Opinion

Felix Salmon

“We are searching for a different winery for this brand”

Felix Salmon
Jul 24, 2009 03:57 UTC

In the February 2008 edition of Robert Parker’s hugely influential Wine Advocate newsletter, critic Jay Miller gave a highly-coveted 96-point rating to a formerly pretty-much unknown Spanish red called Sierra Carche, a Monastrell-based wine from Jumilla. Given that most Americans — indeed, most wine drinkers — have never heard of either Monastrell or Jumilla, the rating was a huge boon for the wine, and directly resulted in at least one consumer, Robert Kenney, ordering several cases without having ever tasted the wine at first hand.

Dr Vino picks up the rest of the story at some length, but suffice to say that Kenney was disappointed in the wine he bought, Miller agreed with Kenney’s opinion, and the importer ended up emailing this note to Miller:

“We have had similar problems with this wine and had a meeting in March with the winery to find out what the problem is. There was clearly some substandard product shipped by the winery and we have had to take back a large chunk of this wine from the market because it was rejected by the trade. I apologize on behalf of the winery for this apparent bait and switch. Going forward we are searching for a different winery for this brand (owned by our UK partner Guy Anderson wines).”

Yep: “we are searching for a different winery for this brand”.

Conceptually, most of us are dimly aware that if we buy a big, mass-produced wine like Yellowtail or Jacob’s Creek, we’re not going to always get juice from the exact same vineyard. But Sierra Carche was different: the labels were individually numbered out of 16,000 bottles, it was getting rave reviews in Wine Advocate, and it was made from a mix of obscure grapes grown in an equally-obscure region of Spain. On its face, this was the antithesis of the kind of homogenization and globalization excoriated in Jonathan Nossiter’s documentary Mondovino.

It turns out, however, that the opposite is the case.

This was the first vintage of Sierra Carche, which is owned by Guy Anderson in the United Kingdom. Guy Anderson Wines describes its business: “As one of the UK’s leading brand creators, …. [w]e are constantly researching and learning what people look for when choosing a wine…. We have a strong track record of producing innovative new wine brands…. [B]rands created by Guy Anderson Wines such as Fat Bastard, Mad Dogs & Englishmen and Gran Familia have found success in markets around the world.”

Sierra Carche, in other words, is a brand dreamed up by a UK wine-branding agency. And when there were problems with the first vintage of the brand, they just decided to go to some other winery to make the second vintage of the same brand. Indeed, it’s still incredibly unclear where, exactly, the first vintage came from, or who the winemaker was, or even whether there was any particular winery at all involved in the production of this brand. More likely the brand was created in conjunction with the commercial arm of a group of wineries in southeastern Spain, who were looking for a way to move their juice.

Now I have no problem with foreign winemakers doing interesting things with grapes sourced cheaply from unfashionable regions. Indeed, one such wine won a Pinot contest I held at my house in 2007. But it did so honestly. Sierra Carche, by contrast, looked for all the world like a high-end wine lovingly crafted from local terroir by a dedicated Spanish winemaker, rather than a mixture of juices driven by second-guessing “what people look for when choosing a wine” and designed to be one of “a raft of wines available at your local store”.

Once you know that, the Wine Advocate’s 96-point rating becomes easier to understand: this wine was designed to get high ratings, because high ratings are the best possible driver of international sales. It had been, to use the wine-world term, “Parkerized”. And the importer will of course have done everything in his power to ensure that Parker’s critic drank the very best possible expression of the wine.

Parker has thousands of loyal followers, and if they want to go out and buy Parkerized wines, that’s entirely up to them. If the wines then turn out to be very different from what the critic tasted, that’s a genuine scandal. Guy Anderson Wines will go off and find “a different winery” for Sierra Carche, but will keep the brand, because that 96-point rating, even if it’s for an earlier vintage, is still a great way of making sales on later vintages. Consumers will assume there’s some kind of continuity there.

But many of them will also assume that Miller somehow stumbled across this gem from Spain, rather than thinking that they’re drinking an English brand, made from Spanish grapes, specifically designed to appeal to Miller’s palate. But that’s what a lot of winemaking is, these days. And it’s increasingly difficult to tell the difference between honest local wines, on the one hand, and Parkerized global brands, on the other.

COMMENT

The REAL problem are the CONSUMERS who BLINDLY accept ratings and wine show awards as gospel. That and lazy retailers/distributors who only sell wines based on these same results.

good article.

Posted by Ben | Report as abusive

Larry Summers’s billion-dollar Harvard gamble

Felix Salmon
Jul 24, 2009 02:07 UTC

Greg Mankiw adds some insider detail to the story of Larry Summers’s ill-fated interest-rate swap, in the form of an email from “someone knowldgeable about the financial situation at Harvard”.

The email is clearly meant to exonerate Summers, at least a little, but I’m unconvinced. Taking the three points in sequence:

1) The instrument in question was highly liquid and could be sold fully within a few days; essentially all money was lost in 2008 two years after Larry Summers left.

