, an equally exclusive option for those people on the go, who like things planned ahead of time wherever they are in the world. EXECUTIVE wanted to know more and went to Karen Bou Fayad, Vertu’s marketing and public relations manager in Lebanon for the lowdown on one of today’s must haves and its bespoke customer service.

E When did Vertu decide to establish the Concierge service and what was the corporate philosophy behind it?

The idea of establishing the Concierge service came in the earliest phases of the development of Vertu. The whole philosophy of the brand was to create an unforgettable experience to his clients. What makes Vertu so special is the obsessive attention to details and the craftsmanship that is behind each product. Each component was selected in order to make the use of a Vertu phone an unparalleled experience: The scratchproof sapphire crystal screen, the jeweled ruby bearings under each key, the exceptional sound quality, and the hours of work spent in the assembly of a phone, the level of performance, etc. To compliment this experience, Vertu decided to offer his clients the unique Concierge service, an integrated customer experience, where the service is accessed directly from the phone simply and easily by way of a dedicated button on the side of every phone. This is unique to Vertu and is not available on other phones. Neither are other services so instantly and easily accessible.

E Fair enough. How many Concierge users are there in Lebanon? What percentage of Vertu users, both in Lebanon and abroad, have signed up for Concierge?

Concierge is complementary for the first year, but a lot of our clients are so satisfied with the service and find it so useful that they subscribe to it at the end of the first year.

The frequency of usage of the Vertu Concierge can be very different from one client to another. The most frequent requests the lifestyle managers get are information about hotels, restaurants, theaters, concerts, musicals, sports events and so on. Unfortunately, we can’t disclose detailed figures on the percentage and the number of Concierge users.

E How much does Concierge cost and what services are on offer? What is the most used Concierge service?

As mentioned earlier. Concierge is a service that comes with every Vertu phone. The Vertu clients gain access to a dedicated team of lifestyle managers, capable of helping them get the most out of their valuable free time. The service is available 24/7 in English, French, Italian, Russian, Mandarin, Cantonese and German. There are three kinds of service: Support on issues related to Vertu and Vertu products, questions regarding the phones, the distribution, the company, etc. Secondly there is an emergency service in which we can put the client in touch with doctors and organize car repairs and services and lastly there is the Lifestyle service through trips can be organized and restaurants recommended and booked. Concierge can also give shopping advice. All three services are widely used by our clients. The lifestyle service is highly appreciated for the quality of the work and the recommendations of the Concierge managers.

At the end of the first year, clients will continue to be supported on issues relating to Vertu products. Those clients wishing to subscribe to ongoing lifestyle support can do so. There are two levels of service. The standard service, similar to the level of service received during the first year, is available for £650 ($1,140) per annum. Those who wish a more bespoke and personal service can subscribe to VIP service at £3,600 ($6,300) per annum. This includes a personal lifestyle manager who oversees all requests relating to a small group of specific clients

E Can you give us some real life examples of how Concierge is used?

Certainly. A woman recently wanted to arrange a small 21st birthday gathering with friends in Switzerland. Vertu Concierge recommended the perfect location, managed all contact with the venue and even organized drinks, food and a cake for the event. A regular business traveller used Vertu Concierge to arrange a last-minute trip including all flights, car hire, accommodation and a gift to thank his hosts at the end of the trip. The client particularly liked dealing with one person, who had responsibility for all of the arrangements. One Vertu client was head over heels in love with the red pair of shoes of her dreams and had tried in vain to bribe the sales team of a very famous luxury brand store to strike a name from the waiting list and replace it with hers. Even the brand’s customer service couldn’t help. The shopping specialists of the Vertu Concierge knew that those shoes could only be bought at the firm’s own stores, so the selection was limited. They telephoned the entire brand’s stores in the world, negotiated with the sales managers, had the staff of the headquarters rummage through the stock room and finally met with success. A few days later, a courier brought the client’s house the pair of shoes of her dreams.

E Phew! Ok so what is the profile of the Concierge user?

Vertu’s customers are lovers of the most beautiful things in life such as watches, clothes and cars. They want to be surrounded by accessories that fit their personality and lifestyle. Most of our clientele is male. However, some models of Signature and the last Pink and White special editions have shown a very strong response among women. I would say that the profile of the Concierge user is the same than the general profile of Vertu’s clients. They are lovers of the most interesting experiences in life and expect Concierge to answer their needs and compliment their lifestyle. The requests the Concierge will receive are based on the clients tastes and hobbies. The Concierge will be asked to recommend the most select restaurant to the best pub to watch a football match!

E What do you say to those who counter that if you can afford Vertu you don’t need it?

Vertu Concierge is a personal service consisting of a team of specialists dedicated to developing a global database of international suppliers and testing these to ensure they will deliver the best service exclusively to Vertu clients. Their expertise is not limited to a country or a domain.

When a request comes through the team of experts combines his or her expertise with services held within the knowledge bank to deliver solutions in response to the client requests. They have extensive international experience, and an undeniably international outlook. For clients this means the service can be extremely useful, not only at home, but also when they travel. The lifestyle managers try to get to know each of the clients better in order to deliver to them customized personalized recommendations and suggestions that will answer the best their personal needs and tastes. The Concierge users are therefore sure they can receive the best assistance at any time and in any part of the world they are living in or traveling to.

E How many establishments have signed up to be part of the Concierge infrastructure? What does it cost them? In Lebanon which is the sector – hotels, restaurants, car hire etc – that has responded the most to Concierge? How can we measure how much business Concierge has brought to those businesses that have signed up?

No establishment will need to sign up to Concierge to be part of its database and recommendations. As the Concierge service is dedicated to offer the best service to his clients, the lifestyle managers will only recommend the best response to their clients needs. They have an international database and strong relations with key locations and suppliers. Not only will the Concierge service will always try to update his database with the newest and the best locations and services on an international level, he will also take in consideration the clients’ experience and feedback about places or services he recommended to answer other users requests. However, the Concierge may also contact some establishments to organize special offers to his clients. The best example would be the themed offers for the owners of the Pink and White Special Editions phones, such as priority personal and Christmas shopping at Barney’s and Harrods, complementary pink champagne at the Raffles Grill in Singapore, priority booking in the Spas of the Mandarin Oriental in New York and Singapore and the Georges V in Paris and special upgrades in the Ice Hotel in Canada to name a few.

E What is the level of growth in Concierge both in terms of subscribers and those companies signing up to be listed in the service?

Since the creation of the company in 2002, Vertu has witnessed an exceptional level of growth. The Middle East region is very dynamic and I would say that, as a result of this, the number of the Concierge users is also growing in an exponential way.

