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The Year of the Monkey
December 22, 2003

The Chinese are predicting that 2004 will be a prosperous year. Here are some of our predictions for developments affecting a variety of risks during the next 12 months:

Basel II: The new global bank capital proposal was not signed by the G-10 central banks as scheduled this month and may not be agreed by the new June 2004 deadline. OCC chief John Hawke told the FT: �I am much more skeptical about the currently stated goal of achieving implementation of Basel II by the end of 2006."

NYSE: The interim head of the Big Board, John Reed, will go back to France, former NYSE CEO Dick Grasso and former board members will be pursued by packs of lawyers, and the world�s most important stock exchange will move toward an electronic format sans specialists. The NYSE will also be forced to give up any regulatory role. Reed�s invitation to Grasso to propose a settlement in the Sunday New York Times ranks among the great displays of chutzpa of all time. We repeat: the end of the Grasso era marks the end of selfregulation on Wall Street.

Sarbanes-Oxley: Thankfully there will be no new legislation regarding corporate governance in 2004, but members of Congress will hear growing numbers of complaints about the Sarbanes-Oxley legislation from business leaders, accountants and lawyers. The Public Company Accounting Oversight Board will fall further behind the Sarbox schedule for supervising accountants.

Boeing: Boeing CEO Harry C. Stonecipher, who formerly led McDonnell Douglas before the merger with Boeing, may be forced out because of close ties to former CFO Michael Sears and former Air Force official Darleen Druyun. The multiple investigations of the U.S. aerospace giant will reveal a culture of corruption inside the Pentagon stretching back to the early 1990s and including the C-17 and V-22 programs.

Inflation: The �irrational exuberance� regarding the U.S. economic recovery will give way to a more sober appraisal. The U.S. markets will eventually accept that inflation is a problem, but not in the same way as in the 1970s and 1980s. Statistics like productivity and consumer prices reflect low inflation, but the falling dollar and massive destruction of value in the equity markets shows the effect of too many paper dollars chasing too few real investment opportunities. Falling prices in many industries and the sound of jobs walking offshore reflect the latest round of dollar devaluation. As in Japan, the question facing the Fed is not when to raise interest rates but how much longer it will take to reflate the battered U.S. economy.

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