Moon of Alabama Brecht quote
September 30, 2008

The Southern Sudan Weapon Mystery

Somali pirates, the unofficial coastguard of Somalia, captured a Ukrainian cargo ship with lots of weapons on board. b real has kept us informed about the story from with this item on downward. Next to many small arms, at least 33 relative modern battle tanks are on board of the ship, enough equipment for a full tank battalion.

The ship was supposed to unload in the Kenyan port Mombasa. Kenya says that the weapons are for its own army. Multiple other sources refute this and allege that the weapons are for the Sudan People's Liberation Movement in Southern Sudan.

The LA Times, reporting on the issue today, asserts:

[S]ince signing a 2005 treaty with the Sudanese government that ended a 21-year north-south civil war, the SPLM has not hidden its desire to strengthen its former guerrilla army. It spends about half its budget on military training, salaries and supplies.

In addition to purchases and assistance from countries such as the U.S., Russia and Ethiopia, the new autonomous southern Sudanese government recently announced it might build its own air force.

Under the terms of the peace treaty, southern Sudan is permitted to operate and fund its own military, separate from the national army. The agreement does not prohibit southern Sudan from purchasing foreign weapons, nor is the region restricted by the United Nations arms embargo, which covers the Darfur region in western Sudan.

The last paragraph seems to be wrong to me. Southern Sudan is supposed to integrate the forces of the various rebels and the regular military, but it is not to allowed to purchase additional weapons.

One part of the 2005 Comprehensive Peace Agreement that governs Southern Sudan is the Agreement on Permanent Ceasefire and Security Arrangements Implementation Modalities between the Government of the Sudan (GOS) and the Sudan People's Liberation Movement/Sudan People's Liberation Army (SPLM/SPLA) during the pre-interim and interim periods (pdf).

The interim period ends in 2011 when the people in South Sudan will hold a referendum.

Until then, according to the text of the Ceasefire and Security Agreement:

5.3. The permanent cessation of hostilities shall include final termination of the following activities:
5.3.5. Replenishment of ammunition, weapons and other lethal or military equipment;

If Southern Sudan's regional government really bought tanks (with who's money?) it may well be in breach of its obligation under the Comprehensive Peace Agreement.

Has anyone better or additional information on this?

Posted by b on September 30, 2008 at 08:45 AM | Permalink | Comments (65)

Back to the Drawing Board

The worst of the current slump seems to be over for now. Markets in Britain and Germany are not in panic and I expect U.S. markets to level too later today.

Bush is supposed to speak this morning which is a bad idea. He is certainly not that person that can inject public trust. He and Paulson were the ones who screamed 'fire' within the full theater and initiated yesterdays panic.

The Paulson plan will likely be given another try in the House. It has now been re-labeled as 'rescue plan' instead of 'bailout'. That comes a bit too late. Marketing can not revive a bad product after it failed.  The resistance within the U.S. population against a Wall Street bailout seems to be too big to be overcome by Congress and I'd suggest it will be even bigger against a second attempt.

It is wrong plan and Paulson, with obvious conflicts of interests, is the wrong person to execute any plan right now. Why, by the way, is he still in office?

The same question goes for Bernanke. Take a look at the Fed's balance sheet. The Fed is now out of power.

Ian Welsh has a plan. Congress should give the Treasury some $150 billion for emergency measures and start drafting and hold hearings on a real rescue bill. I am not sure I agree with all the proposals he wants to put in there. There might be need for some more radical measures, like direct federal lending to main street.

There is a lot of hyperbole in the current media. The financial system will not be destroyed. It will change and morph into a different, hopefully more responsible, one. Hedge funds and 'special investment vehicles' may vanish. So what. Was there ever a justification for their existence other than greed?

Posted by b on September 30, 2008 at 05:25 AM | Permalink | Comments (30)

September 29, 2008

Oops - Paulson Bailout Stopped in House - Updated

HR-3997, the Paulson bailout, just failed to pass the House.

via CSPAN life stream

Dems - 140 Yea,  95 Nay
Reps -  65 Yea, 133 Nay, 1 Not Voting
Total - 205 Yea,  228 Nay, 1 Not Voting

Paulson, we have a problem ...

adding on the fly:

Where does it go from here? I have no idea but would bet that everything financial will now go down hard - that includes oil and even gold - the system is deleveraging.

Roubini wrote shortly before the vote took place that the Paulson bill wouldn't matter much anyway - the markets say the 'Mother of All Bailouts' is the wrong bill.

The US and global financial crisis is becoming much more severe in spite of the Treasury rescue plan. The risk of a total systemic meltdown is now as high as ever

It is obvious that the current financial crisis is becoming more severe in spite of the Treasury rescue plan (or maybe because of it as this plan it totally flawed). The severe strains in financial markets (money markets, credit markets, stock markets, CDS and derivative markets) are becoming more severe rather than less severe ...
The next step of this panic could become the mother of all bank runs, i.e. a run on the trillion dollar plus of the cross border short-term interbank liabilities of the US banking and financial system as foreign banks as starting to worry about the safety of their liquid exposures to US financial institutions; such a silent cross border bank run has already started as foreign banks are worried about the solvency of US banks and are starting to reduce their exposure. And if this run accelerates - as it may now - a total meltdown of the US financial system could occur. We are thus now in a generalized panic mode and back to the risk of a systemic meltdown of the entire financial system. And US and foreign policy authorities seem to be clueless about what needs to be done next. Maybe they should today start with a coordinated 100 bps reduction in policy rates in all the major economies in the world to show that they are starting to seriously recognize and address this rapidly worsening financial crisis.

I don't agree on the panic policy rate reduction - it would only reduce trust in the central banks' abilities without having any meaningful economic relevance right now. Otherwise, Roubini is correct.

Last thought for now: 9/29 will be a marked day for historians - maybe even as big (bigger?) than 9/11. Osama Bin Laden's goal to bankrupt the U.S. was achieved without him doing anything remarkable. The U.S. did it on its own.

An end of an era. As said in earlier comments, the end of the quarter tomorrow will be devastating for lots of financial entities. They will have to report real numbers instead of made up stuff because the Paulson bill, which gave the authority to fake balance sheets by 'mark to fantasy', was rejected. The Paulson bill could probably have helped to make the dive smoother.

Many hedge funds will be slaughtered as redemptions will come in at an unprecedented scale. All of the capital they have and which will now be redrawn is highly leveraged in risky bets on all kind of financial 'products'. They will have to sell, sell and sell everything.

With those leveraged bets unwinding, the post WWII credit super cycle may end. The natural result would be deflation and a Greater Depression.

I am not sure that's going to happen, but if it does, the experience will be quite extreme for all of us.

Posted by b on September 29, 2008 at 01:58 PM | Permalink | Comments (39)

The Price Of Haughtiness

Der Spiegel is a German weekly magazine comparable to Time magazine but with a bit higher relative circulation and about three or four times as thick. The current title picture shows the Statue of Liberty with its flame blown out.

The Price of Haughtiness
An economic crisis is changing the world

Seems to catch the general mood pretty well.

Posted by b on September 29, 2008 at 10:37 AM | Permalink | Comments (11)

Down Fast, Too Fast

The bailout bill is still the same Paulson three pager but with a 100+ additional pages of window dressing.

I wonder who will vote for this at all. Anyone in the house who is up for reelection is in danger if her vote is yea. Most Republicans will certainly vote nay, so the bill, if it goes through at all, will not be bipartisan, but will get hung around the Democrat's necks.

Some people like Brad DeLong and Larry Summers think that this bill will cost the taxpayer little or nothing. I doubt that very much. Giving Paulson a free hand over hundreds of billion dollar will not be free of cost, but might well end up as a very expensive endeavor. As serious economists point out, the bill does nothing to get at the root of the problems. In January, at the latest, another big bailout will be needed.

In between the Ponzi scheme that is the hedge fund industry will come down. Hedge funds will have to report quarterly results in a few days. Those will likely be a mess as many have made losses with the Lehman bankruptcy or depend on now restricted short selling. Many of them have rules that delay investors withdrawals for three month. By December these highly leveraged entities will have to sell many, many assets to be able to return at least a part their money to their investors.

The selling spree guarantees that all markets will fall further.

Today Germany rescued the commercial real estate investment bank HypoReal, Belgium and the Netherlands rescued Fortis and Britain nationalized the bad parts of Bradford & Bingley. In the U.S. Wachovia will be rescued soon or go bankrupt.

The contagion is now spreading fast, too fast.

Posted by b on September 29, 2008 at 05:59 AM | Permalink | Comments (11)

September 28, 2008

Freedom at a Zeros Cost

The Treasury fought hard to regain freedom for Wall Street. It won! Rejoice! Your government will now become the proud owner of lots of weird papers.

Freedom seldom comes for free, but as the president will soon explain in a special TV address,  the Treasury's fight for freedom of Wall Street will cost you only a zero. It may even gain you some real value.

During the next weeks, the president will announce, you will be asked to turn over all your cash to your local sheriff's office. Don't fear. You will get your money back immediately after a zero has been removed from each note greater than five dollars.

Homeland Security considers five dollar and one dollar notes to have the potential to finance terrorist activities. Each of these notes will therefore be replaced with two quarters or a dime respectively. You will gain some real, soon very precious, metal in exchange for a dangerous tools of terrorism.

Thanks to Wall Street and the financial industry the same process will be applied automatically to all your checking accounts, 401(k)s, money market funds and brokerage accounts. Unfortunately the Treasury is not able to remove any zero from taxes due. We apologize for that small inconvenience. 

The president ordered the experienced 3rd Infantry’s 1st BCT to help local authorities in visiting each home to make sure that every American will have an equal opportunity to take part in this operation.

Equal opportunity and freedom. Isn't that what the U.S. is about?

Posted by b on September 28, 2008 at 01:26 PM | Permalink | Comments (33)

No More Ground Attacks on Pakistan?

It seems that the U.S. government finally understood that invading tribal areas in Pakistan will not help the situation there and in Afghanistan:

U.S. special operations forces have paused ground operations in Pakistan’s tribal areas, but military and civilian government officials differ over why the cross-border raids have been halted.

But this stay may only be a temporary:

“We are now working with the Pakistanis to make sure that those type of ground-type insertions do not happen, at least for a period of time to give them an opportunity to do what they claim they are desiring to do,” the Pentagon official said, adding that this did not apply to air strikes launched from unmanned aerial vehicles at targets inside the tribal areas.
[A] U.S. government official closely involved with policy in the Afghanistan-Pakistan region said the military had underestimated the Pakistani response and was reconsidering its options.

Really the military? It seems that someone who ordered the Joint Special Forces Command to do the raid has gone wild with these attacks and that there was no coordination with other forces in the area.

Jeff Huber points out that instead of unity of command there are at least four U.S. chains of fools that act independent of each other. ISAF/NATO is under the U.S. European command, the area logistics for Afghanistan and Pakistan fall under Central Command, the special forces that raided Pakistan are under Joint Special Forces Command and the drone flights that attempt targeted killing are a CIA operation with support from the U.S. Northern Command. There is also a split between the military and the State Department and a hodgepodge of uncoordinated aid agencies that trample on each other feet while ignoring the Afghan government.

This seems to be a somewhat intentional construct by the White House which wants real command power only for itself and thereby creates the typical mess:

The raid represented “a strategic miscalculation,” the U.S. government official said. “We did not fully appreciate the vehemence of the Pakistani response,” which included the Pakistan government’s implication that it was willing to cut the coalition’s supply lines through Pakistan. “I don’t think we really believed it was going to go to that level,” the government official said.

In the White House sits a gung-ho president who loves to hear Tom Clancy like stories of special operations. It is he who ordered the raids:

When JSOC forces cross the border into Pakistan, they do so only after receiving clearances from the highest levels of the U.S. government, sources said. However, exactly who has the authority to approve JSOC’s missions into Pakistan is shrouded in secrecy.
“Even a missile strike requires the highest level of authority,” a special operations officer with Afghanistan experience said.

Asked who would have to sign off on a mission into Pakistan, he replied: “The president, no doubt in my mind. The president.”

While ground raids were halted for now, I expect that there will be continued bombing from Unmanned Ariel Vehicles, like the one the Pakistanis shoot down last week. (Though maybe that one was a British drone.)

In other news the British Observer reports on talks between the Afghan Government and the Taliban, supported by Britain and most important by Saudi Arabia. The idea is to bring some Taliban commander like Mullah Omar into the government. The Taliban demand, while not yet sufficiently clear, includes an end of the foreign occupation.

An accompanying piece finds it unlikely that the U.S. would agree to this:

Hekmat Karzai, director of a think tank in Kabul, said that although discussions with the Taliban 'might not be too difficult... getting the international community on board would be extremely hard'.

The Saudis will have to pressure Washington to give the plan some chance.

Posted by b on September 28, 2008 at 12:30 PM | Permalink | Comments (3)

September 27, 2008

The Tracks Lead To Goldman

Two weeks ago, the nation’s most powerful regulators and bankers huddled in the Lower Manhattan fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.

As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.

The only Wall Street chief executive participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.
Behind Insurer’s Crisis, a Blind Eye to a Web of Risk

It seems that Paulson invested $85 billion of taxpayer money into AIG to save Goldman from a $20 billion loss, or $200 billion - who knows? Still Paulson acted to save Goldman, not AIG. With what reasoning?

Why would anyone trust this criminal who asked Congress for unreviewable power to spend a Trillion, or two, to run the U.S. Treasury?

Posted by b on September 27, 2008 at 02:52 PM | Permalink | Comments (15)

Not a cigarette paper between them

by Debs is dead
lifted from a comment

It's kinda touching to see that some people take these prez debates seriously. Consider that you can't push a cigarette paper between either major party candidate on any major issue. Both want to keep killing people on the other side of the world for no real reason other than "they are there", neither is prepared to undertake any major structural change to amerikan society, a society that is failing as a socially cohesive group, an efficient place to breed and live (Infant Mortality 42nd not counting the much worse 'colonies like Guam, P. Rico, or American Samoa much less the newest Iraq).