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Finance

Mena- GCC securitisation General Issues

by Executive Staff
written by Executive Staff

Over the last couple of years the MENA and GCC markets have started to push for more diversity in their financial activities. Securitisation has emerged as a catalyst and is experiencing notable growth that has already materialised in markets like Egypt, Lebanon, Saudi Arabia and the GCC countries. Some specificities related to these markets and major hurdles that have slowed progress, are examined thereafter.

Securitisation has already demonstrated its ability to structure transactions in markets where no specific regulations exist. Most of the countries in the MENA – GCC regions have yet to enact such regulations. Some countries have or are on the verge of enacting regulations. Others have yet to envisage such reforms and remain a challenge for securitisation transactions. Several countries have addressed the securitisation issue in a formal way, like Turkey, Tunisia and Lebanon for instance (which has recently enacted a new securitisation law). It is interesting to mention that the absence of such a precise and predetermined setting has not been a hurdle for securitisation transactions, a number of which has already close in some MENA – GCC countries.

In looking at Saudi Arabia and all other sharia based systems, it can be determined that there are stringent restrictions and uncertainties at many levels. Although transfer of assets or receivables is allowed, some restrictions apply as to the nature of the purchaser. Also, courts apply Shariah law in their decision-making process. Shariah is itself divided into different schools of thought. Although the Hanbali school is dominant in Saudi Arabia, a sitting judge can decide to choose another school of thought and focus exclusively on substance, ignoring what was created in form (a necessity in structured finance). This brings great uncertainty and instability to the cornerstone of a securitisation transaction: the concept of true sale. The possibility of re-qualifying a true sale and of piercing the legal and corporate veil makes any investor very weary of such a risk. Another problem faced in Saudi Arabia and in some other countries in the area are the very strict laws on foreign ownership. These hurdles imply that for transactions in such countries, the best ways to structure a securitisation transaction would be by using a two tier structure with both an SPV in the country of origination (the “Owner SPV”), and one in a foreign country, (“Issuer SPV”), with adaptable legislation (Jersey, Luxembourg…). It is necessary to mention that it is not an option to create an SPV as a subsidiary of the Originator, since it would expose the “Owner SPV” (the “local” one) to consolidation risk and would remain under the control of the originating entity.

In addition to the above mentioned factors there are a number of factors to be considered in any market for securitisation. In the MENA – GCC region these factors are also hurdles at this very early stage of the evolution of regional structured finance. The absence of fixed income capital markets which efficiency is measured by their ability to accurately and transparently reflect a true measurement of risk and return. Simply stated and in a market ignored by the Rating agencies, there is a real problem with information gathering, processing, disseminating and analysing.

In the rare cases where the mentioned handicaps can be overcome, some additional factors come into play. From the investors’ perspective, there is real hesitation to engage in what still seems to be an exotic financial instrument. This is a result of the lack of experience and exposure but also in case of banks, it is the result of fear of competition. Additionally, the stagnation of financial activities has affected the private sector. Companies that otherwise would be viewed as potential clients for a securitisation transaction, are so dependent on traditional banking and on their relation with those banks and would hesitate to jeopardize these relationships for a financing alternative. The choice of securitisation often comes at a moment where a company would have exhausted other alternatives. Beyond the absence of harmonisation of the standards used throughout the region which already makes the data eventually available hard to understand, the implementation of the International Accounting Standards (IAS) raises another problem. These standards (IAS or other) are the result of a lengthy nurture process stemming from back and forth “trial and error” actions on very sophisticated markets. Standards have been put to the test and improved on numerous occasions. They grew in sophistication along with the markets. This is a major difference with MENA – GCC where these standards have been imported in their most refined/sophisticated version. Thus, instead of starting to evolve in a rather flexible market, regional markets have to evolve with complicated accounting standards that developed markets did not experience while growing their business. This puts an additional hurdle for innovative financial instruments.

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Business

Zafer Chaoui

by Executive Staff
written by Executive Staff

Zafer Chaoui was appointed Chairman of the board of Château Ksara in 1991. During his tenure, the country’s oldest winery has gone from lame duck to Lebanon’s market leader both at home and abroad. Although wine is not Chaoui’s only business interest (he is a managing partner of the Chaoui Group of companies, which began life selling paper, board and pulp from Finland in the 30s and which is now a market leader in this field. The group’s other activities include the sales of raw materials to the pharmaceutical, food, feed and detergent industries. Zafer Chaoui is a board member of Banque Libano-Francaise and the honorary consul for Finland), he calls it, “the most beautiful part of my business life.” A businessman who normally prefers to let his results do the talking, he kindly spoke to EXECUTIVE.

E The company is embarking upon a significant expansion over the next four years. Can you outline the changes you envisage for the company and why you felt it was necessary now?

Since 1991, we have gone from a production level of 1 million bottles to a production level of 2 million bottles. This is the optimum we can do today with our current facilities. For the last three years we have sold out of our wines and have had to delay shipments. Our customers have not been happy about this. But before embarking upon any expansion program, we had to make sure that our grape partners, Mrs. Rizk, Mr. Itani and the Jesuits at Tanail, would agree to enlarge the vineyards. All this has been approved and in the coming years production will increase to 2.7 million bottles. I want to stress however, that we are not expanding to sell more but to improve quality and to sell it better locally and abroad.

E Will this gradual move to better quality see a change in pricing strategy and the streamlining of your range?

We have a good range. We will not streamline. On the contrary, we might move into niches like we did with the single varietals, the Chardonnay and Cabernet Sauvignon. We will certainly emphasize on noble grape varieties as much as we can.

E Will the increased production be used to plug gaps where demand currently exceeds demand, like with the Reserve du Couvent?

The reserve is our best seller and I don’t believe you can find a more competitive price to quality ratio anywhere in the world. The château range of wines is our flagship and I would like to see a greater concentration on premium wines. We are quality conscious but we are a company that likes to make money. We make higher margins on the premium wines.

E Lebanon is a very small producer in global terms yet its quality is not in doubt. What should be done among the producers to harness its potential?

The other [Lebanese wine] producers are our competition and healthy competition is key to success. They share our principals of professionalism and honesty and their aggressive ad policy has created greater awareness among the Lebanese population and increased local consumption from 2.5 million ten years ago to 5 million today. That said, consumption is still low by global standards and there is room for improvement. We exhibit together at international fairs because the biggest market for us is the world and as Lebanon’s production is small we can develop a niche market. Our wine sector is now used by the government as an example of a healthy local export, one that can be an ambassador for Lebanon.

E It could be argued that wine is Lebanon’s most high profile export. What are your personal feelings about the promotion of wine by the public sector?