This is true, but misleading. When people speculate in the markets, it’s the act of putting on the position which is the point at which the gamble is made. After that point, you make money if the position rises in value, and lose money if it plunges. Interest rates could have fallen at any time after the bet was made, and Harvard would have lost the same $1 billion.

The argument about liquidity only serves to underline how speculative this bet really was. If it was a genuine long-term hedge of certain future borrowing needs, Harvard would not have needed the liquidity since the position would have been designed to sit on the university’s books for decades. On the other hand, if Harvard was intending to trade in and out of this position, then the liquidity helps, but the swap can no longer be considered a hedge at all.

Was Harvard maybe intending to keep the swaps on its books in the event that interest rates rose, while selling them if rates fell? That seems to be the implication here: that if Summers had still been around, he would have liquidated the swaps when rates fell, and thereby avoided massive losses.

Again, however, this argument doesn’t hold up to scrutiny. If Summers had wanted to buy a swap with limited downside, one which automatically unwound if rates fell to a certain level, he could easily have done so. But that’s not the instrument he bought. Instead, he bought a sophisticated financial product which left Harvard potentially on the hook for $1 billion or more — and then did nothing to address that tail risk.

2) Harvard has a system where the treasurer makes these decisions with approval of the corporation and involvement of a debt management committee on which president does not serve.

Does anybody believe that this hare-brained scheme was the idea of Harvard’s treasurer? Come on. Harvard had $1.6 billion in floating-rate debt, and it’s conceivable that the treasurer might want to swap that debt into a low fixed rate. It’s not conceivable that the treasurer would be interested in swapping nonexistent future floating-rate debt into today’s fixed rates — especially not when the hypothetical future borrowing wouldn’t even take place for as long as 20 years. This deal has Summers’s fingerprints all over it, and would never have been done had he not been president of the university.

3) Given the plan to borrow large amounts of debt in the future, doing something to lock in low rates made sense. Iif Harvard was borrowing big, there would be offsetting saving now. The big error was the failure to adjust hedge when Allston was scaled back and to take account of the risks associated with the change in the university’s credit rating.

I honestly don’t know what Mankiw’s anonymous source could be talking about when he or she refers to “offsetting saving”. Was it an egregious dereliction of fiduciary responsibility to keep the swaps on Harvard’s books even after the excuse for putting them on — the multi-billion-dollar plan to expand the university into Allston — was put on hold? Yes, of course. And you can’t blame Summers for that, since he had left Harvard by then. On the other hand, there was always a risk that Allston would be scaled back, and indeed one of the most likely reasons for scaling back Allston was that there might be a national economic crisis — exactly the sort of thing which is normally accompanied by a reduction in interest rates.

Summers was well aware of the risk of an economic crisis. Indeed, in 2004, at about the time that the swaps were put on, he gave a major address at the IMF/World Bank annual meetings about the systemic risks posed by the US current-account deficit, and warning of “a slowdown in growth that would be unacceptable in the United States and would have very severe consequences for growth globally”. But maybe because he had gone through so many other current-account crises abroad during his tenure at Treasury, he was pretty clear that he thought the big risk was that interest rates would go up, rather than go down. In response to one question from a central banker, he said:

I certainly would not want to suggest how you or any other central banker should manage your reserves, but I would point out that when you buy U.S. treasury bills, what you get is 1.75 percent, and it doesn’t really matter whether the U.S. economy grows rapidly or grows slowly. And that is, as I said, a negative interest rate in real dollar terms, and I think that’s the number that one should focus on.

Summers couldn’t have been much clearer that he was pretty convinced that interest rates in the US were going to have to rise: it seems quaint now, but back then 1.75% really did seem like an incredibly low interest rate on T-bills.

Given his analysis, and his ego, it’s pretty obvious how Summers decided to use the future Allston expansion as an excuse to engage in a massive interest-rate gamble outside the purview of the Harvard Management Company, which is the arm of Harvard with a real mandate to play the financial markets. The real reasons for the rate swaps can be found in that 2004 lecture, not in vague ideas that Harvard was sure to issue floating-rate debt at some point in the 2020s. And given those real reasons, it’s easy to see why there was no clear mandate to unwind the swaps when Allston was scaled back.

Basically, Summers took a massive gamble with Harvard’s money, and lost — big. The buck stops with him, and I look forward to Summers admitting as much sooner rather than later.

COMMENT

On point (3): So long as there was borrowing for the Allston project, the interest rate position was not something that created risk– it reduced risk, by hedging. Of course, if Summers had an opinion on how interest rates would move, that would make him all the more eager to hedge to a zero net position instead of gambling the wrong way.

This relates to your point (1), but makes it backfire. The position could have been undone at any time, and so it could and should have been undone when the Allston borrowing was halted. Up to taht point, the interest rate position reduced risk; after that, it increased risk.

I wouldn’t be surprised if this was Larry SUmmers’s idea, even tho he didn’t have formal reponsibility and there is no evidence for him being involved. If so, maybe it illustrates the perils of having a smart leader introduce an innovative new policy: After he leaves, the dummies left behind can make things worse because they don’t understand the purpose of the innovation.

Posted by Eric Rasmusen | Report as abusive
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