BUSINESS INTELLIGENCE BRIEF

January 25, 2010

Political Pressure Builds as Bernanke Twists

The elections of 2010 will be known as the most anger inducing and populist in years. The frenzy of the
2008 elections will be nothing as compared to the voter angst this year and the political response has been one
of getting ahead of the mob as opposed to leading it. The economy is the one and only issue for the vast
majority of the country and there is a strong desire to do two things at once. The first is to fix the thing so that
people can get their jobs back or feel comfortable about the ones they have. The other demand is for those who
are deemed “responsible” to be held to account – whatever that means. The response form the political
establishment has been to engineer program after program to “fix” the economy while at the same time
deflecting blame on to somebody other than themselves. This has led to trillions of dollars of stimulus efforts,
a massively loose monetary and fiscal policy and seemingly endless promises of government aid to the
economic recovery. It has also meant a steady barrage of attack on every element that might be held
responsible for the recession – except, of course, for Congress itself. It is the Big Banks, it is corporate greed,
it is irresponsible borrowers and lately it is all the fault of Ben Bernanke and Tim Geithner.
As Bernanke comes up for Senate conformation for second term the politics has been intense. He needs 60
Senators to support his nomination and there remains some question as to whether he will get the required
number. The analysts expect him to be conformed as most of the opposition appears to more posturing for the
voter than heartfelt belief that he is not the appropriate person for the job at the moment.
Details on page 4.
Analysis: What difference does it make who runs the Fed? This is a question that we may ask as the functions
of the Federal Reserve remains somewhat murky in the minds of most. Is the Fed Chairman all powerful
when it comes to the economy? Not really, although in the current crisis it has taken on more responsibility
than it has in previous years. The massive injections of liquidity have been judged appropriate by most
economists although there is deep seated concern about how to unwind from all this largesse in the future.
The Fed’s actions during a recession have been compared to pushing a string. It is immensely hard to get
people to do something with money when the economy is weak. The Fed can make loans cheap and it can
expand the money supply but it can’t force banks to lend and it can’t force people and businesses to borrow.
The next phase of Fed activity is much easier to grasp and the question is when it starts. In many ways the
toughest test of the Bernanke Fed is in the future as the focus starts to shift towards fighting inflation. That
is the main and central tenet of any central bank and it will be controversial as this is when the spigot is
turned off. Too late and the economy starts to reel from price hikes that swiftly get out of control, too soon
and the nascent recovery is nipped in the bud. Bernanke will be confirmed but the Senate has issued its
warning. Do not derail the recovery – at least not until the elections are over.

Global Expectations Vary as Davos Meeting Begins Again

The meeting of last year’s World Economic Forum had the feeling of the Titanic as it hit the iceberg. There seemed to be rampant
confusion as to what all this means and the actions of the assembled multitude looked like arranging the deck chairs as the ship sank. The
dire warnings were apocalyptic and many of the analysts present seemed to be working overtime to out doom one another. Going back to
some of the reports and speeches reveal that there were more than a few who suggested that this recession would last years instead of
months. These warnings were extreme and called for the destruction of the global economy on a scale not seen since the Great
Depression. To be sure this was not the consensus view but even the more cautious within the economic community had little to say that
would inspire confidence.
It has been a year and the mood is different although the concerns remain. The focus of that fear has shifted as the analysts have been
both supportive of the moves taken to rescue the economy and concerned about what it has meant to the future development of that same
economy. One compares the reaction to the recession to the actions of the local fire department. As the fire rages, the solution is to pour
water on it but after the conflagration one has to contend with the water damage and flood that result. The extraordinarily loose monetary
policy will be given credit for getting the nations of the world out of the grips of a recession that could have been much, much worse and
much longer. The challenge now is that those same economies are now going to have to navigate the downside of that loose monetary
policy – inflation. There are also some longer term fears that have been expressed by economists. Has the rescue removed moral hazard
from the equation? Has the collapse threatened people’s faith in the markets and in capitalism itself?

(Continued)