The public sector anywhere in the world is always slower to react than the private sector. In Lebanon, it is probably slower. There is much goodwill when we speak to all the ministries individually but as our interests are spread between three ministries – those of Economy and Trade, Industry and Agriculture – this can sometimes make life difficult. But there is progress. We are working to create the National Wine Institute to make sure our wine meets the required standard and to help export our wine. Furthermore, since export levels have increased, I have noticed a bigger increase in interest from the public sector. You know it is always easy to blame the government but it has helped where it can, especially in facilitating soft loans for Lebanese industry.

E Château Ksara’s biggest export market is Syria. In light of the recent political tensions, how would you describe the commercial relationship between the two countries?

I don’t want to avoid this question. Syria is one of our main export countries. It is a huge country with untapped potential and we can see this just by looking at the many banks that have entered and are still entering the Syrian market. There is little or no wine production in Syria and we have always sold our wine there. Our sales are increasing year after year and have not been affected by any political tension.

E 2007 is the 150th anniversary of the company. How will Château Ksara be celebrating?

First of all, I want to say that I feel I am very lucky to be chairman at this time. We are making a documentary film and producing a book to commemorate the event. We are also hosting a three-day event for our foreign contacts, distributors, the press and private individuals who are close to Ksara. It will entail one full day at Ksara and other events in Lebanon. Then we will hold another event for our local customers, focusing on the tradition and modernity of Ksara.

E The company has come a long way since the early 90s. What would you say has been the main factor in the resurrection of the company’s fortunes?

The main factor has certainly been the investments that have been made in this company in a regular basis, year after year following a strategic plan that that has been fully respected.

E Can you tell us the level of investment?

Let us say that we have invested on average $500,000 every year since 1991.

E When the company decided to embark upon its expansion policy in the early 90s, the local sector was very different than it is today; Ksara was, in a way venturing into the unknown, especially in planting untested vines and buying new equipment in anticipation of greater production. What was your biggest fear during that period?

We were optimistic. You must remember that the war had just ended. We had been let down during the war by a lack of security and had lost out on many opportunities. When the war ended, we looked forward. We had great terroir, we had a strong brand and we had willingness of the board to make Château Ksara exceptional. So our fears were not professional fears. As long as the country was stable, we always knew we would succeed.

E So there were no doubts as to your strategy?

I was confident and everyday since that day my confidence increases.

E What would you say are the company’s strengths?

The name of Château Ksara, one that dates back to 1857, and one that is associated with tradition and quality. Again, I cannot overemphasize the backing of the board that is determined to invest and do the best for the company.

E Château Ksara is one Lebanon’s oldest, possibly the oldest, companies.

It is the second oldest according to the records at the chamber of industry.

E How important is this tradition in your corporate philosophy and how has the company been able to build in this tradition in terms of brand equity and market positioning?

If you want to succeed, you play on all the elements that help you achieve success. We have played on our history and we have exploited our assets, especially the fantastic [ancient Roman] caves. We have emphasized on tradition through our name and the lineage, nobility through our quality and modernity which reflects what we have done since 1991, when we transformed Ksara from an old company to one with the best equipment, best human resources, and aggressive local and international marketing.

E Has your age and your links to the Jesuit brothers ever been a negative factor in your brand positioning?

You have to transform liabilities into assets and the inherent equity in our name and heritage far outweighs any negative connotations. Today we are seen as an old company with a young spirit and this has been, especially borne out in our packaging, our labeling and in our innovative ad campaigns.

E Many of your senior managers have been with the company for many years? What is done to foster human resources development within the company and how has this been translated into performance?

Alot. Really I mean it. We have fantastic middle management with a high level of education. This is a huge asset. Furthermore, we delegate clearly specified business responsibilities as well as regularly send them, lower management, on courses, as often as three times a year, to improve their core performance and expose them to changes, developments and new techniques in the world. This is something I am very proud of. We also operate a bonus system. This makes the staff feel they are partners in the company that they have a stake. The managing director Charles Ghostine and I work hard to create the right atmosphere. People spend a lot of time at work, much more than we do at home and so the key to success is a good environment in all areas of the company. Whoever wants to work and is positive will stay with us for a long time and those who don’t want to work will leave us very quickly. I would like to add that, despite everything in 2005, we achieved better sales than 2004 and this is a huge indicator of our corporate determination.

E Your export manager started in accounting and studied wine making in France before taking up his present role. He is now a respected member of the wine community. This delegation of responsibility is rare in an Arab company, where decision making is still a very much centralized entity.

Yes, he had the chance to study Ksara in all its aspects. He discovered a love for wine and wine making during the war when our French enologist had to leave. He then went to study France and get his diploma. This is very important for an export manager. He knows the product inside out and speaks with authority and, as you say, he is a respected member in the world of wine. However, this is the exception. It is not how we do things. We can’t ask every one of our employees to go and study wine for three years. Ideally, when I look for a sales manger, I would want an aggressive businessman with a strong business degree.

E You have many business interests. You are a pharmaceutical industrialist, a paper manufacturer and a banker. What does Château Ksara mean to you?

Yes I am fortunate to have many biz interests as you say. However, Ksara is the most beautiful part of my business life. It has a touch that does not exist in other businesses and sentimentally speaking it has a special part in my heart

E Where would you like to see Château Ksara ten years from now?

As I mentioned earlier, I hope we will have reached our target for increased production. I don’t believe we can go further than [2.7 million bottles]. We will have reached a satisfactory limit whereby we will have improved quality and strengthened our position in the local and international market.

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Business

Pipe Dream

by Thomas Schellen
written by Thomas Schellen

In the Lebanese economy, trade houses and regional distribution ventures have long resided at the nexus of business success. And while at first it may look unassuming, the import and distribution of plumbing supplies, sanitary wares, heating equipment and tools is a fascinating part of this crucial but underreported economic activity. Georges Khoury & Co is one of the leading players in this particular industry.

Based in Beirut, the enterprise, which employs around 100 staff, supplies locally manufactured as well as imported tiles, pipes, bathroom fixtures and related materials to commercial and individual customers. Founded in 1937, the company’s operation in Lebanon looks back on almost 70 years of action in its sector. For the past three years, the firm has also been running branch operations in Syria and Iraq.

Business in this subsector of the building industry currently is, “slow in distribution and good in projects, and this is symptomatic,” business development manager George Khoury told EXECUTIVE. This situation is symptomatic for the country’s economic mood, he elaborated, in that individual clients of the middle to lower middle income groups hesitate to invest in building new homes or undertaking major renovations whereas larger investors, such as hotel and up-market property developers, show more optimism about Lebanon’s potential.