Just across the northern border in Canada the average life expectancy is nearly 10 years longer for both genders, you'd think that one fact would be sufficient to motivate a change to decent health care but it hasn't and Obama won't try much less succeed in getting any sort of meaningful health coverage instituted for all amerikans.

Not least of all because it is too late. The asset base, skill sets and community infrastructures had to be built up before the baby boomer bulge over-strained the resource. But even if that weren't so he wouldn't succeed because the fundamentals of amerikan society are too askew. Peeps can be persuaded that idiotic issues like the spread of communism, rise of islam or whatever are more important than the health and well-being of their own family.

Not only do people accept that lunatic suggestion a substantial number of amerikans will try and ram that stupidity down the throats of anyone who attempts to disagree. The oppression has become self-service. Amerikans race to institute more and more laws defining more and more types of criminal act that can be committed by the poor while they destroy any restraints on the criminal behaviour of the rich and powerful. . . Willingly. Not because they were told to but because they imagine it will be better that way. Better for who?

Grey nonentities struggling for the right to commute to servile labour in order to scrape together the means to buy pre-packaged nutrition free food?

Certainly not for the millions of amerikans who will spend their entire lives in 'the prison system' fully 25% of people on this planet who are in prison are incarcerated in amerika in the sadly misnamed 'amerikan justice system'. (Amerikans make up about 4.5% of the world population and have 25% of the world's prisoners yet they believe other countries want their freedoms? It would be funny if it weren't so sad.)

Neither candidate would have been prepared to substantively discuss any of those issues during the great debate or any of the myriad other major life effecting issues that amerikan society has slipped outta a humane resolution of.

Instead they will have uttered platitudes about a meaningless court case from last century Roe V Wade that amerikans have never really grasped anyhow, or debate who was having the best 'withdrawal' from Iraq when the withdrawal either would create isn't a withdrawal, it is a permanent occupation.

I suppose 'energy independence' has become the latest meaningless distraction away from the real issues. That prolly got an arcane, jargonistic but clichéd pounding during the debate.

And now they are competing with each other to give the tiny skerrick of amerika's wealth that hasn't already been swallowed up with murdering foreigners or supporting the mind-bogglingly complex corporate welfare system that guarantees every rich amerikan will be made richer - small sum set aside for public school education and basic health care for the elderly is now going to be diverted to the mega rich in a completely new way.

The reason for this plan appears to be that if amerikans don't accede to this extortion they will lose their right to commute to servile labour in order to scrape together the means to buy pre-packaged nutrition free food.

A decent leader would call the banks' bluff. Of course McCain isn't going to do that he will give as much away as Obama but he wants to try and shame Obama in in front of Obama's 'core constituency'.

How the rich must laugh at the sight of the two candidates for people's choice arguing over the degree of obeisance they have shown the rich. Guffaw safe in the knowledge that the candidate who has promised less to the rich and more to the voters will be rewarded with defeat.

Posted by b on September 27, 2008 at 04:38 AM | Permalink | Comments (62)

September 26, 2008

The Dems Have Been Had - Again

The Democrats have been had, again, by the Republicans.

After Paulson delivered his scare show to Congress leaders last week, demanding a $700+ billion check without checks and balance, it were the Democrat leaders in Congress, Pelosi, Schumer, Frank, who immediately stepped forward and agreed in principal that such a lunatic plan was needed.

Blinded by Wall Street contributions to their campaigns, they publicly declared that 'something must be done' and followed the lead of the most despised president ever like the sheep they are.

They attached a bit of window dressing to the Paulson plan but left out any real issue progressives should care about like the mortgage modifications in bankruptcy courts.

Yesterday evening the Republicans pulled the rug and the deal is off.

These Republicans and McCain will now be able to tell their constituency that it was them who protected the taxpayer and that the Dems and Obama were indeed the people who wanted to throw money at Wall Street.

This was a huge ploy and the Dems fell for it.

Karl Rove must be laughing his ass off.


This is not a crisis over liquidity and providing liquidity, while in some cases necessary, will not relieve the blocked interbank credit markets. This is a solvency crisis where many financial entities are suspected to be bankrupt. The people in bank A know how they fudge their own balance sheets to hide the losses. They correctly suspect that bank B does the same. That is the reason why A does not want to lend to B and B does not want to lend to A. Those who have money prefer to stay liquid instead of taking the risk to lend it to some bankrupt entity.

That situation is not good and it will eventually lead to trouble for Main Street. There are ways to get out of this, but the Paulson plan was about the most ineffective and wasteful way one could think of.

People need to sit back, and think through the issues to come up with something comprehensive. Paulson pushing the panic button or Cramer screaming on TV is no reason to favor giveaways.

The Dems should prepare a real stimulation program, several hundred billion dollars of infrastructure investment, and be prepared to lend to Main Street when the banks fail to do it. Buy up foreclosed homes and destroy them to relief the housing market of excess supply that further pulls down the housing market.

Help the people, not the banks. Those, over time, can and will sort out the solvency issues themselves.

There are many structural issues that must be tackled by the next congress.

J.P. Morgan just took over the failed Washington Mutual in a quite lucrative deal. It is now the biggest bank in the U.S. with Bank of America being number two. This giants will have to be split at a point. Companies that are 'too big to fail' must never be allowed to exist. They disturb the markets by the implicit government insurance that comes with the 'too big to fail' status.

The whole finacial system must be renovated. But that is nothing that can be done within weeks and by giving away money.

Posted by b on September 26, 2008 at 04:04 AM | Permalink | Comments (80)

September 25, 2008

Palin on the Bailout

The thing scaring me is that there seem to be millions of people out there who really buy into this:

PALIN: Ultimately, what the bailout does is help those who are concerned about the health care reform that is needed to help shore up the economy– Oh, it’s got to be about job creation too. So health care reform and reducing taxes and reining in spending has got to accompany tax reductions and tax relief for Americans.

Then again, maybe a Dem like Reid or Pelosi would have formulated it better, but given who pays them the outcome would probably be the same.

Posted by b on September 25, 2008 at 03:32 PM | Permalink | Comments (19)

Three Items On Afghanistan

No time today to write something up, so for now just links to three 'atmosphere' items on Afghanistan.

Via Ghost of Alexander the trailers to the movie At War.

At War is a documentary film shot and directed by Scott Kesterson, who spent a year embedded with US forces in Afghanistan.

With all the blind shooting going on it seems that the soldiers have no idea at all who or what they are fighting.

A WaPo reporter on growing anarchy in Kabul:

While Taliban insurgents stage increasing attacks in the Afghan countryside, equally fast-expanding violent crime -- kidnappings, carjackings, drug-related killings and highway robberies -- is plaguing the capital of 5 million and the vital truck and bus routes that connect the country's major cities. It is making some Afghans nostalgic for the low-crime days before 2001, when the Taliban sternly ruled most of the country.
"The government is weak, and it has an enormously high level of tolerance for crime, abuse and corruption," said Nader Nadery, an official of the Afghan Independent Human Rights Commission. "If you have power and money, you don't have to account for your actions. Instead of the rule of law, there is a state of impunity, which is one of the factors contributing to the growth of the Taliban."

And grow they will.

Alex Peter Cwalinski, who seems to be a U.S. marine in Afghanistan, blogs a series on Just another day in Afghanistan. Parts 2, 3, 4, 5 and 6. Subjective and revealing.

Another team found where the gun fire came from. They knew this because they found the empty brass from which the bullets came from strewn out on the ground behind a wall. The gunman had apparently fled, I guess he got want he want, the opportunity to say that he shot at Americans.

Their was nothing left for us to do now so we turned around and headed back to the trucks. Upon climbing up into the back the feelings of nausea returned. I reached over the edge of the armor and started throwing up, only a little at first, but I knew their was more to come I could feel it. I stood their, head hanging over the side, my helmet weighing it down. I moved the headset mic that hooked up to my radio so I wouldn’t throw up on it again. I looked down towards the dark asphalt trying to make the headache go away. I finally finished, it was all I had left in my stomach.

Posted by b on September 25, 2008 at 02:11 PM | Permalink | Comments (4)

The Paulson Crime And Other Thoughts

It seems like Paulson and Bernanke together with their partners in crime Pelosi, Reid, Frank, Dodd and Schumer have successfully arranged the biggest single wealth transfer from the people of the U.S. to the very rich.

Obama and McCain stand by to laud that feat.

A few weeks ago the economic problems were 'contained', the banking system 'sound'. Now the same folks who over the years produced the crisis suddenly scream "Depression!" and claim to have found the only solution: "Give me your money!!!"

This is by far not depression territory - yet. But Congress is following Bush in doing the best possible to get the U.S. there.

Most of the money that will go into the Paulson plan will be wasted to save some big bank shareholders. That money will be lacking when it will be needed for real programs that would make a difference.

From a guy who was right all along:

[I]n order to resolve this financial crisis it is not enough to take the bad/toxic assets off the balance sheet of the financial institutions (a new RTC); it is also necessary and fundamental to reduce the debt overhang of millions of insolvent households via a significant debt reduction on their mortgages (an HOLC program like the one that was implement during the Great Depression); and also recapitalize undercapitalized banks with public capital in the form of preferred shares (as the RFC did with 4000 banks during the Great Depression).

An RTC scheme without an HOLC and RFC component would not resolve two fundamental problems: millions of households are insolvent and unable to service their mortgages; the financial system is vastly undercapitalized and needs capital to avoid an ugly credit crunch and to foster new credit creation that is needed for future growth.

With $700 billion wasted for the Paulson plan, likely borrowed from China by selling out Taiwan, where will the money come from to get the other programs going? What else is for sale? Would Russia buy back Alaska? Sarah Palin should ask for an offer.

GE just cut its profit forecast. 50% of GE's earnings come from its financial business arm. That part is likely to look no better than Washington Mutual which will go belly up on Friday, if not earlier. It then will be split up and the taxpayer will be made to eat the bad parts while some rich folks will feast on the valuable ones.

The German foreign minister and the finance minister currently have fun saying 'I told you so':

Frank-Walter Steinmeier said during a visit to the U.S. Stock Exchange that Germany, Europe's biggest economy, had run into a brick wall when it called for more checks on international finance.

'I must say that we, and the finance minister (Peer Steinbrueck) in particular, were right in the recommendations that we have been making for two years,' he told reporters on Wall Street.


"The U.S. will lose its status as the superpower of the global financial system, not abruptly but it will erode," Finance Minister Peer Steinbrueck told the lower house of Germany's parliament in Berlin, according to published reports. "The global financial system will become more multi-polar."

Steinbrueck criticized the United States for failing to adequately regulate investment banks and said free-market policies embraced by the United States and Great Britain that emphasized a short-term "insane drive for higher and higher profits" were partly to blame for the crisis.

Both are right and both should shut up. Such talk only provokes anger. Germany will be hit hard too. Not as hard as the US, the UK and the neo-liberal eastern European economies but for a big exporter like Germany a recession is unavoidable under these circumstances.

But Germany is unlikely to see violent protests over the downturn or any measures like these:

"The next emergency measure will be that Americans are not allowed to buy foreign currency and transfer money overseas, and the next measure will be not permitting Americans to buy gold and so on and so forth…. It creates even more uncertainty in the market place when you continually change the rules," Faber said.

Faber's assumption is that the U.S. will massively inflate and U.S. people will try to hold their money in other currencies. Then currency controls will be needed to stop the capital outflow. He is right, so prepare yourself.

Stephen Colbert yesterday tried to explain how much $700 billion is. The easiest way, he said, is to think of it as 1 Euro.

That wasn't funny.

Posted by b on September 25, 2008 at 08:58 AM | Permalink | Comments (21)

September 24, 2008

The Shameless Buffett Deal

Henry Paulson wants the taxpayers to pay some $700+ billion for trash paper currently held by his old company Goldman Sachs and others. The deal will likely bring a 50% or bigger loss for the taxpayers.

At the same time Warren Buffet buys a $5 billion stake of Goldman Sachs that practically guarantees him a return of some 17-20% per year plus possible upsides in the stock price. This because Goldman will likely be the one profiting the most from the big bailout.

[Buffett] made it very clear that he would not have bought anything right now if he wasn't confident Congress will do the "right thing" and approve the financial bailout proposal put forward by Treasury Secretary Henry Paulson.

As he himself admits, Buffett and the other Berkshire shareholders will make $500 to $1,000 million profit per year because the taxpayer will pay for the big losses Wall Street made.

And now he is openly 'talking his book':

Buffett told us the financial system was on the brink of collapse last week before Paulson and Bernanke went to Congress with their plan.  And he warns that last week will "look like Nirvana" if a bailout plan isn't passed by Congress.

He calls the current crisis everyone's problem, not just Wall Street's, with the markets in a "very, very difficult situation."

This is high class gangster capitalism. Buffet did not make all his money by NOT being shameless.

And when such fine deals can be made, thanks to Paulson, why not take care that more of such will come along?

Buffett said Paulson is doing a great job, and he recommended that the next president keep him as Treasury Secretary for another year or so.

Utterly shameless.   

Posted by b on September 24, 2008 at 01:25 PM | Permalink | Comments (33)

Is The Bailout the Right Cure?

Paulson uses medical terms to describe the state of the financial system.

Paulson told ABC it was essential to prevent the financial system from clogging up, "because if it does clog up, this is going to have an adverse effect on people's abilities to get jobs, on their budgets, on their retirement savings, on lending for small businesses and so that's where the first priority has got to be."

Bernanke too:

Sen. Charles Schumer, D-N.Y., discussing statements that Federal Reserve Chairman Ben Bernanke made to the Senate Banking Committee Tuesday, said he "told us that our American economy's arteries, our financial system, is clogged and if we don't act the patient will surely suffer a heart attack _ maybe next week, maybe in six months, but it will happen."