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 Analysis: The WEF will deal with the good news first. The global recession is ebbing and most of the world’s economies are in some
form of recovery. This has become very apparent in the Asian community as China is now back to 10% per quarter growth and they
have been joined to some degree by nations as diverse as Thailand, Taiwan, Korea, Vietnam and even Indonesia. The growth in Asia is
not as dependent on trade with the US and Europe and that bodes well for these countries in the next few years. The US now seems to
be coming out of the recession slowly but deliberately and may hit 3% growth per quarter by Q2. The Europeans are lagging somewhat
as they contend with the issues in their hardest hit nations but even here there is a return to some growth – albeit only around 1.5% to
2%. Those meeting at Davos will take a moment or two to celebrate the successful end to the recession but the next issue will
immediately take center stage.
For much of the last six months there have been conversations about unwinding but there was relatively little urgency as the focus
was still on the issue of recession relief. Now that conversation is moving higher up the priority list and will dominate the meeting. The
process of withdrawal is not mysterious but the timing is. There will likely be three distinct steps in the unwinding and it is all but certain
that two of them will take place this year. The last of these steps will be the most controversial and there will be significant divergence
between central banks.
The first and easiest step is already underway to some extent but there remain elements that reject it. The Federal Reserve in the US
has suggested that they will soon end some of the programs that have been bolstering the housing market. They intend to stop
purchasing those mortgage backed securities whose failure set the crisis in motion in the first place. This has been a $1.2 trillion
commitment but opinions vary as to whether now is the time to reduce that commitment. The stimulus packages are coming to an end
in much of the world but there remain political pressures to do more. The IMF has been insistent that the time is not yet right for
reducing the monetary inflow but those who want to reduce the supply of government funds point out that deficits are already out of
control and there are signs that asset bubbles are forming in many markets – not just in China and other parts of Asia.
The second step will be a slow tightening of the money supply through conversation. This is the preparation that needs to take place
before there is a reversal of monetary policy. The financial markets have been accustomed to a steady diet of loose talk. The Fed has
been explicit about its determination to focus on the recession and has all but promised to keep interest rates down. This is what the
markets have decided to depend upon and the message from other central banks has been pretty consistent. The financial community
is averse to surprise – especially when there is change in policy anticipated. The Fed will signal what it intends some time before acting.
The thinking is that central banks will start to prep the markets for that unwinding process in the next quarter or sooner. Much of the
conversation at Davos may center on this issue – how to delicately approach the issue and not spook the financial community. Too
much tightening will create the threat of a double dip recession and the sense is that this needs to be avoided at all costs.
That leaves the third and most dramatic move – actually tightening the economy. The thinking at the moment is that this will not
occur until late in the year and possibly not until 2011 but much depends on what happens with inflation and the threat of asset
bubbles that need popping. This will be the major conversation at Davos. What will the real trigger be? If the traditional notion of
inflation at 2% is used, the Fed may not have an excuse to raise rates for a while but the deficit hawks are insistent that actions be taken
before that level is reached. The discussion will be over whether there can be some halfway measures taken that lower the threat
without reversing course. It is very unlikely that there will be some definitive plan revealed at the meeting but the trends should be
obvious enough.

Campaign Finance Reform Takes a Hit

The election of 2010 just got a lot more expensive and probably a lot bloodier. The Supreme Court shot down many of the key
provisions that had been part of campaign finance reform on the grounds that it limits free speech. The decision was a 5-4 vote with the
four conservative votes joined by the “swing” vote of Anthony Kennedy. The decision essentially guts the campaign finance laws that
have existed for the last few years. The intent of the legislation seemed to be to limit the amount of money that corporations, unions and
other groups could spend on an election and the Court has ruled that this approach is not consistent with the Constitution. There has been
a focused effort on the part of many to overturn these laws on the grounds that it unfairly limited the involvement of organizations in
advocating for and against a given politician or political situation.

Analysis: Those who support the laws point out that this will allow corporations and other groups to pour money into campaigns at an
unprecedented level and that this will drown out the voices of the opposition. The direst warnings have asserted that democracy as we
know it is over. Others are less certain. It has been pretty apparent that elections have been just as affected by money as they have
always been. This decision by the Court holds that arbitrary limits on the right of some entity to try to influence the outcome of an
election is not legal and that will send campaign reform elements in a different direction. It has been pointed out that money doesn’t
always have the desired impact and that voters have often rejected the better funded alternative. But it has also been pointed out that
most people are only causally engaged in the political process and can be affected significantly by the advertising messages they
encounter. The reversal of the law is going to be a real boon for the media this year however.

Business Intelligence Brief is an online information service, published electronically by Armada Corporate Intelligence. It is prepared by
Armada CI. The publisher has taken all reasonable steps to verify the accuracy of the content of this information. Armada Corporate
Intelligence shall not be responsible for any errors or omissions.