With warehousing space of some 20,000 square meters between all its locations, Georges Khoury & Co manages an inventory of some 10,000 stock keeping units (SKUs) ranging from items of less than a dollar to luxurious shower cubicles running at $20,000 per unit.

According to Khoury, the company is large in its sector on the Lebanese enterprise scale and a medium to large player in the highly segmented regional building supplies sector. Due to company policy, however, he would not disclose turnover figures or the amounts which the company invested into building its operations in Iraq and Syria.

Politics don’t much impact the business of Georges Khoury & Co but the fortunes of the local economy are likely to reflect directly upon the performance of the company, which achieved good business with major project developments and can show a contract to supply the Four Seasons Hotel on the Beirut waterfront as a recent example.

Being able to win such contracts has a lot to do with having a track record of experience and knowing contractors, consultants and developers in Lebanon and beyond. Having this track record gives Khoury confidence that the firm will be able to tap into the lucrative market for large real estate developments and outright mega-projects that are emerging in Syria.

Gulf boom

Khoury said that working in the reconstruction of Lebanon primed the company to be a strong contender for projects in the Levant that range from hundreds of residential units to entire communities designed from scratch, mostly by Gulf–based developers and financiers. What gives Georges Khoury & Co and other Lebanese firms an additional edge in this new market is the fact that the building materials suppliers and contracting firms in the GCC countries are already highly stretched in handling the construction boom in their home markets, he added.

Besides strong industry contacts, the manager referred to technical knowledge and consistent development of human resources as key factors for success in the sanitary wares and plumbing supplies business, as much as for any modern business today. While they may not always look the part, the humble drain and the average faucet are more than just off-the-shelf components. Selection of appropriate systems even in the budget end of the market influences the long-term performance of a building project, whether individual home or apartment complex, and produces substantial consequences for long-term operating costs and replacement needs.

Regional expansion

On the top end of the market, technical expertise is also a crucial factor in representing manufacturers who measure their products by performance improvements of shower thermostats that respond to water pressure changes three-tenths-of-a-second faster than rival products, and seek to distinguish bathroom technology with names such as “dreamspray” and “silkmove”. The space at the top of the global faucet and bathroom systems manufacture is a hotly contested realm where players seek to woo the competition with innovations such as household water recycling systems that allow for discarded water from your kitchen sink to be re-used in flushing the toilet.

Georges Khoury & Co carries products of around 25 manufacturers, among them three Lebanese brand producers, Lecico, Uniceramic, and Future Pipes. For other suppliers, the company relies on manufacturers from all price ranges and many countries. China, for instance, is not the only good source for low-cost products, Khoury said, pointing to Turkey and Egypt as very competitive regional producers and referring to the latter country comparable to China in terms of labor cost as well as productivity.

Representing such a wide range of suppliers, means that a distributor plays different roles for different corporate partners. High-end manufacturers in Europe run strong marketing and presales departments on their home turf but in a market like the Eastern Mediterranean, the distributor acts as more than a wholesaler, Khoury said, and is a partner in promotion and brand building of the products he carries.

The same may not apply in relations with local manufacturers, which make their own investments into acquiring market share and may view distributors merely as one in a number of equal channels to market. This creates interesting questions on the role of intermediary companies and the value they add in representing international vis-à-vis local brands.

Sitting in a first floor office in the Beirut suburb of Sid al Bouchrieh, George Khoury is a third generation family member in the management of Georges Khoury & Co. He just returned from scouting market and industry developments at a sector trade show in Egypt. His desk is lined with neat miniatures of Dutch houses in a testimony to his admiration for this European country.

Role models

His admiration for the Dutch relates in part to the similarities between Lebanon and the Netherlands, he said, as far as the widespread abilities of both peoples to converse in several languages and their success in trade.

Among business role models, Khoury expressed high esteem for the management of Kuwait’s PWC Logistics company, which transformed itself within a few years from a local to a global enterprise and logistics provider to such picky clients as the Pentagon.

While the business development plans for Georges Khoury & Co are not quite as high-flying, the company appears to be working on reinventing itself, although Khoury would not reveal details. But he is adamant in describing the strengths he sees in the Lebanese, praising the country as a series of micro-economies. “I call the Lebanese market dynamic. It is constantly changing,” he said.

Georges Khoury & Co. still derives the bulk of its turnover from the local market but Khoury anticipates many changes for the sector at large and for the company. “The future is outside [of the country],” he said, but “Lebanon is our strong base for the region, it provides us with our strength, the people that work for the company.”

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Business

Black gold black ops

by Michael Young
written by Michael Young

Why is it that in Hollywood movies, the Middle East is always best understood by characters that are jaded? Watching George Clooney in Stephen Gaghan’s film Syriana, that obligation is again respected. Clooney, who portrays a CIA agent and won an Oscar for his role, shuffles through the scenes comatose with cynicism, burdened by his past manipulations, buffeted, too, by the perfidy of the American government.

It’s fun, but Syriana, like its misleading title (Syria plays no role in the story), is a misleading film. It’s often an inaccurate, anachronistic compilation of tendentious postulations about oil politics in the Middle East, thrown out as complex truth to an unsuspecting audience.

In a nutshell, the main plot involves an American oil company trying to regain oil drilling rights in an unidentified Arab emirate that has just awarded those rights to a higher-bidding Chinese company. The person behind the China deal is the reformist son of the emir, who feels it only natural, given his country’s interests, to hand the contract to the higher bidder. The emir’s other son, however, a lightweight, is used by the American company to invalidate the Chinese contract in its own favor. His reward is to succeed his father. It’s not giving much away to say that the CIA helps ensure this succession, thus benefiting American oil.

Syriana is supposedly based on Robert Baer’s book See No Evil, an account of his days in the CIA. Baer was stationed in Beirut in the mid-1980s, and, since leaving the agency, has made a career as pundit on the Middle East and the intelligence community. In fact, Syriana has very little to do with See No Evil, and far more with Baer’s second book, Sleeping With the Devil, describing how the US, because of oil, has looked the other way on Saudi Arabia’s troubling relationships with militant Islamic groups.

Hypocritical

That theme has nourished a bevy of post-9/11 films and non-specialist books about the Middle East, most prominently Michael Moore’s documentary Fahrenheit 9/11. Most of these efforts are paper thin when it comes to understanding regional realities. But that’s hardly news: popular culture has always depicted the Arab world ineptly-not necessarily degradingly, but usually shallowly. To an extent that’s understandable, since few cultures display subtlety in portraying very different ones in their popular media. The thing is, Syriana is utterly frivolous in depicting something the director and producers should have known something about: the United States.