The fear is that losses and deleveraging on Wall Street will lead to scarcity of credit on Main Street. 

But as David C. Johnston points out, there is little evidence that such scarcity exists:

Ask this question -- are the credit markets really about to seize up?

If they are then lots of business owners should be eager to tell how their bank is calling their 90-day revolving loans, rejecting new loans and demanding more cash on deposit. I called businessmen I know yesterday and not one of them reported such problems. Indeed, Citibank offered yesterday to lend me tens of thousands of dollars on my signature at 2.99 percent, well below the nearly 5 percent inflation rate. That offer came after I said no last week to a 4.99 percent loan.

So for one we wonder if Paulson's diagnosis is correct at all.

But let us assume for a moment that it is. What is then the best therapy for clogged arteries.

Any practitioner will tell a person with that diagnosis to first stop the bad habits. Stop smoking, eat less fat and cholesterol heavy stuff, do sports. I have yet to see the Fed, the Treasury and Congress to make any step into that direction. Where is the regulation that will prevent the clogged financial arteries from immediately clogging up again after this proposed bailout? Where is the behavior change that is needed?

To repair clogged arteries doctors have developed angioplasty. Inserting and expanding a tiny balloon at the site of the blockage. The Paulson bailout would provide the balloon to widen the financial arteries. But doctors usually combined angioplasty with the implantation of a stent, a small metal coil that will keep the artery open. The stents that will keep the financial arteries open are not part of the Paulson program. Instead of some permanent solution, Paulson would have to repeat the balloon trick again and again.

Sometimes arteries are damaged so badly that they can not be reopened. Lehman or Indybank come to mind. In such a case either other arteries must take care of the blood flow or the doctors will install a shunt: a segments of a leg vein is sewn onto the arteries to shunt blood around blocked areas.

Paulson argues for other arteries to take over. He wants to donate taxpayer money to Wall Street so Wall Street can lend it to Main Street. Is he sure that those arteries are in better shape than Lehman and Indybank? The shunt solution may actually be the better one. If the U.S. government really can spend $700 billion on this problem, why not shunt them around Wall Street?

If there is a scarcity of credit on Main Street, is there any reason why the government can not lend directly to Main Street, i.e to consumers and producers of real products? The government does not use Wall Street to collect taxes. So why should Wall Street be used to distribute taxpayer money?

Paulsons diagnosis may be correct and the arteries may really clog up. There certainly was some trouble in the arteries of interbank lending last week. But the therapy he is pressing for is not the best one and it is unlikely that it will lead to permanent healing. The patient needs: a. behavior change and b. a better blood distribution system. The Paulson's program does not provide either.

Congress needs to take a wider view on this issue. Paulson rushes in as a doctor with a ready diagnosis and a therapy and wants immediate approval for emergency action. His diagnosis may well be wrong, the therapy he proposes will not lead to permanent healing and the case for an emergency has yet to be made.

And what if the doctor is the real problem here and this the real diagnosis?

We have a treasury secretary in America - Hank Paulson. I'm afraid he's gone insane. He's become like the Colonel Kurtz of Treasury Secretaries. He's gone native. He's co-opted trillions of dollars of American taxpayers' money and he's playing hedge fund like a rogue trader. We have got a rogue trader in the Treasury Secretary's office. He's being aided and abetted by Ben Bernanke who's been discredited as the entire Federal Reserve Bank has been utterly discredited. We're looking at a possible inflationary depression in America and the worse is yet to come, much worse is yet to come."

$700 billion is a lot of money and there are many alternative uses. For example - the money could pay $35,000 per year to 2 million people for 10 years to do something sensible like repairing bridges and levees. That would have lots of positive secondary effects on production, local development and taxes. Saving a few thousand jobs at Wall Street hardly looks like the optimal way to spend so much money.

For once, let's try bubble up instead of trickle down.

Posted by b on September 24, 2008 at 08:43 AM | Permalink | Comments (40)

September 23, 2008

On Regulating Credit Default Swaps

While the media still fret about subprime loans, Asset Backed Securities and the Paulson bailout, the real monsters slowly creep into the public view.

Frequent MoA readers will know these monsters. Jérôme warned here about Credit Default Swaps in April 2005. In April 2006 I posted on European 'financial war gaming' of large defaults involving these. My April 2008 piece on The Problem with Credit Default Swaps ended with the line:

Compared to what will happen in the CDS markets, the losses in subprime mortgages will look like small change.

So: 'Who could have know ... '? 

Yesterday New York state governor David Patterson announced that he will start to regulate certain Credit Default Swaps:

Under Paterson's plan, the New York State Insurance Department would require entities selling credit-default swaps to bondholders to show they can actually pay the claims if there is a default. The new guidelines will become effective in January.
Credit-default swaps, which are traded between banks, hedge funds, insurers and other investors, are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt or to hedge against losses.

They pay the buyer face value in exchange for the underlying securities or the cash equivalent should the borrower fail to adhere to its debt agreements. The market has grown 100-fold over the past seven years to cover $62 trillion of debt, or more bonds than there are outstanding.

New York State regulation would only cover a fifth of only one certain type of CDS originated in the United States.

At today's hearing in Congress SEC Chairman Cox, suddenly found his socialist soul and asked for authority to regulate CDS'. Cox, fox, hen house. Barndoor - closing.

But Cox still does not want real regulation for CDS'. The only reason why he comes up with this is because his friends at Wall Street, who created these instruments and prevented their regulation in the first place, may now see them used against themselves:

Swaps linked to firms including Goldman Sachs Group Inc. and Morgan Stanley climbed to records last week, with increases preceding or mirroring drops in stock prices.
Cox today said investors who buy swaps without owning the underlying debt may be similar to naked short sellers who sell stocks they don't own or borrow. Such short sales can flood the market and illegally drive down stocks.

(Side question: Since when is it 'illegal' to expect the price of an asset to sink and to act on that expectation to make some gain?)

There are three problems with regulating Credit Default Swaps.

  • The existing CDS are a myriad of individual private contracts that are not standardized at all. It will be impossible to get these contracts under any sensible regulation in a decent time-frame as they all include different legal language, are based on various specials underlying products and have each dozens of special conditions attached to them.
  • The complexity of the existing CDS is is also the reason why any attempt now to create a clearing house for such contracts, as the Fed has suggested, will not work.
  • In a global financial system only world-wide can be effective.

The existing CDS bubble WILL bust before any regulation can be in place.

The only solution do get these toxic CDS' out of the system without bringing down half or more of the financial world is to declare all existing CDS null and void.

After that world-wide regulation for CDS and comparable derivatives must be established.

During last years spring and summer German chancellor Merkel tried to get the CDS regulation issue on the G8 agenda but the move was rejected by the U.S. and the UK. Both countries better not expect help from Merkel when this bubble blows up.

Former German chancellor Schmidt recently suggested to let the IMF draft world-wide regulation for CDS' and related 'products' as it is somewhat neutral and has a lot of international specialist, but currently rather little to do.

The CDS bubble is an imminent danger and it is still growing by the day. It is too late to regulate it away. There is either this solution or a financial meltdown.

Posted by b on September 23, 2008 at 12:47 PM | Permalink | Comments (33)

Billmon: Things Become More Serious


We may not be there yet. Both the dollar and the commodity prices could stabilize, at least temporarily -- particularly if the Cheney Administration (or should I say the Goldman Sachs Administration?) and the Dems in Congress can quickly reconcile their differences and ram the MOAB through the legislative colon (and up ours). Further disasters are not inevitable -- or at least, they don't have to happen all at once.

But if and when it comes, disaster (the kind that turns financial panics into searing generational memories) will unfold in a string of events that will look very much like what we saw in the markets today -- only on steroids.
Things Become More Serious

Posted by b on September 23, 2008 at 11:02 AM | Permalink | Comments (13)

The Treasury Morphs Into A Hedgefund

The Mother of All Bailouts plan gives the Treasury not only authority to buy and sell Mortgage Backed Securities, but allows it to deal in any financial instruments including leveraged derivatives.

This evolved over the various versions.

The original Paulson proposal said:

Sec. 2. Purchases of Mortgage-Related Assets.

(a) Authority to Purchase.-- The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.
Sec. 12. Definitions.

(1) Mortgage-Related Assets.--The term “mortgage-related assets” means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.

All media reports and blogs I have read about this assume that the Treasury under this plan would only buy Mortgage Backed Securities, i.e. bonds backed my mortgage payments.

But the above language also includes Credit Default Swaps. Insurance contracts or derivatives, that guarantee the recoverability of MBS and change their value in relation to an MBS' value.

The language in the Treasury Fact Sheed on the proposal is even wider:

Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets. The purchases are intended to be residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans. The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets.

It seems like the fact sheed exceeds the breadth of the released proposal.

Oh, you say, the Democrats in Congress will prevent the Treasury from morphing into a investment bank backed by $700 billion of taxpayer capital?

Here is Senator Dodd's expanded proposal of the Paulson plan. The language is even worse than in the original:



(1) AUTHORITY.—The Secretary is authorized to establish a program to purchase, and to make and fund commitments to purchase troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with policies and procedures developed by the Secretary.

(7) TROUBLED ASSETS.—The term ‘‘troubled assets’’ means—

(A) residential or commercial mortgages, and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case were originated or issued on or before March 14, 2008; and

(B) upon the determination of the Secretary, in consultation with the Chairman of the Board of Governors of the Federal Reserve System, any other financial instrument, as the Secretary determines necessary to promote financial market stability.

The Dodd version gets lauded by Krugman, DeLong and other 'liberal' luminaries.

This while the bailout language morphed from "mortgage related assets" to "any financial instrument."

The Dodd version added some nice little extras for a homeowners in distress and some oversight provision. But it also extended the scope of the Paulson plan far beyond housing and mortgages towards an all encompassing bailout for any financial issue.

Since 2003 Dodd collected over $4 million in contributions from Securities and Investment companies. His top five doners include Citibank, SAC Capital Partners and Royal Bank of Scotland. That may well be the reason why he does not want to keep the bill restricted to mortgage related assets but wants to include any financial instrument.

If this becomes law, Paulson and whoever replaces him in January will have the authority to buy Asset Backed Securities from car loans and credit card loans. He will be able to buy and sell derivatives based on ABS that have build in leverage effects. The Treasury may even deal in synthetic Collateral Debt Obligations and derivatives base on those. It can buy and sell shares of public dealt companies, precious metals, future contracts on these and it can speculate on interest moves of Russian government bonds.

Are there any big long future positions on the Canadian dollar the U.S. president does not like? Just get the Treasury buy them up. Congress is giving it the right to do so.

With a capital of $700 billion and the authority to buy and sell any highly leveraged financial instruments, the Treasury will become one gigantic hedge fund that can and may well act to move multi-trillions.

If such an entity makes one wrong move, it can bankrupt its owners within a few hours. The Treasury is too knowledgeable to make such mistakes? So were two Nobel Price winners at LTCM.

Posted by b on September 23, 2008 at 09:12 AM | Permalink | Comments (11)

Iraq Off The Menu

The probably best coverage of the War on Iraq is by McClatchy's Washington Bureau.

But Iraq, despite continuing daily carnage there, has now mostly fallen off the radar in U.S. news. The Washington Bureau followed that general move and eliminated the years-old Iraq link from its main menu.

McClatchy Washington Bureau a few days ago (bigger)


McClatchy Washington Bureau now (bigger)

Instead of news from Iraq we now get 'Polls'. The most recent one says Most Americans think U.S. is losing war on terrorism.

Will eliminating Iraq from news frontpages change that opinion?

The direct URL still leads to the McClatchy Iraq coverage page. But there is no link to it from the homepage.

McClatchy's Baghdad bureau chief Leila Fadel is back in Iraq and again blogs about the daily disaster. She is a damned good reporter and this is probably a setback for her. Please give her some nice comments.

Posted by b on September 23, 2008 at 04:05 AM | Permalink | Comments (18)

September 22, 2008

Who Is Behind the Bombing in Islamabad?

"What we cannot escape," one Pentagon policy planner told us, "is a confrontation with Pakistan.  Pakistan holds the key to success for us in Afghanistan."
Afghanistan: How Does This End?, Swoop, Sept 20, 2008


If one wants to make sense of the big bombing that hit the Marriott hotel in Islamabad yesterday, one has to look at the bigger strategic picture.

If you believe the usually 'western' media, the U.S. is still an ally of Pakistan and India is still a neutral country. In reality the U.S. and India are allied in a war against Pakistan and China.

Foreign policy elements in India and the in U.S. see China as their respective big strategic enemy. But both want - for now - avoid an open conflict. The center of gravity in this silent war against China are the hydrocarbon reserves in Central Asia, the Middle East and Africa and the transport routes for these.

The war in Afghanistan and the war in Pakistan can be seen as proxy wars between these three big powers over the energy issue.

China is developing the port of Gwader in Baluchistan on the south coast of Pakistan and transport routes from there into its mainland. The port will allow energy flow from Africa and the Middle East to China without Indian naval interference.

Just like China is in a strategic alliance with Pakistan, India is in a strategic alliance with Afghanistan. It is developing a road connection from Herat to a port in south Iran. While Pakistan supports some Taliban groups in their war against the U.S. occupation of Afghanistan, India and the U.S. support other Taliban groups within Pakistan in fighting Islamabad.

The current aim seems to be to splinter Pakistan into smaller pieces.

Oh, that is not what the media say? The above is all baloney?

Attached is a collection of excerpts of recent news pieces and strategic papers. Skim through them with the above in mind.