2
 STRATEGIC GLOBAL INTELLIGENCE
January 25, 2010

Banks Start to Organize Against Regulatory Effort

The meeting at Davos, Switzerland in the next week is going to be concerned with a wide variety of issues that matter to the global
banking community and heading the list will be the lurch towards populism in the US and Europe. The Obama plan is controversial in the
US and has been affecting the strategic discussions in other parts of the world as well. The banks are now organizing to protect their right
to remain engaged in the business of investment and they will be using the Davos meeting to press their case. To most analysts in the US,
the Obama Plan seems unlikely to become law. There is not all that much support in the Senate and the banks will be wielding their power
in the next few months as the campaign season heats up. There are plenty of economists that are less than enthusiastic about the plan and
assert that it has little or nothing to do with making the world safe from another recession.
The effort to reform the banks has centered on two issues – their size and their business model. The Obama plan asserts that the banks
are too big and that they need to be broken up in order to ensure that they do not threaten the economy with “too big to fail” again. It is also
asserted that the banks engaged in risky behavior through their engagement in investment activity. The use of their own money in these
investments put them at risk if the economy went sour and this is what dragged the government into the fray in the first place. This
assessment is far from universal although most economists agree that the risk issue is real and so is the fact that banks have become very
large.
Analysis: The position that the banks will be adopting at Davos and elsewhere is also not universal but the majority of the bankers are in
agreement on some fundamental precepts. The first is that size matters and that banks have grown larger because the economy of the
world has grown larger. The size of corporations has grown and this has meant that the banks have grown with them. Smaller banks with
more constraints mean that large corporations will lack the support and resources they need to grow and even survive. In the last twelve
months there have been many Fortune 500 firms that have teetered on the edge of bankruptcy but have been rescued by banks that are
large enough to handle the issue. These same banks have often failed to come to the rescue but that is another issue. The point is that
without large banks, the large company is at greater risk.
The other argument that banks are expected to make is that these reform efforts will seriously constrain the ability of banks to get
engaged in developing business. The supply of money will be reduced and perhaps seriously. Banks would be placed at the same
disadvantage they faced some years ago. They would be smaller, restricted in terms of how they made money and be required to carry
more reserves. This caution may sound like a good idea in the wake of a recession that was prompted by profligacy and excess but there
are threats in too much conservatism as well. The corporations will be forced to turn to the markets more aggressively – to hedge funds
and private equity funds and to venture capital. This money is not as stable as bank money and provides no more guarantee of wisdom
and patience. The banks will argue that the solution may well be worse than the cure.

Bank Popularity at Very Low Ebb

The major challenge that faces the banks in their effort to avert the regulatory onslaught is that they are now among the most vilified
institutions in the world and that makes politicians very wary of getting close to them in any way. The latest polls in the US, UK and
Europe show that banks are ranked at the very bottom in terms of trust and support – lower than those that once held that unenviable
position. Car dealers are moving up the scale but only the politician ranks anywhere near the “evil banker”. Some hold the banks to be the
embodiment of venal greed and others just see them as stupid and incompetent but either way the mood is to impose greater control. Most
importantly the average voter wants to attack them in the pocketbook – supporting special taxes and limits on compensation. To say that
the banking industry has a massive public relations effort to mount would be an understatement.
Analysis: The public mood is to punish and that puts the elected officials in a quandary. Some know that these attacks are over the top
but they can’t be seen as bank buddies in this environment. Others know that banks have behaved poorly and that some reform is due
but the efforts needed are far more subtle than the public is demanding. Others will simply capitulate and join in the assault and will find
ways to deflect responsibility when other things go wrong. The banks are going to be pushing a great deal of money and influence on to
the legislative process in the coming months.

Haiti Continues to Polarize

Now it is the Italians that have jumped on the US effort to aid Haiti and this has caused some frantic high level negotiations. The head of
the Italian humanitarian effort has echoed the French objection to the US military in Haiti and this caused the Foreign Minister to do some
damage control. The scope of the effort has been massive and the attempts to coordinate have been thwarted by the need for every nation to
appear the hero. Haitian recovery is being set back years by this squabbling.
Business Intelligence Brief is an online information service, published electronically by Armada Corporate Intelligence. It is prepared by
Armada CI. The publisher has taken all reasonable steps to verify the accuracy of the content of this information. Armada Corporate
Intelligence shall not be responsible for any errors or omissions.

3
 Careers That May be Hard to Explain
The news from the job front is not that great for this year’s college graduate. Maybe not quite as grim as last year but this promises to be
tough. There are fewer jobs available and the competition is fierce as more and more people are expected to go slogging across that stage
this May. This is when the odd careers start to appear – those that may be awkward to explain to parents that have bankrolled the last four
years. The most intriguing is the human bed warmer that Holiday Inn is providing in some British hotels. The hapless employee dons a big
white coverall and a hair net and climbs in bed for a few moments – getting the sheets all toasty before the guest elects to run in. The guest
is not present during this episode but one assumes they are nearby – otherwise the effort is for naught. The next step in taking care of
guest’s creature comforts is something not worth contemplating. Then there is the rise in jobs that involve taking care of pets. It is logical
enough to have dog walkers and pet sitters but here is now a business in providing attack dogs with some exercise and to keep them sharp.
It seems that lack of a threat allows the canines to become soft. People are hired to don a protective cover and then attempt to enter where
they are not wanted – allowing the slavering beast to maul them and thus keep them sharp.

Analysis: The job market is tough. Perhaps this now becomes the tool that parents can use to keep their offspring focused. Study and
make good grades or face a career of warming beds and serving as Fido’s dinner. The other options on the table may be just as
interesting. These brief descriptions are provocative in their own right; antler collector (seems there is a shortage in Norway), equine
parade attendant (we all knew that somebody followed behind the horses and we all know why) and finally the greatest title yet. The
“apologist”. This is a person that is hired to make an apology to someone whose reaction is likely to be a bit extreme.

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Business Intelligence Brief is an online information service, published electronically by Armada Corporate Intelligence. It is prepared by
Armada CI. The publisher has taken all reasonable steps to verify the accuracy of the content of this information. Armada Corporate
Intelligence shall not be responsible for any errors or omissions.