Like Moore, Gaghan falls back on an old theme in the film-making repertoire: the malevolence of large corporations manipulating vile governments. No beef there, but given that Hollywood is an invention of large corporations, the criticism is a trifle hypocritical. And as Peter Nolan and Sacha Kumaria have written about Syriana, the idea that multinationals control oil markets is laughable. “The reality is that the heart of the oil industry, the vast fields in the Persian Gulf, Russia and elsewhere, are already the private preserve of governments, who own 80 percent of the world’s oil reserves, shutting out foreigners and the private sector.”

No less laughable, they note, is expecting that the CIA will readily murder those obstructing the welfare of US oil. The relationship between big oil and government is undeniably cooperative at times, just look at the current Bush administration; but it’s not invariably so: during the Clinton years, the administration was not pleased that American oil was cutting deals with an Iraq under sanctions. But Gaghan’s point is different; his aim is less to be accurate than to offer a cautionary tale about American politics; and here, too, his intentional ambiguity is disturbing.

Myth

Baer’s memoirs cover the Clinton years, and Syriana seems to take place before 9/11. However, it is not Bill Clinton’s legacy that the film-makers are going after (Gaghan and Clooney are voluble Democrats). Rather, if the release date of a film says anything about its message, then it is the current Bush administration that Syriana is warning against. And while no one would deny Bush has been an aficionado of big oil, he has also been far more willing to address democracy issues in the Middle East, despite American oil politics, than Clinton ever was.

More than ever, the Middle East has become Rashomon-like in its capacity to serve as a vehicle for very personal interpretations of the US government, not necessarily substantiated by facts. That may be fine for American film-makers and actors, but it doesn’t help anyone learn more about the region, oil markets, or about US politics for that matter.

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Business

Growing brand

by Executive Staff
written by Executive Staff

In October 11, 1990, as the Lebanese civil war entered its final phase, Charles Ghostine received a phone call that would change his life. However, the Former National Liberal Party politician, who had anticipated returning to practicing law, did not expect much to come of the invitation to meet the Chateau Ksara board members.

In fact the meeting was seen as an inconvenience more than anything. “At the time, I lived in Beit Merri. I had to drive down to Beirut, park some distance away and then negotiate the various checkpoints on foot to get to Ksara’s offices on Avenue Charles Malek,” recalls Ghostine. “During the meeting, Albert Sara suggested I take over running the company. The last managing director was Jean-Pierre Sara, who had left the company 1987. Since then, Chateau Ksara had drifted.”

Ghostine knew nothing about wine, but had earned a reputation as a wartime leader and an organizer with a sharp mind. He had served for a period on the Executive Committee of the Lebanese Forces and in the early years of the war had been responsible for the defense and day-to-day running of Sodeco. These skills, and his reputation for hard work and honesty, were what the board wanted to exploit. “They recognized the need for crisis management,” says Ghostine. “Maybe in a normal situation I would not have been the man for the job but it was a crisis.”

Ghostine promised to think about it, but not longer after the war reached its bloody denouement and he thought that perhaps the offer had been superceded by national events. “I thought that was that and went back to practicing law. There was a lot of work at the time, disputes to be settled quickly out of court and so on.”

But call back they did, on January 17, 1991. By this time Ghostine was up to his ears in legal work, but admits it was difficult to say no. “I arrived at work on January 21 and immediately began looking at the files. I then went to Zahleh, a town I had not been able to visit for some time. I went to Ksara’s caves (underground cellars) and immediately felt something magical. Even though Syrian soldiers were still there, I was convinced there was something to be done with this company. I knew I could restructure it even though at the time I knew nothing about wine. By the time I reached Beirut I knew it could be done but it would take at least five years.”

According to Ghostine, everything that could go wrong with the company had gone wrong. There had been no investment since 1984 and very little since 1973. Before that, the previous owners, the Jesuits, had not really ploughed much money into what was an aging infrastructure. Ghostine also discovered that, although Ksara had a 12-year agreement with Jesuit brothers at the Tanail convent to provide 1,000 tons of grapes a year, this amount had had decreased to 200 tons and the winery was forced to buy grapes – at that time the traditional Cinsault, Grenache, Carignan and Ugni Blanc – from individual farmers in the village of Kefraya.

Today, 15 years after joining the company Ghostine pulls out his personal notes from his early days and reads out aloud. “1991: The winery is in bad shape. Staff moral is low, equipment is aging and there is a reliance on the local wine producers.”

One of the first things he had to do was sort out the grape situation. It would be a path that would lead to one of the most visionary moves in the history of modern Lebanese wine.

After the 1991 harvest, he went to meet the local farmers. “They all wanted to meet with me, as Ksara was, even then, the biggest producer and therefore it was up to us to set the price,” he explains. “It was a strange experience for me and a huge responsibility. I had to negotiate with 30 farmers after just six months in the business. I needed all my previous skills to hide my ignorance. In the end, I agreed to an increase in the cost of the kilo of grapes from 27 cents to 29 cents. They had wanted to double it but I think in the end they were satisfied.”

Noble grapes

Then came the biggest challenge, the bid to plant noble grapes – Cabernet Sauvignon, Syrah, Chardonnay Merlot and the like – essential to any step up in terms of overall product quality but which no one, not least the local farmers, believed would thrive in the Bekaa’s relatively untested terroir. There was a little Sauvignon Blanc and a bit of Cabernet Sauvignon, but nothing on a huge scale. In any case, the farmers made their calculations in terms of yield and these “new” grapes would take three years to mature and even then would give fewer grapes. “They all told me I was mad,” recalls Ghostine. “They told me that I was a lawyer and knew nothing about grapes. They said, don’t you think if we could plant these grapes we would have planted them years ago.”

Nonetheless, Ghostine was determined. The problem was he also had to find more land to plant. The company only owned 25 hectares in Ksara and he needed more autonomy. “I didn’t want to have to deal with the farmers every year to buy 1,500 tons. I wanted to control the quality of what we were producing.”

Ksara planted their first new vines in Mansoura. The farmers were reluctant to pull out their old grapes as they did not want land left fallow. They took some convincing, but Ghostine paid them double. In 1993, Ksara made a new agreement with the convent at Tanail to plant and buy Cabernet Sauvignon and Syrah, and, on land owned by the Schneller Institute in Kherbet Kanafar, the winery planted a further 40 hectares. “We told them we would finance everything during the lease period. We planted all the land in one year. I remember Elie Maamari (see page 56) was digging in the snow to finish in time. By the time we had finished we had planted Sauvignon Blanc, more Cabernet Sauvignon, Merlot, Chardonnay, Semillon, and Clairette.”