From the U.S.:

[T]he Pashtuns, concentrated in the northwestern tribal areas, would join with their ethnic brethren across the Afghan border (some 40 million of them combined) to form an independent “Pashtunistan.” The Sindhis in the southeast, numbering 23 million, would unite with the six million Baluch tribesmen in the southwest to establish a federation along the Arabian Sea from India to Iran. “Pakistan” would then be a nuclear-armed Punjabi rump state.
Drawn and Quartered, New York Times op-ed, Feb 1, 2008

From India:

If ever the national interests are defined with clarity and prioritised, the foremost threat to the Union (and for centuries before) materialised on the western periphery, continuously. To defend this key threat to the Union, New Delhi should extend its influence through export of both, soft and hard power towards Central Asia from where invasions have been mounted over centuries.  Cessation of Pakistan as a state facilitates furtherance of this pivotal national objective.
With China’s one arm, i.e. Pakistan disabled, its expansionist plans will receive a severe jolt. Beijing continues to pose primary threat to New Delhi. Even as we continue to engage with it as constructively as possible, we must strive to remove the proxy. At the same time, it is prudent to extend moral support to the people of Tibet to sink Chinese expansionism in the morass of insurgency.
Stable Pakistan not in India’s interest, Indian Defence Review, Sept. 2008

From Pakistan:

Pakistani policy analysts are convinced that United States has been a duplicitous ally during the past seven years, using the sincere Pakistani cooperation on Afghanistan to gradually turn that country into a military base to launch a sophisticated psychological, intelligence and military campaign to destabilize Pakistan itself.

The objective is to weaken the control of the Pakistani military over geographical Pakistan and ignite an ethnic and sectarian civil war leading to changing the status of Balochistan and NWFP, possibly even facilitate the break up of both provinces from the Pakistani federation.
Pakistan Reverses 9/11 Appeasement, Ahmed Quraishi, Sept 13, 2008

Various sources:

Mere rhetorical response to the mounting American gangsterism is no answer, when this adventurism has very deeper diabolical motivations to it.
It is for the failure of the retired general, who loved playing a slave to American warlords, to demand this action from the coalition forces in Afghanistan that our tribal region has become the lair of foreign-sponsored militants, who on the bidding of their masters have turned our once-peaceful tribal belt into a violent place and the rest of our country their killing field.
Mullen’s betrayal, The Frontier Post,  Peshawar, Editorial, Sept 19, 2008


India is buying armaments that major powers like the United States use to operate far from home: aircraft carriers, giant C-130J transport planes and airborne refueling tankers. Meanwhile, India has helped to build a small air base in Tajikistan that it will share with its host country. It is modern India’s first military outpost on foreign soil.
“There seems to be an emerging long-term competition between India and China for pre-eminence in the region,” said Jacqueline Newmyer, president of the Long Term Strategy Group, a research institute in Cambridge, Mass., and a security consultant to the United States government. “India is preparing slowly to claim its place as a pre-eminent power, and in the meantime China is working to complicate that for India.”
Land of Gandhi Asserts Itself as Global Military Power, NYT, Sept. 22, 2008


Armed with a permit for global nuclear trade, India's prime minister leaves next week for the United States and France hoping to seal atomic energy deals and discuss cooperation in defense and counter-terrorism.
Atomic trade high on India PM's U.S., France tour, Reuters, Sept. 19, 2008


Senior Chinese military official Guo Boxiong pledged on Monday to further strengthen military exchanges between China and Pakistan.

In his meeting with Pakistani Chief of Army Staff Ashfaq PervezKiyani, Guo, vice chairman of the Central Military Commission, appreciated the fruitful cooperation between both sides over the years.
China highly values its all-round strategic cooperative partnership with Pakistan, Guo said, vowing to join hands with the country to boost bilateral ties to a new level.

In response, Kiyani said his country treasures its traditional friendship with China and is ready to further boost cooperation with China.
China eyes closer military exchanges with Pakistan, Xinhua, Sept. 22, 2008


Taliban insurgents have attacked an Indian construction project in the western Afghan province of Herat, killing 11 Afghan policemen and wounding several others on a weekend that saw most fighters lay down their weapons for U.N. Peace Day.
Indian construction project targeted by Taliban, Globe and Mail, Sept. 21, 2008


ISLAMABAD, Pakistan -- Two local intelligence officials say troops and tribesmen opened fire when two U.S. helicopters crossed into Pakistan from Afghanistan.
Intel officials: US copters cross Pakistan border, Reuters, Sept. 22, 2008


Pakistani military forces flew repeated helicopter missions into Afghanistan to resupply the Taliban during a fierce battle in June 2007, according to a U.S. Marine lieutenant colonel, who says his information is based on multiple U.S. and Afghan intelligence reports.
U.S. Officer: Pakistani Forces Aided Taliban, Defense News, Sept. 19, 2008


This U.S. media campaign has been going hand in glove for the past eighteen months with a wave of terrorism inside Pakistan targeting Pakistani civilians and government.  The blame for these acts was laid at the doors of something called ‘Pakistani Taliban’ which is, in major part, a creation of Indian and Karzai intelligence setups inside Afghanistan.
But the situation between Islamabad and Washington does not have to come to this. Islamabad can help tip the scales in Washington against the hawks who want a war with Pakistan. Not all parts of the U.S. government accept this idea and this must be exploited. Pakistan must make it clear that it will retaliate.
The only way to entrap Pakistan now is to either orchestrate a spectacular terrorist attack in U.S. and blame it on Pakistan, or to assassinate a high profile personality inside Pakistan and generate domestic strife that will make it impossible for the military to resist U.S. attacks.
Pakistan Reverses 9/11 Appeasement, Ahmed Quraishi, Sept 13, 2008


  • Who could be/is responsible for yesterday's big bomb in Islamabad?
  • May China have, beside Taiwan, additional conditions for the big bailout that relate with Pakistan?

Posted by b on September 22, 2008 at 12:05 PM | Permalink | Comments (64)

Selling Out Taiwan To Finance The Bailout

With regard to the mother of all bailouts, my first question was:

Any future lenders will [..] ask for higher interest rates. Will they have additional conditions on top of those?
Who will finance Paulson's plan (or any other plan of this size) and under what conditions?

Today Bush called the prime lender to the U.S. and asked for the big loan. With polite language the Chinese revealed their 'additional condition'.

It is a nice, small but productive island Beijing wants to reunite with the fatherland for quite a while. Until now U.S. interests prevented that. But now things may have changed.

Chinese, U.S. presidents talk over phone about ties, U.S. financial turmoil
BEIJING, Sept. 22 (Xinhua) -- Chinese President Hu Jintao and his U.S. counterpart George W. Bush discussed bilateral relations and the financial upheavals in the United States in a phone conversation on Monday morning Beijing time.
Bush briefed Hu on the latest development of the U.S. financial market, saying his government was well aware of the scope of the problem, and had taken and would continue to take necessary measures to stabilize the domestic and world financial markets.

Hu hoped the measures would soon take effect and lead to a gradual recovery of the financial market, which he said not only serves the interests of the United States, but also those of China, and benefits the stability of the world financial market and the sound development of the world economy.

The Chinese president also praised the good momentum of the development of the Sino-U.S. ties in recent years in various areas.

He said China is ready to work with the U.S. side to intensify dialogue, exchanges and cooperation, and properly handle issues concerning mutual interests and of major concern, particularly the Taiwan question, in a bid to push forward the sustained and steady development of the Sino-U.S. constructive and cooperative ties.

Translated from diplo-speech: "Give us Taiwan and you'll get the loan."

Taiwan will not be the only 'additional condition' in this deal but for China it is the premier one.

Taiwan's GDP is some $700 billion, about the amount the U.S. needs for the current bailout. A good deal for Beijing even if the dollar falls and the big loans never gets repaid. A war over Taiwan would be more expensive.

Bush will now have to brief Congress leaders and will need to get some consensus within the U.S. foreign policy establishment on this issue. I doubt that China is dumb enough to hand the money over without having some bi-partisan guarantee.

Such a sell out of an area of interest to finance wars is not unprecedented. Bush can finally compare himself to Napoleon.

Will the U.S. agree to the Chinese condition and sell out Taiwan for the big loan it needs?

My bet is yes.


Posted by b on September 22, 2008 at 08:56 AM | Permalink | Comments (32)

September 21, 2008

Declare All Credit Default Swaps Null And Void

Estimates on the productivity advantage of granite countertops and CDS' were too optimistic.


The Paulson plan is useless as it only tries to address the degraded value of Asset Backed Securities.

These are neither the source nor the reason for the very real threat of a total financial crash.

Credit Default Swaps of a nominal value of $65+ trillion are in real danger to implode any minute in a chain reaction that will take down half of the worlds financial infrastructure and impair the real economy for a long, long time.

There is only one possible way to avert this event:

International legislative action that immediately declares all Credit Default Swaps null and void.

Here is why:

At the bottom of the inverted financial pyramid are overvalued land, wood structures, dry walls and granite countertops - i.e. cheaply over-build houses.

These were sold to people who could only afford them with mortgages that had unrealistic starting conditions and on the premise that housing prices would continue to rise forever.

These mortgages were bundled, sliced and diced into Mortgage Backed Securities and sold to investors. Home equity loans, car-loans and credit card debt were converted to Asset Backed Securities and sold off.

On top of these MBS/ABS papers some geniuses constructed an additional financial layer. 

These were insurance contracts that covered against the default of ABS, MBS and various types of bonds. These insurance contracts, Credit Default Swaps, are totally unregulated private agreements. They were widely created and dealt with when the risk of default of the underlying papers was assumed to be low.

Some of the insurers who issued these CDS never had the capital to back all the policies they wrote. In a competitive environment they offered too low premiums to insure against default risks.

Some insurers partly insured themselves via reinsurance. When they sold a CDS on a bond issue of some $10 million they went to other insurers and bought themselves CDS, let's say $5 million or perhaps even for $20 million. The re-insurers partly re-insured themselves again by buying CDS elsewhere.

Some people simply betted on a change in the default risk of some bonds. They did not even own the MBS or bond in question, but bought or sold insurance against the default of a specific MBS or bond anyway. Some may have bought total insurance from different insurers in a way that a default of the MBS would pay them ten times the nominal value of said MBS.

Imagine you could have ten fire insurances on your home that would each pay out the full value of your house if it burns down. That would probably give you some very hot ideas.

That is exactly the reason why fire insurance regulation prevents such a case. But CDS are unregulated, their originators are unregulated and there is no settlement mechanism for them other than the private contracts between the parties.

The original size of the mortgages going into default are probably $300-500 billion. The total mortgage origination in the last years were a few trillion dollars. These and additionally credit card loans and auto loans that were converted to Asset Backed Securities in a volume of about $6 trillion.

But on top of these $6 trillion of MBS/ABS and bonds insurances, re-insurances and re-re-insurances were written with an estimated total nominal value of some $65+ trillion. The real number is unknown, but it is bigger than the whole worlds yearly GDP.

Now the housing bubble busted. There was simply too much supply created to sustain ever rising prices. Without rising house prices a lot of homeowners had to default on their mortgages.

With the mortgages going into foreclosure, the MBS and other asset backed papers where suddenly less worth than expected. This triggered credit insurance events. People who had bought the Credit Default Swaps suddenly demanded money from their insurers.

It turns out that these insurers, or their re-insurers, or whoever meanwhile carries the now negative side of the CDS in question are out of money and the insurance agreements are worthless. The worlds biggest insurer, AIG, was nationalized because it had written too much credit insurance for too low prices.

The big danger now are not defaulting homeowners. The big danger are not Asset Backed Securities that might lose some value.

The big danger is the pyramid of credit insurances that is certain to come down and that will take with it at least half of the existing finance infrastructure.

Banks, hedge funds, pension funds, municipals and others who bought insurance will find that it is worthless. Banks, hedge funds an others who sold insurances will find that they will have to pay out more than their total capital.

We currently see a credit-freeze because nobody wants to lend to anybody as it is impossible to know how much credit insurance the other party has written or how much it depends on their validity. You do not lend to anyone who might already be bust.

That is the situation we are in and it shows why the Paulson plan is utter crap and nothing but a huge robbery.

The Paulson plan would not help at the bottom of the inverted pyramid, the housing market, and not at the top, in the CDS market.

Paulson knows that the crash of the CDS market is inevitable. His plan is an attempt to let the taxpayer pay for the stabilization of the middle of the pyramid in the hope that the big crash will come only after the election (and in the hope that the loot might help Paulson's beloved Goldman Sachs to survive.)

There is only way to avert the crash.

Declare all CDS contracts, worldwide, as null and void. There is precedence for this:

During the Great Depression, many debt contracts were indexed to gold. So when the dollar convertibility into gold was suspended, the value of that debt soared, threatening the survival of many institutions. The Roosevelt Administration declared the clause invalid, de facto forcing debt forgiveness. Furthermore, the Supreme Court maintained this decision.

The maze of the value and ownership of $65+ trillion of financial credit insurance contracts has frozen the credit markets. Nobody is lending to anybody else because the value of the counterparty is in doubt.

Those $65 trillion reasons for the credit market freeze will never go away without a huge crash that then will have worth consequences than the 1929 stock market crash. The only way to eliminate these reasons is internationally concerted action to declare the legal obligations of all CDS' null and void.

At the same time:

  • all financial exchanges and markets of the world close for a week
  • CDS are declared null and void and new CDS creation is forbidden until new regulation is in place
  • the publicly dealt financial entities have seven days to figure out and publicly restate the value of their liabilities and assets excluding all CDS
  • a onetime windfall tax will be created that socializes overt advantages some entities will have from this
  • the proceed of that tax shall be used to prop up the capital of the big losers in a program comparable to the Reconstruction Finance Corporation of 1932.

To spend taxpayer money to buy up some MBS that lost value will do little to avert the coming CDS crash.

A $700 billion bailout can not save a unregulated $70 trillion CDS market that is under severe stress.