Still there was resistance to the idea of noble grapes. “There was no understanding of the concept. We had to work hard to instill the culture that started the concept of long-term agreements. Still in 1994, we were able to plant more grapes in Tallet Noub (45 hectares) and in the Itani property (40 hectares). The message eventually got through, Says Ghostine. “We were paying more for better quality grapes. Now they all do it.”

Rehabilitation

Ksara wanted to show the market that it was in control of its own grapes and its own vines so that no one could say that it didn’t have its own vineyards. “Today we control all our grapes and we are ISO Certified.”

Then came a revamping of Ksara’s range of wines. Ksara’s most visible wine had until that point been the Clos St Alphonse, but the new management felt it needed to lose its old fashioned image. However, as Ghostine points out, they couldn’t change image without changing the product. The winery had to wait three years until the new grapes were ready before it could change the labels and packaging. “We waited, even if it meant losing out to Chateau Kefraya.”

Ghostine insists that the support he had from the board was crucial to the company’s rehabilitation. “They believed in the brand’s potential although back then the extent of the dream was to be the market leader. We had no idea that we would be where we are today in terms of selling our wines in so many countries, although Mr. Chaoui had made it very clear from day one that one of my key missions would be to take the name of Ksara abroad. So from early on we looked at France, Germany, Finland, Sweden and Canada, where we were the first Lebanese wine to be sold, as well as the US, Syria, Egypt and Jordan.”

But what of the staff, whose morale had been eroded by a lack of leadership and focus. Ghostine had to rally the troops. “I gathered the staff and I told them we are here for what is inside this bottle before all else. I told them I wanted the wine to be delicious and we would exert all our efforts to make good wine. I told them I didn’t care about packaging. If the wine was good, the label was not important.”

But Ghostine also admits he had to find out how to reach this high standard. He looked at the existing equipment. “I asked if we had stainless steel vats and if not, why not and why were we still fermenting in cement?” He went to the wine fairs and sourced the equipment needed by a modern winery but he needed the money. Once again the board made the funds available. “Whatever I asked for I got. Since the first year we started investing intensively heavy. Close to $1 million a year. Today we have no debts.”

Same brand new image

Marketing was also key to rebuilding the winery’s image. Ksara’s television ad for Ksarak is widely held up as one of the best Lebanese clips in modern times. Filmed in the Bekaa it captures all that is good about rural Lebanon and, with its young-couple-in-love motif, breathed new life into the brand and the company. “The ad had an impact,” explains Ghostine. “It positioned the company as a Lebanese brand, a young product that hinted at a better past.”

In 1991, the company released what new wines it could, starting with the hugely popular Gris de Gris. The wine made an immediate impact abroad. “I went to a contest in Holland with the Gris de Gris, our arak, an excellent Reserve du Couvent and a Sunset rose and came back with five gold awards,” beams Ghostine. “We came back with a video and when we aired it on TV, we were accused of staging it. He grins. “Can you imagine?”

New wine maker

In 1993, the Syrians vacated the premises and it was also time to hire a new winemaker. Noel Rabaud, the French winemaker who was first hired in 1975, was still on the payroll. He visited Ksara five times a year to oversee the viticultural and vinicultural processes. But he was also working as a consultant in France for nearly 70 wineries. Ghostine knew that if Ksara were to forge ahead with its new program it needed someone full-time. In 1994, he hired James Palge, who is still with the company to this day.

“Palge was nearly disowned by his parents, who were worried about him going to work in a war zone,” recalls Ghostine, who had received than a dozen CVs for the job including interest from a Monsieur Bouat, a former Ksara winemaker who had worked for the Jesuits. “We nearly hired him but in the end we wanted a younger man. He was very disappointed.”

In June 1994, Ksara unveiled the Cuvee de Printemps, while the Gris de Gris was by now consistently selling out. Ksara then began to produce new labels and revise its pricing strategy. By the end of the year, the three year plan was complete. Ksara had planted new grapes, hired a new wine maker, developed the range, landscaped the winery, and bought new equipment.

Today, Chateau Ksara’s reputation as Lebanon’s biggest and oldest winery is secure. In producing 2 million bottles the winery harvests nearly 2,000 tons of grapes from its 300 hectares, an average of nearly 7 tons of grapes per hectare. “Some wine countries will obtain yields of as much as 14 tons per hectare,” says Ghostine. “We will not do this.” And even the farmers have stopped complaining.

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Finance

We’ve said it before and we’ll say it again

by Nicolas Photiades
written by Nicolas Photiades

Back in September 2005, this magazine published an article about the possibility of holding a donors’ conference in Beirut in December 2005. In the same article, the magazine expressed serious doubts as to the conference taking place in the medium-term, let alone in 2005. The main reasons for these doubts were built on the fact that as long as there were paramilitary organizations in Lebanon, and as long as the various UN resolutions (particularly 1559) were not implemented, a donors conference would remain a vivid fantasy.

Indeed, it is becoming increasingly apparent that potential donors, led by the United States, are insisting that not a single penny will be disbursed to Lebanon as long as weapons are still held by organisations other than the Lebanese army, UN resolutions are not fully implemented, and economic reforms, particularly privatisation, are not put into practice.

Donors have been burnt before in Lebanon with both the Paris I and II conferences, where much had been promised by Lebanon. These promises were not delivered, mainly due to political squabbles between the late former Prime Minister Rafik Hariri and President Emile Lahoud. At Paris II, there was no insistence on the part of the donors (which included France and the European Union), and supranational entities (such as the IMF and the World Bank) for arms held by Hizbullah and Palestinian groups to be surrendered to the army.

Missed the boat

It is clear then that Lebanon, by failing to deliver on privatisation, has missed the boat and burnt its bridges with international donors. Conditions for lending or donating much needed funds are now tougher, and require serious political commitments from the current Lebanese government. The political situation is also less straightforward than what it was back in November 2002, with brinkmanship being the name of the game today among the various political and religious groups. While the Seniora government is hoping it can kick start privatisation as soon as possible, other groups are blocking the way by using their seats in Parliament. In other words, the Lebanese economy is tied in a Gordian knot, whose disentanglement will be key to future economic prosperity.

The Lebanese government now has to show significant good faith by announcing with convincing commitment the resumption of the privatisation program. It has to take the bull by the horns and start with its privatisation program even if there is no clear sign that a donors’ conference is going to be held. This time, the Lebanese government has to take the first step and deliver before getting any funding from international donors and lenders. The government will have to convince the various political protagonists that privatisation is an urgent necessity and that its resumption is the first sign that Lebanon is in the right step to sort out its political and economic mess.

What the various quarrelling factions will have to understand is that the country won’t be able to get much needed cheap funding without a minimum effort from their part, which is summed up in the resumption of privatisation. Surrendering arms and implementing UN resolutions are also key conditions, but they can be smoothed up over time if the government shows a strong will to privatise inefficient public institutions.

Talking about inefficiency, Lebanese public utilities and other companies are high on the world’s shame list of badly managed government organisations. Their transfer to competent private hands, who would come in the form of strategic institutional investors and a demanding retail investor base, would transform the Lebanese economy beyond any current politician’s wildest imagination.

It is unacceptable that a company such as EDL remains in the hands of Lebanese politicians. It is indeed, mind-boggling that a majority of the population is still going through electricity rationing for the greater part of the day while paying outrageous bills. Other public companies are equally inefficient and need to finally deliver decent service to a long-suffering population. Enough said. Privatisation is long overdue.

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Business

Democracy Dilemma

by Michael Young
written by Michael Young

As the United States has turned spreading Middle Eastern democracy into a top foreign policy priority, it has also seen the broad boulevard of simple ideas on the matter turn into a warren of blind alleys. While the complexity of the problem must not mean discontinuing efforts to push the region’s states and societies toward openness, those interested in such an endeavor have to be aware of the headaches involved.

The most obvious initial question is what kind of democracy should the Middle East be asked to endorse? If it’s traditional liberal democracy, where people are allowed to vote regularly in transparent and unmanipulated elections, where there is a transfer of authority from leaders and representatives to elected successors, where there is freedom of expression and association, and where markets and exchanges are free, then that would be grand. But how realistic is this?

Take the case of Arab minorities. If liberal democracy is interpreted as one person one vote, or majority rule, then minorities, religious or ethnic, will feel far more threatened than reassured by democracy. By the same token, while many Arabs probably favor a regular, democratic transfer of power to new leaders, they would not necessarily see this as part and parcel of a smaller role for the state, particularly in economic affairs. And in some countries democracy may lead to instability, perhaps through the arrival to power of hitherto marginalized groups, for example Islamists, so that secular voters may fear the consequences of free elections.

A second question is what happens when Arabs, including Arab liberals, consider liberal democracy merely as an extension of American power? The fact is that instead of using American support to buttress indigenous democratic efforts and then afterwards shaping the consequences to serve their own national interests, Arab democrats often, simply, get hung up on America. As Barry Rubin has written in a book on the Arab struggle for democracy, liberals have not only argued that American assistance undermines Arab democratic efforts, some have insisted “that indigenous Arab reform [is] the best way to avoid US domination and intervention.”

Foreign help needed

What this liberal attitude leaves unsaid is that American or broader Western intrusion is often indispensable to protect Arab liberals against autocratic leaders, but also against another enemy they must increasingly address these days: Islamists. It also fails to mention that the myriad problems of the Arab world are not primarily related to “US domination and intervention,” but entail essentially domestic issues such as abuse of power, economic underdevelopment, mediocre education levels, stifled civil space, and much more. In other words, setting reform up as a barrier against the United States is a very narrow, indeed downright dishonest, justification. However, it is also so widespread that any outside effort to advance open Arab societies can be quickly labeled “neo-colonialist.”

A third question – one with consequences for secular Arab liberals – is whether Arab societies are that keen to embrace the whole package of liberal democracy? Societies in the region are often deeply conservative, so that while they may reject the violence used by Islamists, they do not see his as a compelling reason to play down the pivotal role of Islam. Similarly, this conservatism is easily manipulated by nationalist regimes as a means of enhancing their own power while aborting outside calls for change, which are swiftly tagged as efforts to weaken Muslim values.

All these obstacles, to which one might add the inhibiting insistence that nothing can truly advance in the Middle East before the Palestinian problem is resolved, mean that democracy promotion is destined to be a bumpy ride for its advocates, especially the US. And the Bush administration’s belief that things will improve thanks to more aggressive public diplomacy is bound to be disappointed, since the image of the US is so deeply, often preposterously, stilted in its disfavor.

So what can be done? Very little. At best, outside powers, mainly the US, must continue insisting that democracy is of vital concern to them, but also accept that the region’s contradictions allow only for ad hoc progress, where democratic principles are robustly advanced wherever possible, to be used later as building blocks elsewhere. Sometimes force, or the threat of force, may have to be employed, as in Iraq. For democracy to truly spread is up to the peoples of the region to resolve their incongruities. They are the ones living under oppressive dictatorships. Obsessing about America is convenient, but will not improve their condition one bit.

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Economics & Policy

The shrinking factor

by Nicolas Photiades
written by Nicolas Photiades

For a long time, there was a widespread belief in Lebanon that the Lebanese sector was highly diversified given the large number of banks (at one stage, the sector had more than 80 institutions). The fact remains that this diversification of the banking system was nothing more than an old myth that had turned into an inefficient sector concentration by the mid 1990s. By this time, Lebanon did indeed have a large number of banks, all of which offered the same services and the same products, in varying degrees of quality. At the same time, a limited number of banks, through their better relationship skills and greater vision and understanding of the local and regional environment, succeeded in carving out a top twenty position for themselves, as Lebanon’s largest banks in terms of assets and deposits.

These 20 largest banks have slowly attracted the best quality customers in Lebanon, leaving to most banks below the top 20 the lesser quality customers and the more complicated dossiers. A significant number of unwanted depositors were also pushed out to the lower part of the Lebanese banks league table. While the larger banks have been busy capitalizing on their position, the smaller banks were mostly left cogitating about their future. Should they sell to or merge with a larger bank? Should they sell to a foreign investor who is interested in establishing a banking franchise in Lebanon? Should they update and modernize their infrastructure, invest in financial and human resources and start competing with the top twenty? Should they think hard about building a niche or specialization that would create value for their shareholders?

Strength in size

Most of the smaller banks have not stopped growing along with the larger ones since the end of the civil war, due to the significant government debt securities and Treasury bill market created by the government and the central bank. Smaller banks were needed to the same extent as the larger ones, as they too constituted a domestic investor base for government securities and made up the numbers in a increasingly liquid secondary market. However, the central bank today is keen that these small banks merge with their larger brothers, as they are believed not to have evolved sufficiently in parallel to the environment, and consequently not to have the capacity to compete in the long-term within an increasingly sophisticated global operating environment. It is clear that the forthcoming Basel II capital regulations, which are due to be implemented in Lebanon by 2008, and which focus on efficient risk management and corporate governance, are going to constitute a mammoth task for the smaller banks, which are still struggling to understand these regulations, let alone implement them.