There is precedence that decisive legislative action can solve this really big problem. Unless this is done, all money to prop up the markets by whatever means is simply wasted and will make no difference in the final outcome of the crisis.

After CDS' are gone, Congress should set up a new Home Owners' Loan Corporation to solve the foreclosure problem and stabilize housing prices. This will then stabilize the MBS/ABS markets. Losses will have to be taken, but the catastrophe would be avoided.

If you are a U.S. citizen you may want to call your Congressmen and Senator on this issue. Monday morning might be a good time to do that.

Posted by b on September 21, 2008 at 01:42 PM | Permalink | Comments (57)

How To Still Short Financials

The Security Exchange Commission and its equivalents in several other countries have banned short selling of financial stocks. As a result, financials rallied on Thursday and Friday.

This was an utterly dumb move that will have some bad side effects. The financial stocks did not sink because of short selling, but because those companies are in bad shape and their future profits, if any, will be small.

While the SEC measure will prohibit small investors from profiting on the downturn, big investors have a very easy way around this.

They will simply go short on complete indexes like the Dow Top 30, FTSE 100 or S&P 500 and will then go long, i.e. buy, all single stocks in that index that are not the ones they want to target. The net effect is a short position on the targeted financials only.

It will take a day or two for large hedge funds to set this up effectively and reprogram their computers to automate the process. Then the financial stocks will sink again as is appropriate.

The SEC would have to prohibit all index option trading to prevent this, but that would freeze and ruin lots of investors like pension funds that have done nothing wrong.

To ban shorts on financials was a stupid step, an outright manipulation of the markets and a warning to all. The SEC, Fed and Treasury are quite capable to take more such steps and thereby turn the already bad situation into a even worse one.

Posted by b on September 21, 2008 at 05:45 AM | Permalink | Comments (10)

OT 08-32

Open Thread - Your news & views ...

Posted by b on September 21, 2008 at 01:37 AM | Permalink | Comments (95)

September 20, 2008

Who Will Finance Paulson's Plan?

The Secretary of the Treasury is asking Congress for a blank check of $700,000,000,000.00 to buy up Residential and Commercial Mortgage Backed Securities of dubious value on whatever terms he wishes.

The biggest obscenity in the presented proposal is this:

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

I will have to more to say about the type of this bailout later on. For now only one point that is independent of the type of bailout.

Who will finance this?

Paulson also wants to lift the US national debt ceiling to $11,315,000,000,000.00. (When Bush took office, the U.S. federal debt was some $5.6 trillion and on a downtrend.) The U.S. GDP is roughly 13.5 trillion so the US government debt at that ceiling will be some 83% of US GDP. In international ranking that puts the U.S. debt to GDP ratio somewhere between Cote d'Ivoire and Sri Lanka. Still excludes from that calculation are several trillions of liabilities of Fannie & Freddie and AIG the U.S. government recently took over.

Japan is of course still worse off with a debt to GDP ratio of nearly 200%. But most of Japan's debt is held at home as Japan is a nation of savers and has a positive currency account. It exports more than it imports. Over the last years the U.S. has imported a lot more than it exported and needs some $500 billion per year from foreigners to finance that habit. The U.S. national saving rate is somewhere near zero. It therefore needs foreigners to lend the money of any deficit.

Now Paulson wants $700 billion in emergency finance from where?

Who in this world can and will lend $700 billion for an emergency plan when the total lending to the U.S. in one year is only about $500 billion?

Did Paulson talk with China, Russia and the Saudis about this?

With this new debt and debt to GDP ratio the U.S. does no longer deserve an AAA rating. That will have to be cut down two or three notches.

Any future lenders will therefore ask for higher interest rates. Will they have additional conditions on top of those?

To create some emergency plan is one effort. To find the money to proceed with it is a different point. I have yet to see the second issue discussed in any serious way. But some thoughts must go into that.

What do you think.

Who will finance Paulson's plan (or any other plan of this size) and under what conditions?

Posted by b on September 20, 2008 at 01:40 PM | Permalink | Comments (41)

September 19, 2008

Who Started the Georgian Five-Day-War?

Saakashvili's splendid little war in early August was accompanied by a lot of propaganda. But it still it was obvious to most people that Saakashvili started the war with an artillery barrage against civilians and Russian peacekeepers. Only some 12-15 hours later Russian troops from outside South Ossetia arrived to help their besieged comrades. After two days the outcome was obvious. Georgian troops were beaten and the Russian Federation forces had won the fight.

NATO analysis, the OECD observers and 'western' intelligence agencies confirm this view of the events. The Georgians attacked in mass first, then the Russian Federation moved troops and beat them.

But on August 26 a new Georgian version crept up. The Georgian government started to assert that regular Russian troops rushed into South Ossetia before the Georgians attacked.

We have now undisputable judgement on who is correct here.

Michel J. Totton, a right wing will-write-whatever-for-money 'journalist' was flown to Georgia and sat down with Saakashvili official media adviser. On August 26 he then published The Truth About Russia in Georgia asserting, as he was payed to do:

Virtually everyone believes Georgian President Mikheil Saakashvili foolishly provoked a Russian invasion on August 7, 2008, when he sent troops into the breakaway district of South Ossetia.
Virtually everyone is wrong. Georgia didn't start it on August 7, nor on any other date. The South Ossetian militia started it on August 6 when its fighters fired on Georgian peacekeepers and Georgian villages with weapons banned by the agreement hammered out between the two sides in 1994. At the same time, the Russian military sent its invasion force bearing down on Georgia from the north side of the Caucasus Mountains on the Russian side of the border through the Roki tunnel and into Georgia. This happened before Saakashvili sent additional troops to South Ossetia and allegedly started the war.

Totten quotes Saakashvili's media adviser:

"That evening, the 7th, the president gets information that a large Russian column is on the move. Later that evening, somebody sees those vehicles emerging from the Roki tunnel [into Georgia from Russia]. Then a little bit later, somebody else sees them. That's three confirmations. It was time to act."

There are 34,600 Google links to Totten's piece, mostly from rightwing U.S. sites who swallowed that story hook, line and sinker.

But somehow that was not enough to convince the relevant people and the public attention was  moving on. Last week the Georgian government made new attempt to establish a false history by using a more prestigious propaganda organ than Totten.

On Tuesday the New York Times headlined: Georgia Offers Fresh Evidence on War’s Start:

A new front has opened between Georgia and Russia, now over which side was the aggressor whose military activities early last month ignited the lopsided five-day war. At issue is new intelligence, inconclusive on its own, that nonetheless paints a more complicated picture of the critical last hours before war broke out.
Georgia claims that its main evidence — two of several calls secretly recorded by its intelligence service on Aug. 7 and 8 — shows that Russian tanks and fighting vehicles were already passing through the Roki Tunnel linking Russia to South Ossetia before dawn on Aug. 7.
Vano Merabishvili, Georgia’s minister of interior, said he was told of the intercepts by Georgian intelligence within hours of their being recorded. The information, he said, was relayed to Mr. Saakashvili, who saw them as a sign of a Russian invasion.

Pressed as to why more than a month passed before the conversations came to light, Mr. Merabishvili said the file with the recordings was lost during the war when the surveillance team moved operations from Tbilisi, the capital, to the central city of Gori. Georgian intelligence officers later sifted through 6,000 files to retrieve copies, he said.

There are now some tapes of alleged phone calls of dubious origin and the NYT seems to believe the story. But the last quoted graph throws up a serious follow up question the NYT did not ask:

Why would Georgia move its surveillance operation, that 'lost' the recordings to find them a month later, in the middle of the war from the safe capitol Tbilisi to the city of Gori which was near the front and a day later under Russian control? Beats me.

Neither the account dictated to Totten, nor the new 'tape' story the NYT published seem believable to me. But that is just this leftwing blogger's opinion. But some unfortunately relevant people seem to to support my take.

Yesterday U.S. Secretary of State Rice revealed the official U.S. administration version of the start of the Georgian war in a speech to the German Marshall Fund (the same speech she asserts that Russia is on the way to 'international irrelevance'):

On August 7th, following repeated violations of the ceasefire in South Ossetia, including the shelling of Georgian villages, the Georgian government launched a major military operation into Tskhinvali and other areas of the separatist region. Regrettably, several Russian peacekeepers were killed in the fighting.

These events were troubling. But the situation deteriorated further when Russia’s leaders violated Georgia’s sovereignty and territorial integrity – and launched a full scale invasion across an internationally-recognized border.

Here we have the official version from the U.S. Secretary of State:

  1. The Georgians attacked.
  2. Further, the Russian Federation responded.

As reality is now even acknowledged by the Bush administration isn't time for Totten, the NYT and other propaganda organs to give up on the issue?

Posted by b on September 19, 2008 at 03:00 PM | Permalink | Comments (21)

The Mother of all Bailouts?

So Bernanke and Paulson go to congress and say a big bailout is needed. After 90 minutes congress in principle agrees. Half a trillion is said to be the appropriate number. Markets rally as short sellers get squeezed by this news.

But there is yet nothing behind this plan. Who should be bailed out and by what means? Who should do the bailout? How is this supposed to be financed? Who has the money to finance this? Under what conditions?

The general idea now seems to be to buy up bad loans from financial institutions for a rebate and to later sell these off.

The plan involves using hundreds of billions of dollars in government funding to buy bad loans, leaving banks with more money and fewer problems, according to two sources familiar with what was said at the meeting.

But what is the correct price for buying this stuff?

Two very different plans are cited as comparison for the current one. The Resolution Trust Corp. of the 1980s and the Reconstruction Finance Corporation of 1932. The RTC took over insolvent thrifts with real assets and slowly sold these off. The RFC gave credit to existing banks and companies. Neither form seems to fit here.

Why would the government buy those papers from the banks at all? Would it not be much better to buy the underlying assets of these papers?

If the government buys houses in foreclosure this would prop up the housing markets AND the mortgage backed papers the banks are holding. The government would then own  real value and could use it as the society finds necessary. This would help the banks as well as the communities.

The current plan looks like an attempt to do something - anything - simply so the administration and congress can say that they did something. Congress is not good in making such decisions under time pressure - remember the Patriot Act.

This emergency bailout will not have the results that people expect. Half a trillion fresh government debt will have many negative side effects. The bailout will not really help with the markets either. They will fall again as there are still many more bad loans that have not yet been acknowledged.

Sit back everyone and think again.

Posted by b on September 19, 2008 at 08:38 AM | Permalink | Comments (42)

Russia Irrelevant?

Russia’s invasion of Georgia has achieved – and will achieve – no enduring strategic objective. And our strategic goal now is to make clear to Russia’s leaders that their choices could put Russia on a one-way path to self-imposed isolation and international irrelevance.
Secretary Rice Addresses U.S.-Russia Relations At The German Marshall Fund, Sept 18, 2008

International irrelevance? Hmm ... you really think so? Here is the response:

Russia threatened to block NATO from using its air space for operations in Afghanistan if member states did not stop "hostile" policies toward Moscow, the Kremlin's top diplomat in Kabul said.

"(Russian air space) is still open, but if the NATO countries continue to their hostile policies with regard to Russia, definitely this issue will happen," Zamir Kabulov told BBC radio in an interview aired on Thursday.
Russia envoy warns NATO on air space to Afghanistan, Sept. 18, 2008

Posted by b on September 19, 2008 at 05:03 AM | Permalink | Comments (16)

September 18, 2008

McCain and Cox

CHRIS Cox for VP?

Former conservative colleagues in the House of Representatives are  Christopher Cox, chairman of the Securities and Exchange Commission since 2005, boosting to be Sen. John McCain's vice presidential running mate.
ROBERT D. NOVAK - Syndicated Columnist, March 18, 2008


Republican presidential candidate John McCain, in remarks prepared for delivery Thursday, said he thought Christopher Cox, chairman of the Securities and Exchange Commission, should be dismissed.
In a speech in Cedar Rapids, Iowa, Sen. McCain said the SEC allowed abusive short-selling, or bearish bets on a company's stock, to turn "our markets into a casino."
McCain Says Cox Should Be Fired As SEC Chief Amid 'Casino' Markets

McCain is right that Cox should be fired. (Still unlike McCain assumes, Cox can not be simply fired on a Presidents say so.) But Cox should certainly not be fired for allowing short selling.

If you allow people to act on expected increases of a products price, like filling up the car before a Gulf hurricane hits because gas will likely be more expensive the next day, why not allow people to act on an expected decrease of a product's price? Why should there be an asymmetry between up- and downside risk?

This is the real reason why Cox should be fired:

The events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

Instead, the 2004 exemption -- given only to 5 firms -- allowed them to lever up 30 and even 40 to 1.

Who were the five that received this special exemption? You won't be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley.

Blaming short sellers is in vogue these days. But financial markets did not go down because of short sellers. They did and do go down because rampant fraud allowed after zealous deregulation. Something McCain and Cox both have favored and are still favoring.

Posted by b on September 18, 2008 at 03:48 PM | Permalink | Comments (18)

Housing Crisis: Creative Destruction Can Help

Thinking about a solution to the housing mess I had been playing with this idea for a while:

Here is one government program to fix the housing crisis:  buy and destroy homes.

While I did some math on this, I never wrote about it. Now Fabius Maximus makes the argument.

The core of the housing crisis is overbuilding, which has created an excess supply of housing units (broadly defined).
Many vacant homes will be destroyed, the fast track to fixing this problem.  Empty houses get vandalized, destroyed by the owners (spite or insurance fraud), occupied by squatters or meth labs, or wrecked by the forces of nature.  In regions with net out-migration (e.g., Detroit) homes remain vacant for long periods, often abandoned by their owners (valueless but costly due to taxes and maintenance).  As anyone familiar with the history of the South Bronx knows, empty homes acts as an infectious blight that can devastate larger areas.  After a decade or two, the result can look like Dresden after the bombing in 1945.