The smaller banks are mostly family owned and, with a few exceptions, are unlikely to be able to attract strategic investors that would help these families develop expansion and build an efficient internal infrastructure. Their lack of corporate governance, managerial vision, risk management capabilities and insufficient capital, are all factors that will keep any strategic and sophisticated institutional investor away. Moreover, the constant absence of a clear cut, detailed and efficient operational and financial strategy is not only a reason for the lack of attractiveness, but also for their initial positioning below the top 20.

It is worth noting that not all the smaller banks (the 30 or so banks that constitute the smaller tier of the Lebanese banking sector) have the same reasons for being there in the first place. Some are foreign banks, which do not wish to expand their franchise in Lebanon further, as exceeding an optimum size would start affecting the risk profile of their group on a worldwide basis. Others are banks which are moving in the right direction and have sufficient financial means to buy their way up in the upper tier of the bank league table. However, the majority have been stuck in the lower divisions due to an initial lack of vision and preparation to meet a constantly evolving environment.

For those smaller banks with no financial means, the best advice would be to sell their franchise (at a realistic price) to a larger local competitor and hope to keep jobs and, for board members, seats on the board of the larger entity. For small banks that have been rising in the last decade and which have the means and financial resources to keep up the pace with the larger peers, advice would be to specialize and become a niche player. With Lebanon entering the WTO and the Basel II regulations due to be implemented soon, these banks have little choice anyway.

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Economics & Policy

Alan Greenspan: Genius or Liability?

by Faysal Badran
written by Faysal Badran

Alan Greenspan became something of a cult figure in the financial markets during his reign as Chairman of the Federal Reserve, both in the financial markets and in the media. As central banker of the largest economic powerhouse, his every move and utterance were scrutinized as markets boomed and reeled, often based on his speeches and long winded assessments. There was even a jargon attributed to him, “Greenspeak” which was a blend of seldom understood nuances and signals. Most bond traders, glued to their screens during his prose, would simply be baffled by the amount of cross currents in his statements. Financial media, obsessed with Fed action over monetary policy, went as far as trying to gauge his upcoming decisions, based solely on the perceived size of his briefcase, or the tempo of his walk into the Federal Reserve building. The man wielded great power, and maintained, despite his friendships across the political spectrum, an aura of independence from political wrangling and calm from the storm of the financial markets.

While Alan Greenspan will surely be associated with an era of great prosperity for the US, one where the housing boom seemed eternal and where shares blew out all other asset classes (at least until 2001), his main qualities were mostly in his character. He seemed to ooze confidence and serenity, and at many times, such as during the many wars, 9/11 and its aftermath, and the Y2K scare, his mere presence comforted market participants. His pragmatic approach to monetary policy, and his fondness for the most subtle signs of inflationary pressure made him a Wall Street icon. It is debatable, however, whether, in a few years time, he will be remembered so fondly. His personal traits will endure, but his financial legacy is one of excesses. He presided over a period of excess debt both on an individual and country level, and more importantly, over the final demise of the US Dollar as a safe store of value. Greenspan, despite orthodox policy views, allowed the liquidity orgy to go on, amplified by booming and unregulated lending and hedge funds, and this will not go down as an achievement when the chips eventually tumble.

Debt spree

While Greenspan was fixated in avoiding systemic risk, i.e. risk of a financial system breakdown, and often cushioned great potential disasters such as the Mexican, Asian and Internet collapses, he appears to have done little to push for healthier fiscal priorities for the US. During his era, the US went on a debt spree going from the largest creditor nation in the late 60s to the largest debtor nation, literally living off China and other emerging country reserves. Today, the US is completely dependent on foreign capital to sustain itself, and while this may not be his doing alone, his lax policy with regard to the currency and his soft approach to the twin deficit will come back to haunt his successor. The loose policies which Greenspan adopted, favoring calm on Wall Street over healthy and sound targeting is in part responsible for the heavy debt among of US households, and the excessively easy entry for weak companies into the capital markets. These two factors will be doubtless sources of strain on the US economy going forward in the future.

Poor communication

The degree of US economic supremacy over the last three decades has more to do with the global changes which occurred, and while Greenspan seems to be credited with a lot of the gains made by the US, some purists, such as previous Fed Chairman Paul Volcker cast a doubt over the sustainability of those gains, given that the US has become such an intensely service-oriented economy. It is often said that Greenspan will be better remembered by financial conglomerates than by say, auto giants where the US’s position has eroded.

In a previous piece in EXECUTIVE, we spoke of the relevance of Fed policy in general. We believe that the role of central banks and that of Greenspan and his ilk, had been reduced by the mushrooming size of the credit markets. During the Greenspan years, especially since the mid-1990s, the bond market became the spearhead in defining monetary policy, giving birth to the notion of Bond market vigilantes. In fact, Greenspan’s policy on interest rates seemed to follow the bond market’s perceptions, not the other way around. As an inflation fighter, Greenspan is credited with a long period of low inflation, and while even that is debatable, since incomes have been stagnant in the US on an inflation adjusted basis for nearly half a century, the main impetus behind the well-behaved Consumer Price Inflation was a by-product of many factors outside his area of remit. The inflow of cheap imports from abroad, as well as the absence of collective wage bargaining, was the main reason, not the Greenspan magic.

It can be argued that one of the main flaws of the Greenspan era was the poor communication from the Federal Reserve. Often cryptic and incomprehensible to most market watchers, the Fed statements became an exercise in semantics and seldom sent the real message which often added volatility to the markets. The last legacy of disaster left by Greenspan, one which is most likely to come to the forefront, is his lax approach to the advent of large rogue unregulated hedge funds, which allowed the over the counter derivatives market to reach unfathomable levels. In fact, this is where system risk is likely to emerge. If one looks at the numbers of large money center banks closely, they have become more like casinos, with outstanding derivative commitments frequently a multiple of the size of their core banking operations. Structural changes made Greenspan associated with long periods of economic expansions and relatively short recessions, but one feels that those were not his own doing, but rather trends stemming from globalization and the dynamism of US corporations.

Years of excess

The successor of Alan Greenspan, Ben Bernanke is certainly qualified from an academic perspective. He completed his graduate work at MIT and taught at Princeton since the early 1980s. He is however known for his laissez faire, often blase, attitude toward inflation and currency stability, a trait that could constitute a handicap in the markets. He is also famous for having mentioned, in private, that the US could “print its way out of recessions”. This reliance on money creation is not comforting, as it will have its impact on the perceived value of the dollar, but Bernanke will most likely face a straight jacket from the massive twin deficits and the slowing consumer spending, and most certainly will reap the headache from the years of excess nurtured by the Greenspan Fed.

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