There are excess houses on the market. These houses will decay without occupation and lead to slums. This will be expensive for their owners as well as for the communities, i.e the taxpayers.

Further these excess houses depress prices and they are the reason why the decline of house prices will go much further than necessary. Without supply destruction the prices for houses will be lower after the decline than before they bubbled up because of this excess supply.

So how much would the taxpayer have to invest to get rid of them?

According to the U.S. Census Bureau there are some 130 million houses in the U.S. but only 111 million are occupied. 14.6% are not occupied.

Here are the vacancy rates for rentals and for 'owner occupied' units:


The graph shows how the Rental Vacancy Rate (pink, left scale) jumped from some stable 8% in the 1980s and 90s to 10%.  The vacancy rate of 'owner occupied' units (blue, right scale) jumped from a long term 1.7% to 2.7%. There are simply too many houses.

To bring the vacancy numbers back to normal levels the excess supply, according to my calculations some 1.1 million of rental units and some 815,000* of 'owner occupied' units are excess, will have to be destroyed. (People who can not afford to own, will move back to rental units. So in reality one would destroy 1.9 million 'owner occupied' units and the rental excess would be diminished by people moving.)

The U.S. could easily buy the total of 1.9 million units and depose them. It could buy whole suburbs and tear them down. At a $100,000 average price per unit the current owner or mortgage holder would likely make a big loss so there would be no moral hazard.

The total price for the taxpayer would be $190 billion - i.e. small change in light of recent Treasury and Fed operations. Throw in a few billions for the current jobless craftsman who can tear those down and turn the energy wasting suburbs back into fields.

To do this will likely be cheaper than to take care of the consequences of decaying houses and a deeper fall of house prices and rents as necessary.

* numbers corrected - see the first comment

Posted by b on September 18, 2008 at 11:09 AM | Permalink | Comments (54)

Confidence in U.S. Statements

Islamabad - Chairman of the Joint Chiefs of Staff, Admiral Mike Mullen, visited Pakistan, September 16-17.  During his visit, Admiral Mullen met with Pakistan’s Chief of Army Staff, General Ashfaq Parvez Kayani, and Prime Minister Yousuf Raza Gilani.
For his part, Admiral Mullen appreciated the positive role that Pakistan is playing in the War on Terror and pledged continued U.S. support to Pakistan.  In this context, Admiral Mullen reiterated the U.S. commitment to respect Pakistan’s sovereignty and to develop further U.S.-Pakistani cooperation and coordination on these critical issues that challenge the security and well-being of the people of both countries.
U.S. Embassy Press Statement, Sept. 17, 2008


At least five people have been killed in a suspected missile attack by a US drone on a village in north-west Pakistan, local officials say.

The officials said missiles hit the village of Baghar in South Waziristan, close to the Afghan border.
At least six people were injured in the attack, according to BBC correspondent Dilawar Khan in the neighbouring North West Frontier Province.
'US drone' kills five in Pakistan, BBC. Sept. 17, 2008

One might assume that Mullen was out of the loop. The Joint Chiefs have been circumvented by the White House on Iraq too. Maybe Cheney even wanted to make the point that Mullen is irrelevant.

Still, it is easy to imagine how this looks for the rest of the world. One can not trust any official U.S. voice anymore. If the top U.S. officer Mullen talks of respect for Pakistani sovereignty while his troops at the same time invade Pakistan, how should can one believe ANY official statement the U.S. makes?

This during the biggest confidence crisis in U.S. dominated financial markets. And no - the issues are not unrelated. The central bankers in China, Pakistan's ally, will notice this.

Press reactions from Pakistan:

Dawn: Drone attack belies Mullen’s assurance: Six killed in S. Waziristan village

The News: Drone attack mocks Mullen’s assurance

Meanwhile, in order to lodge a strong protest over repeated violations of Pakistan airspace by the US drones and carrying out airstrikes in the Ahmadzai Wazirs-inhabited areas of SWA, a grand tribal jirga of nine sub-tribes of Ahmadzai Wazirs held its meeting in Wana's main Rustam Bazaar where they raised a tribal Lashkar to defend their frontiers with Afghanistan. They threatened to scrap the peace deal with the government if it failed in stopping the US attacks.

Former JUI-F MNA from South Waziristan, Maulana Noor Mohammad chaired the jirga, where around 1,000 tribal elders and tribesmen were present.
The jirga announced that eight million tribesmen from tribal areas along the border with Afghanistan would voluntarily fight alongside their armed forces if the US dared to attack the tribal regions.

The Ahmadzai Wazirs on the occasion announced raising a 400-member tribal Lashkar that would be deployed at the border with Afghanistan to safeguard Pakistan's frontiers against foreign forces.

Dawn Editorial:

The fact is American strikes inside Pakistan are a terrible idea. US Assistant Secretary of State Richard Boucher has said the whole Pakistani state apparatus must line up behind the goal of beating the terrorists and stabilising Pakistan. Unfortunately, the Americans giving the terrorists a beating on Pakistani soil will do anything but stabilise Pakistan — and all but guarantees that even fewer Pakistanis will accept that our own army beating the terrorists is a good idea either.

No doubt President Zardari and everyone down the de facto hierarchy of civilian power are new in office and faced with an extraordinary crisis. However, the president appears to have frozen in the face of an American onslaught. Mr Zardari must now use his speech before a joint sitting of parliament to explain his plan for defeating militancy — and keeping the Americans at bay.

If the U.S. keeps on with these attacks within Pakistan, Zardari will be replaced in a new coup by the military. That could well mean war between Pakistan and India which just moved nuclear capable jets into Kashmir.

Cheney/Bush are playing with deadly fire here. Not only with regard to war in Pakistan, but also through the general mistrust against the U.S. that is generated through these lunatic actions. The bill for that just starts to come through.

Posted by b on September 18, 2008 at 05:42 AM | Permalink | Comments (17)

September 17, 2008

Black Wednesday?

The Fed seems to run out of cash as the Treasury is selling $40 billion in fresh bonds to provide more money to the Fed. Who will buy those bonds at what rate?

The TED spread difference between Treasury rates and interbank rates is at a record high. The higher the spread, the greater the perceived credit risks in interbank lending. No one wants to lend anymore.

A money market fund yesterday 'broke the buck' and halted redemptions. Safe money market funds ain't safe no more.

Tip: Don't lend (deposit) anything to (at) any bank above what is insured ($100,000 in the U.S.).

The U.S. Securities and Exchange Commission  forbids naked short selling of financial stocks. Russia closed the stock exchange. Free markets abound ...

The Fed is trying to find a buyer for Washington Mutual - the biggest Saving and Loans in the U.S.  It might have as much luck with that as with finding a buyer for AIG.

After Morgan Stanley yesterday announced 'better than expected' earnings, the stock fell 23% 37% 43%. Seems like no one trusts these earnings numbers these days. Why might that be?

Goldman Sachs is down 23%, Gold without the man and sachs is up $50 $80 an ounce.

Everything is, of course,  contained.

More in the comments ...

Posted by b on September 17, 2008 at 11:50 AM | Permalink | Comments (52)

There goes the 'western' Ukraine

The coalition supporting the government of Ukraine has dissolved and a new one will be have to be formed within 30 days or there will be new elections.

The current President Viktor Yushchenko and the Prime Minister Prime Minister Yulia Tymoshenko were both part of the 'orange revolution' against the allegedly manipulated election of Viktor Yanukovych for President. Yushchenko and Tymoshenko recently split over a bid to reduce presidential powers.

While Yushchenko is pro-NATO, anti-Russian and recently supported Saakashili's splendid little war, Yulia Tymoshenko has largely moved to a neutral stand towards NATO and Russia and did not take any position on Georgia's war. Yanukovych is pro-Russian.

In the 450 seat parliament President Yushchenko's 'Our Ukraine' party has 74 seats. Prime Minister Yulia Tymoshenko's party has 156 seats. Together that had a majority. The opposition Yanukovych's Party of Regions has 175 seats. It should be easy to make up a new coalition with Tymoshenko and Yanukovych coming together without new elections.

But Tymoshenko as well as Yanukovych may have interest in new elections. According to a poll they both might come out with about the same percentage as in the last election while President Yushchenko's pro-western party would fall down to 4%.

One also should also never underestimate Yushchenko's authoritarian streak and the support he has from the U.S. anti-Russian/neocon front. A strike by the president against the parliament like Boris Yeltsin's coup in 1993, is a distinct possibility.

But if things go along the democratic way, the Ukraine will end up with a much less 'western' government that is unlikely to strive for a NATO and/or EU membership. This is one consequence of the five day war in Georgia. More will follow.

Posted by b on September 17, 2008 at 10:01 AM | Permalink | Comments (3)

The Real Tragedy

by Juan Moment
lifted from a comment

From fool's highly informative link in the Wild Ride thread :

In addition, The Fed has announced that it will take equities as collateral for loans.  "Equities" is a fancy name for stocks.

That's right - for the first time in history, now banks can take stocks to the discount window.  Maybe even their own stocks.

The Fed has gone from taking only the highest-quality securities - "AAA" rated debt instruments - to taking everything up to and including the most dangerous (common stock) all at once!

Now I may be blind but I've read The Federal Reserve Act multiple times and nowhere do I see where equities can be taken to the window (or anywhere else for that matter) for Fed Credit.

If they intend to actually do this, its quite clear they don't care what the law says. They're going to do it anyway, and their precedent is that you sat back and allowed them to take equity when they bailed out Bear Stearns, and said nothing! They will do anything they want by citing "exigent circumstances" and claim blanket authority.

What's worse, this effectively makes The Fed a margin lender on the equity markets! You think they don't have a reason to interfere in the market eh? Oh boy, now they have billions of reasons, all of them sitting on their balance sheet! Fair and open markets? Bah!

Note carefully folks - this effectively makes The Fed LONG (that is, a "buyer") of STOCKS.

What's even better is that they don't eat their own losses if there are any - they're yours!

That's because The Federal Reserve Act says that the profits (or losses) from The Fed flow through to the Treasury (after operating expenses) which means that now, suddenly The Federal Government is potentially directly exposed to losses in the stock market!

Now it has always been true that The Government "loses" when the market goes to hell as it gets less in the way of tax receipts. But that's different than suffering an actual capital loss - and that is now possible.

The implications of this tectonic shift within the banking framework are as yet to be seen, but this lowering of securities standards by the Feds is essentially the transfer of risk for shonky investments in equities from the commercial money houses to the US taxpayer, and with the risk the obligations to cover the losses. In times when the S&P could easily fall another 20% by years end, this will have grave consequences, possibly triggering a ruinous domino effect throughout the US and entangled nations.

Although AIG has an alleged $1 trillion in assets, it can’t raise $50 billion. Who would have this sort of money at this point in time anyway? Certainly not people who can afford to loose it. So they wonder how much the assets are really worth. How much risk have they insured for loans which will or have already gone bad? When you hear announcements of “imminent death if $75 billion aren’t raised within 48 hours”, then one doesn’t have to be a rocket scientist to predict the future of this company in a downward spiraling economy. Too big to fail they say. Hah, too big to succeed I say, the giant has already stumbled and lost its balance, and no arm will be extended for fear of being dragged down with the helpless giant. So instead the Fed roles out the safety blanket to catch the falling juggernaut, taking on a 80% stake in the insurance colossus, in effect becoming the insurer of many commercial risks across the world. The costs of this venture could potentially be catastrophic for the US treasury.

The US government coffers, already running on empty, hemorrhaging from ridiculously expensive wars on foreign shores and tax cuts to the high income earners, will have to cop further billions of dollars in losses. The thrashing of equity values, the current implosion of global stock markets will continue for quite some time, but from now on the losses will be crystallizing in the US treasury’s P&L. Where exactly is the treasury going to get the money from that will be needed to cover the deficits?

Tax increases? Sell the Empire State to China? Reduce the public service budget by 5% and start laying of employees? With an at best stagnating economy, falling corporate earnings, the tax revenue will decrease. A rise in unemployment figures means more social security outlays. The foreign capital drip which keeps the patient alive for the moment, apart from positioning the US in a dependency that could easily translate into being controlled by foreign powers, is under current global conditions slowly drying up and shouldn’t be taken for granted.

Who ever wins the next election will have to make some tough decisions, but won’t. The mugs in congress, no matter which tentacle they belong to, motivated by self-interest, have been sitting on their hands forever. Stooges, most if not all of them, people who taught us for decades that we best expect nothing so we won’t be disappointed. And that all talk-no action squad, strikingly ignorant and lame for as long as they’ve been in office, are representing us in the battle with the conglomerates. Shudder.

The consolidation happening on Wall Street will leave even less people in control over even more money. One has to wonder if this wasn’t the name of the game in the first place. The incestuous relationship between the oligarchs we have become used to, is lately presenting its more ferocious side, showing that in their passionate love they are not afraid of devouring each other. And this mounting concentration of financial power is producing gorillas too large to measure in pounds.

Even without a degree in business law or economics, people should be starting to see the writing on the wall. Judging by the euphoria generated by both parties’ presidential candidates, I doubt that this awakening is taking place though. All this talk now by Obama & McCain about how they will reform the financial sector, introduce regulations and enforce them, is warm air, blown into the sails of their respective election ships on the swelling oceans of public fears and disillusionment. The crucial decisions in the landscape gardening project on Wall Street will be made by the same tweed suits who caused this mess in the first place, and the conditions imposed on the banking orgs will have loopholes big enough to push in 4 years the next election ship through.

As B pointed out, in terms of interest rates, the Fed has become irrelevant. In the current climate banks will be hording cash and offer interest rates way above the fed rate. Following a predestined path, the flight from falling equities into securer cash assets means interest rates will eventually come down again, allowing the businesses that will survive the current squeeze, bruised but alive, to slowly rebuild their balance sheets. Lower rates would also help to jump start the mangled housing sector, however for that to happen, house prices will have to drop further. Much further. Unrealistic expectations of asset values will need to be adjusted, not just in board rooms but also around kitchen tables.

A painful process, for sure. Financial stress causes marriages to break up, children being yelled at, depression and despair. And so this financial melt down will bring about social hardships for the many caught up in this spider web of too closely related business interests. The anger and frustration will not be helped by the realization that their perceived worth didn’t just disappear into thin air, but that it has been in scandalous fashion redistributed up the pyramid and the perpetrators are buying up foreclosed villas.

The real tragedy though becomes apparent when one puts the figures in context. While the Feds pours $80 billion into the bottomless pit Wall Street has become, people all over the world are starving to death, starvation that could be prevented by a fraction of that money:

UNITED NATIONS (AP) — The United Nations blamed the global food crisis Wednesday for a $3.4 billion global shortfall in emergency humanitarian aid for 34 nations.
U.N. officials said that higher food and fuel costs, along with natural disasters and worsening conflicts, are making it more difficult to raise funds from donor nations, mostly Western governments.
"The donors will need to dig deep into their pockets to try to find that money," said John Holmes, the U.N.'s humanitarian chief.
So far this year, $2.9 billion has been raised, representing about 46% of what's needed to respond to the world's most severe crises, Holmes said...

What a shame.

Posted by b on September 17, 2008 at 05:41 AM | Permalink | Comments (21)

September 16, 2008

Downturn, Inflation and Tax Policy

So Hank Greenberg says on CNBC that AIG is a "national treasure" and wants the Fed to loan it $70-80-90 billion. Last time I looked no nation's treasury owned AIG, but Hank Greenberg, who was kicked out of that company three years ago over dubious accounting practices, owns 11 percent of all AIG shares.

But anyway - should the Fed or Treasury loan money to AIG?

No. There is no way AIG can survive and while such a loan would cover part of its losses it would never be repaid.

Should the Fed lower interest rates?

No. Fed interest rates at this point do not matter at all.

The overnight interest rate for interbank loans was 6% yesterday, 4% over the Fed rate while it is normally only a quarter or a half percent over the Fed rate. What is missing now is trust in the solvency of any partner in the financial markets. The need to borrow $90 billion is not simply a 'liquidity problem'. Nobody wants to lend if their is quite a chance that the money will not come back and that there are now no longer ways to hedge such deals.

This insecure situation will continue. The Dow and S&P may rally a bit from here, AIG failure or not, and will tank again after a few days or weeks. The loan crisis - mortgages, HELOCs, car loans, credit card loans etc - which is the point of origin of the general economic crisis has not even reached its peak. That will come at the end of this year or next spring.

Only then will the system really falter and only then the rubber will really hit the road, i.e. Main Street. The really bad news will come from the big industrial companies in the 2nd quarter reports in  2009. Soon after that the Dow will see the low of the cycle and it will stay there for years to come.

Between now and then we will see lots of smaller banks fail and we will see some big ones going under. Hedge funds and private equity groups will silently close down as they will not be able to get more capital or credit. Leveraged Buy Out deals will be history. The FDIC will go bust and the taxpayer will have to carry that additional burdens. Private pension plans will be in very deep doodoo.

Next year there will be lot of talk about deflation and the Fed will use that talk as justification to inflate massively.

Does anybody remember any serious Fed talk and measures against inflation in the last 15 years? I do not. So while this whole bubble, first tech, than credit, build itself via a lax monetary policy, there never was official inflation that would have required some restrictive Fed measure. But as the bubble now finally breaks there will be serious talk about deflation and it will be used to seriously inflate and to devalue the dollar.

It is a totally dishonest scheme, but it will be the only way the U.S. will be able to repair its economy and balance sheet.

Inflation and currency devaluation is a very regressive kind of unofficial tax. It hits the poor and the middle class much stronger than the richer folks.

One can adjust fiscal policies to somewhat alleviate that effect. Increase the tax rate for income over $1 million to some 80%, over $500,000 to some 60% etc and lower regressive taxes like the sales tax.

With such a progressive tax policy the burden of inflation, which is needed to repair the national U.S. balance sheet, can be put equally on everyone.

Posted by b on September 16, 2008 at 02:28 PM | Permalink | Comments (29)

Tick - Tock - ...

Ratings agencies had threatened to downgrade the insurance giant’s credit rating by Monday morning, allowing counterparties to withdraw capital from their contracts with the company. One person close to the firm said that if such an event occurred, A.I.G. might survive for only 48 hours to 72 hours.
A.I.G. Allowed to Borrow Money From Subsidiaries, NYT Sept. 14


All three major agencies — Standard & Poor's, Moody's Investors Services and Fitch Ratings — dropped AIG's ratings at least two notches late Monday.
AIG downgraded as it struggles to shore up books, AP, Sept. 16

Tick - tock -tick - tock - ...

Posted by b on September 16, 2008 at 05:04 AM | Permalink | Comments (22)

September 15, 2008

The Chenab River And U.S. Pressure on Pakistan

There is again conflict heating up between India and Pakistan. There are two well known political issues between these countries. Yesterday a major economic issue was added by India that may well lead to unrest or even war. I suspect that the U.S. has a hand in this.

One political conflict is over Kashmir, the north western state of India that has a Muslim majority and borders Pakistan. Kashmir does want independence from India, but does not want to become a part of Pakistan.

While Pakistan generally supports anti-Indian activities in Kashmir it does not want Kashmir to become independent but would like to incorporate it. Unrest is Kashmir is often a proxy war that Pakistan traditionally stokes whenever it has interior political trouble.

This time though trouble in Kashmir seems to be indigenous. The state government gave a patch of land near a Hindu temple in Kashmir to some Hindi charity. The 6 million Muslims in Kashmir protested over this in large rallies. Hindu protesters then blocked the only road connecting Kashmir with India for several weeks. This led to big losses for Kashmir fruit farmers who now plan to reopen the silk road to Pakistan.

Saturday five bombs exploded in New Delhi and killed 21 people. A group called Indian Mujahideen took responsibility and referred to the conflict in Kashmir. Some accuse Pakistan of supporting the Indian Mujahideen which I find unlikely.

While the recent conflict might not have been activated by Pakistan, India has other grievances too. Last month the Indian embassy in Kabul was bombed and India as well as the U.S. accused Pakistan's military secret service ISI to be behind this. Pakistan feels threatened by any Indian activity in Afghanistan. (Why do the U.S. and NATO allow Indian activities in Afghanistan at all? These practically guarantee a never ending trouble with Pakistan supported Taliban.)

In a rather harsh step India yesterday added a big economic issue to the already problematic situation:

India has closed Chenab water flow and as a result the shortage in Pakistan has become more severe.

Sources told Dawn on Sunday that the water blockade by India could adversely affect the Kharif crops, particularly cotton and sugarcane which were in maturity stage and required final watering, and the sowing of Rabi crops early next month.
The water shortage could force Pakistan to import more wheat next year, adding to the foreign exchange pressure and worsening its balance of payments crisis.

The authorities are already estimating more than 35 per cent shortage of irrigation water during the next Rabi season following a decline in the melting of snow in Northern Areas, higher withdrawals by provinces during Kharif and increased hydropower generation.

The sources said India’s unilateral decision to stop the Chenab flows had put additional pressure on the irrigation system of Pakistan, which used to receive more than 23,000 cusecs a day until last week, but it had now been brought down to almost zero.

(Chenab is a river (map) of the Indus system that flows from Kashmir to Pakistan. Kharif is the autumn harvest and Rabi the spring harvest period. A cusec is a cubic foot of water flow per second.)

The flow of water from the rivers of the Indus system is essential for Pakistan's electricity generation and for irrigation. Karachi already sees daily long electricity outages and the government recently raised electricity prices by 31%.

India stopping the flow of the Chenab is a violation of the Indus Water Treaty between India and Pakistan.

It is possible that the U.S. has a hand in this and asked India to close the flow. Bush has quite some leverage with New Delhi through the recent nuclear deal. On Friday Syed Saleem Shahzad wrote about the conflict between the U.S. and Pakistan over alleged Taliban support and reminded us:

In this delicate situation, the balance could be tipped by India, on US instigation, mobilizing forces on the Line of Control that separates the Indian- and Pakistan-administered sections of Kashmir, as happened in December 2001. And as happened then, Pakistan will be left with no option but to surrender to America's will in both letter and spirit.

Instead of war at the Line of Control between Kashmir and Pakistan, the threat to Pakistan this time is famine and/or financial ruin. It might fold under this threat or it might get violent over this breach of the international treaty on the river flow.

The new Pakistani president Zardari is visiting London this week and then New York. He will be offered some water. He will also be asked to give the U.S. a free hand to hunt Taliban in Pakistan's tribal eastern areas and to stop firing at U.S. helicopters over Pakistan.

It will be difficult for Zardari to reject the drink.

Posted by b on September 15, 2008 at 07:42 AM | Permalink | Comments (71)

September 14, 2008

The Wild Ride

Wow. I did not expect the pulling of the plug for today, but it happened:

Bloomberg headlines:

Two broker dealers and one insurance company practically gone. It is going to be a dark Monday for a lot of 401k holders.

When will the other broker-dealers, Morgan Stanley, Goldman Sachs, JP Morgan and Citigroup go down the drain? How can BofA survive swallowing Merrill? Remember, they already picked up a bankrupt Countrywide. Did they have so many counterparty risk with Merrill that they had to buy it?

I expect the Fed to lower interest rates this week (Tuesday?) to 1.75 or even 1.5%. The dollar will then go down again, commodities will go up.


Posted by b on September 14, 2008 at 11:15 PM | Permalink | Comments (65)

September 13, 2008

OT 08-31

This blog lives off comments.

Please feed it with news & views.

Open thread ...

Posted by b on September 13, 2008 at 02:00 PM | Permalink | Comments (129)

This Weekend's Bailout

The Fed and the Treasury urge major banks to rescue Lehman Brothers.

The majors, Goldman Sachs, JPMorgan, Morgan Stanley, Citigroup, Merrill Lynch and Royal Bank of Scotland all are in trouble themselves. They do not have the capital to take on more risk and would have problems to raise additional capital under favorable conditions.

If they are willing to take on Lehman at all, they will demand that the Fed or the Treasury take over billions of the risk as the Fed did in March when Bear Sterns was sold of to JP Morgan.

But the Fed has lost $30 billion on that deal and already committed half of its balance sheet to support the financial markets. The Treasury needs to put up some $200+ billion for Freddie and Fannie and much more when more of F&F's 'assets' turn out to be worthless.

To get someone, anyone to buy in to Lehman is a game of chicken and the deadline is Sunday noon when the markets in Asia open. All potential buyers want the taxpayer to take the risk and the Fed and the Treasury fear the consequences of guaranteeing such.

I expect that comrades Paulson and Bernanke of the United Socialist State Republic of America (USSRA) will lose the chicken game and will again commit double digit billions of U.S. taxpayer money to bail out the capitalists and to socialize their losses.

They will find a way to obfuscate the guarantees they will give. That may well work as the media are busy to discuss campaign trivia.

Next weekend the story will repeat with Washington Mutual, two weeks from now American International Group will need rescue. That is going to be a real biggy. It is a major insurance company with a $1 trillion dollar balance sheet and endangered counterparties. Merrill Lynch may hold out a few weeks longer, but I expect it to eventually fail too.

Meanwhile many more smaller banks will go bankrupt and the Federal Deposit Insurance Corp (FDIC) will have to commit its assets to pay out the insured accounts. FDIC is likely to run out of money before the year is over and the government will be obligated to cover all further FDIC insurance losses.

I am curious where this ends. The financial system now deleverages and deflates in unprecedented ways and size. The Fed and the Treasury can only slow down the process, but there is no way to stop it.

What might the end state of this process look like?

Posted by b on September 13, 2008 at 01:52 PM | Permalink | Comments (33)

September 12, 2008

Election Prediction

Pat Lang analyzes the election race and concludes:

John McCain will be the 44th president of the United States. His need to feel the equal of his "fathers" will be assuaged for at least a few months. Sarah Palin is likely to succeed him as president. He is elderly, fragile, physically much abused in life, choleric, and seemingly in decline. His belligerence grows. He is under the influence of the Jacobin neocons who know no limits to the possibility of the fulfillment of their dreams.  Who can say where that influence will take us?

Governor Palin is yet unreadable. [...] She has a great deal of "catching up" to do. People spend their whole lives studying the subject matter that she must master if she is not to be a menace to the world. She needs to have someone explain the consequences implict in the acronym SIOP. Perhaps she can "catch up." 

I think his prediction is correct. Obama plays fair with McCain. That is nice, but will lose him the election. Why is he not really trying to win?

Posted by b on September 12, 2008 at 01:51 PM | Permalink | Comments (69)

September 11, 2008


9/11 - seven years later.

No rebuild on the Twin Towers site yet. At current economic U.S. trends, we will not see any in the next seven years. China and the Gulf states take less than three years to build higher, bigger and better.

No memorial for the casualties yet. Anyone cares?

How are the U.S flight schools doing that trained the pilots involved in this? Did U.S. Special Operation forces kill the 'senior militants' that trained the 9/11 pilots?

My Alma Mater, the Tech University of Hamburg trained Mohamed Atta in urban planing. I am still waiting for the bombs to fall.

And yes, thanks for Ms. Perino to clean up that Osama nonsense:

Q    But Osama bin Laden is the one that -- you keep talking about his lieutenants, and, yes, they are very important, but Osama bin Laden was the mastermind of 9/11 --

MS. PERINO:  No, Khalid Sheikh Mohammed was the mastermind of 9/11, and he's sitting in jail right now.

Well then again -  what was the reason to invade Afghanistan again? We know the reason for Iraq. It was oil, the greed of the imperial power for control of the energy sources it falsely believes will sustain its position. But why then Afghanistan?

9/11 - More questions than answers. And more dead following it then anyone is willing to contemplate. The war on Afghanistan, the war on Iraq, the war on Somalia, all 'justified' by 9/11,  will tally a thousand times more killed than the number killed by a few U.S. trained pilots and some fifteen U.S. sponsored Saudi thugs.

I do not want another one.

Posted by b on September 11, 2008 at 04:34 PM | Permalink | Comments (23)

"At All Cost"

The U.S. is officially attacking Pakistani citizen within Pakistan's borders by military means:

President Bush secretly approved orders in July that for the first time allow American Special Operations forces to carry out ground assaults inside Pakistan without the prior approval of the Pakistani government, according to senior American officials.

This is an open declaration of war against Pakistan.

The commander of Pakistan's armed forces understood that and promises to fight back:

"The sovereignty and territorial integrity of the country will be defended at all cost and no external force is allowed to conduct operations inside Pakistan," [Gen. Ashfaq Parvez Kayani] said.

That grave sentence is the last one in the AP report.

Have the people of the United States understood what Bush is doing here?

He just started a war with a nuclear armed nation of some 170 million people.

Have the NATO/ISAF troops in Afghanistan and their civilian overlords understood what Bush is doing here?

U.S. troops outside of NATO/ISAF command attacked the country through which some 80% of all logistic that sustain those troops are shipped. There is no real alternative transport for these materials and last week the route was already shut down for day. That was clearly a warning.

The international media seem to be quiet about the issue.

There should be outrage. Attacks like the ground operation last week have zero military relevance for the outcome in Afghanistan. Kill one 'senior militant' and ten others will step up to take his job. But such operations endanger all 'western' troops and civilians in Afghanistan and Pakistan.

There are clear alternatives to this. The U.S. commander in Afghanistan requested 10,000 more troops to fight the Taliban within Afghanistan. Those could seal the border to Pakistan. But Bush does not want to pull troops out of Iraq and will send only some 3,500 to Afghanistan and that only next spring. Instead he widens the war to include another country.

Some 90% of the  Pakistani public are already against any cooperation with the United States. Mr. Ten Percent Zardari lied and bribed himself into the Pakistani presidency with the help of the U.S. ambassador to the UN Zalmay Khalizad. The U.S. seems to think Zardari is an asset. In reality his approval rating in Pakistan is 14%. He is irrelevant. The Pakistani army will do what it thinks is best for the country, no matter what Zardari says.

General Kayani just announced layed down a marker: "The sovereignty and territorial integrity of the country will be defended at all cost."

It is time for people to understand what "all cost" includes. People may be more familiar with the term "all options are on the table." That is, what I think, Kayani meant.

Posted by b on September 11, 2008 at 11:43 AM | Permalink | Comments (44)

September 10, 2008

Another Election Thread

(Sorry, I'm traveling and unable to write and post as intensive as I would like.)

Please use this as an election thread.

Proposed discussion topics:

  • Who put lipstick on who's asshole?
  • Will that  really highlight its attraction?


Posted by b on September 10, 2008 at 03:43 PM | Permalink | Comments (39)

The Attack on the Haqqanis

On Sunday the New York times published a report by Dexter Filkins on the Taliban in Pakistan. I excerpted the gist here.

That report included some information on the Haqqani clan:

In 2006, a senior ISI official, speaking on the condition of anonymity, told a New York Times reporter that he regarded Serajuddin Haqqani as one of the ISI’s intelligence assets. “We are not apologetic about this,” the ISI official said. For a presumed ally of the United States, that was a stunning admission: Haqqani, an Afghan, is currently one of the Taliban’s most senior commanders battling the Americans in eastern Afghanistan. His father, Jalaluddin, is a longtime associate of bin Laden’s. The Haqqanis are believed to be overseeing operations from a hiding place in the Pakistani tribal agency of North Waziristan.

Two days later the U.S. attacked the residence of the Haqqani clan:

The drones were apparently targeting the house or the madrassa established by former Taliban commander Jalaluddin Haqqani during the 1978-88 Soviet occupation of Afghanistan, residents said.

At least 23 people died in that attack. The Haqqani men are said to be in Afghanistan at the time of the attack and were not hit.

For the Pakistani security forces the Haqqanis are the good guys. The father was helpful in kicking out the Soviets from Afghanistan. It is said that Hamid Karzai offered him the job of the prime minister. The son fights the current occupation in Afghanistan. They do not make trouble in Pakistan.

So one wonders about this attack:

  • Is timing of the attack related to the Filkins piece that noted Haqqani's role?
  • Is this a message to the Pakistani security service ISI on the day the Pakistan parliaments voted for a new president?

I do not believe that this hit and its timing was random. There is a story behind this.

  • Who gave the order for the attack for what reason?
  • Did someone high up read the NYT on Sunday and picked up the phone?
  • Did someone decide that the ISI itself is the next target and sent a warning?

Let me know what you suspect.

Posted by b on September 10, 2008 at 02:16 PM | Permalink | Comments (9)

September 09, 2008

Agency Bailout Misses Its Aim

As McClatchy confirms a major motive to bailout Freddie and Fannie was to appease foreign investors.

What [Paulson] didn't say publicly is that foreigners, among other big institutional investors, had lost confidence in one of the most vital and plain-vanilla U.S. investments. In a sense, they were losing confidence in the world's largest economy, and he needed to reverse matters.

"That's the unstated objective," said Vincent Reinhart, a former chief economist of the Federal Reserve's rate-setting Open Market Committee.

But as I noted on Sunday:

Paulson today still did not give an explicit government guarantee but pushed that task to Congress.

There is not much in Paulson's acts that will give China and Russia a more secure feeling about their F&F MBS holdings. I therefore expect them to continue their sell off of these papers.

Indeed. Russia is quite open about this:

"For the Bank of Russia, one of the holders of the agencies' debt, nothing has changed substantially (after the U.S. decision)," the bank's first deputy chairman Alexei Ulyukayev said in an interview at the Reuters Russia Investment Summit.

"However, we are not making any pledges. Most likely we will continue to decrease the share (of U.S. agency's debt) a little but we will look into the situation as a whole," he said at the event, held at the Reuters office in Moscow.

I have yet to see an official from China making a remark on this, but the unofficial voice urges caution:

"China has bought a lot of asset-backed securities, and there might be short-term improvement in price," said He Fan, an economist with the Chinese Academy of Social Sciences.
He said the takeover was the last resort for the U.S. government, underlining that the credit crunch was far from over.

"This shows that the risks involved are greater than we thought. As such, Chinese banks should be cautious and prudent," the researcher added.

With less buyers or even net sellers of F&F debt like the Russians, the market price of F&F bonds will sink and the interest rate they will have to offer on new bond issues needs to be higher.

That is of course the opposite of what Paulson claimed he intended. But he only pushed the real solution down the road and over to the next president and congress. They will have to make explicit guarantees for all of Freddie and Fannie's debt or the buyer strike will continue and mortgage rates will continue to go up significantly.

With a record inventory of houses for sale and still increasing numbers of foreclosures, higher interest rates will make the situation worse and prolong the time to recovery.

Posted by b on September 9, 2008 at 07:20 AM | Permalink | Comments (47)

September 08, 2008

Georgia is not the Center of the World

While some more or less realistic versions of the Georgia conflict are now emerging, 'western' media are still obfuscating ongoing developments.

Moscow claims that all troops introduced after August 8 into South Ossetia and Abkhazia are now back on Russian Federation territory. The Russian force level within former Georgian borders is back to what is allowed under the internationally recognized peacekeeping agreements from the early 1990s.

In line with the six-point agreement signed on August 12 by Medvedev, Sarkozy and, after some obfuscation, Saakashvili, Russia keeps troops near a central crossing off the Poti harbor and one monitoring the major west-east highway north of Gori. These troops make sure that currently no major weapon systems like tanks will be imported to Georgia without RF interference.

But those few dozens soldiers are now the only Russian Federation troops on genuine Georgian grounds. But the usual agencies still make a big issue out of their presence.

AP headlines: Russia vows Georgia pullout when EU sends monitors.

Reuters writes:

Russia agreed to completely withdraw its troops from Georgia's heartland within a month on Monday, but there was no commitment to scale back its military presence in two Georgian separatist regions.

AFP claims: Russia commits to new Georgia pull-back"

President Dmitry Medvedev pledged Monday to withdraw all Russian troops from Georgia within a month, although Russian forces will remain in two breakaway regions recognised by Moscow as independent states.

Medvedev said he had agreed to the deployment of at least 200 European Union observers in Georgia by October 1 to monitor the pull-out after winning assurances from a visiting European Union mission.

As usual, nothing of that comes near to what Medvedev really said:

Medvedev said Russia's full withdrawal from Georgia will come not more than 10 days after the European Union deploys at least 200 observers in the 'buffer zone' near South Ossetia and Abkhazia, which under the new agreement is set to happen by October 1.

However, before the pullout takes place, Russia must receive from Georgia "legally binding documents on non-use of force against Abkhazia and South Ossetia," Medvedev said.

Somehow, the 'western' news agencies seem to have missed that crucial point.

The U.S. funded website just wrote Sarkozy: Saakashvili Guarantees Non-Use of Force. The two 'Releated' headlines attached to that short piece are: Saakashvili Downplays Treaty on Non-Use of Force and Saakashvili Says No to Treaty on Non-Use of Force. The links are to old stories but they show how that guy is just a flag in the wind while the Russian Federation demands for a peaceful solution have been the same for years.

Unless there is a completely unambiguous declaration from Georgia and a -at least informal-  commitment from the 'west' not to rearm Georgia, the Russian federation will not pull back the observer troops. A simple ambiguous letter from Saakashvili is unlikely to fulfill that demand. It is not a 'legally binding document'.

Sarkozy's say-so on an alleged letter from Saakashvili will not be enough to generate trust. Sarkozy lost such when he, under U.S. pressure, signed that mysterious letter that distorted the real content of his negotiations with Medvedev.

Saakashvili, after he lost out in his lunatic attempt to establish control over areas that never really belonged to Georgia, introduced a Patriot Act and then a Charter of Politicians of Georgia both of which the oppositions parties denied to support as both would tend to subscribe to support his authoritarian government point fo view.

Politically the guy is toast. He claims: Georgia [is] at the Center of World Politics. Thanks to superbly managed 'western' propaganda he was right with that claim for a few days.

But what is clear by now, except maybe to him, is that the center of world politics is not the place where the world wants Georgia and especially a lunatic like Saakashvili to be.

Posted by b on September 8, 2008 at 04:22 PM | Permalink | Comments (11)

Billmon: The Future Belongs to We

On the other hand, people have told me that my entire argument is off base: Just because the country is becoming less white doesn’t mean it will become more Democratic, and just because it becomes more Democratic doesn’t meant it will become more progressive. We have plenty of proof of the latter proposition.  But some say the former one has also been documented.
It may not be saying much, but after 30 years of conservative hegemony I guess I’ve finally learned to manage my expectations. If it’s going to be a choice between a country that looks and acts like California, or one that looks and acts like Idaho (or Alaska) I know which America I would like to live in -- and it doesn't have to include mooseburgers.
Billmon: The Future Belongs to We

Posted by b on September 8, 2008 at 05:33 AM | Permalink | Comments (46)

September 07, 2008

Guessing Game

What undisclosed location did Sarah Palin vanished to?

Posted by b on September 7, 2008 at 02:35 PM | Permalink | Comments (35)

Tha Largest Bailout Ever

Today the Secretary of the Treasury announced how the bailout of the insolvent Freddie Mac and Fannie Mae is planed to take place. These are the priorities:

Since this difficult period for the GSEs began, I have clearly stated three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers

Did you notice the sequence of those three objectives?

I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction. GSE managements and their Boards are responsible for neither.

WTF - in 2006 the agencies, who are supposed to finance sound mortgages and have done so for some 70 years, started to buy ALT-A loans where the borrower provided no income documentation. The also began to hedge risk through derivatives. This under the eyes of their regulator, the Treasury and Congress. It was certainly not the "business model embedded in the GSE structure" but the greed of the management and the shareholders and the willful blindness of the watchdogs, that drove F&F over the cliff.

Paulson's provides a four step plan. As general strategy F&F will still slowly increase their MBS holdings into 2009 and are supposed to shrink it in and after 2010.

The immediate financial measures are threefold:

First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth.

The taxpayer will buy fresh stocks from these companies and provide them with enough capital to prevent their formal bankruptcy. If they make more losses, the taxpayer will buy more stocks and delute the value of stocks it bought before. The current preferred stockholders will have to take some of the now occurring losses. This will kill off many smaller banks who have their capital invested in such shares.

The second step Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

The U.S. taxpayer will borrow money from China and lend it to F&F because China is no longer willing to lend to them directly.

Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase GSE MBS.

This is the PIMCO provision. PIMCO, the huge bond fund that provides fixed income for many U.S. citizens, has bought quite a lot of F&F (GSE) Mortgage Backed Securities (i.e. toxic waste) it now wants to sell. The chief of PIMCO, Bill Gross, made a lot of noise over this last week as he was afraid to lose money on them. Now the U.S. taxpayer will buy these MBS.

Through the four actions we have taken today, FHFA and Treasury have acted on the responsibilities we have to protect the stability of the financial markets, including the mortgage market, and to protect the taxpayer to the maximum extent possible.

Again, notice the sequence.

The Treasury action came this weekend because Russia and China were recently dumping huge amounts of F&F MBS. They fear that the implicit government guarantee for these bonds would not hold up. Paulson today still did not give an explicit government guarantee but pushed that task to Congress.

There is not much in Paulson's acts that will give China and Russia a more secure feeling about their F&F MBS holdings. I therefore expect them to continue their sell off of these papers. That means that the trouble over these agencies is far from over.

Posted by b on September 7, 2008 at 12:52 PM | Permalink | Comments (14)