Monthly Archives: March 2009

Toxic Assets Were Hidden Assets

Hernando de Soto, the author of the Mystery of Capital, has an interesting opinion piece in the Wall Street Journal (here), which pins much of the blame for the financial crisis on ‘derivatives’ and the lack of regulation around their use.

De Soto first takes on those who want to blame subprime mortgages for the mess where in, but argues that the numbers simply don’t add up.

“Today’s global crisis — a loss on paper of more than $50 trillion in stocks, real estate, commodities and operational earnings within 15 months — cannot be explained only by the default on a meager 7% of subprime mortgages (worth probably no more than $1 trillion) that triggered it. The real villain is the lack of trust in the paper on which they — and all other assets — are printed. If we don’t restore trust in paper, the next default — on credit cards or student loans — will trigger another collapse in paper and bring the world economy to its knees.”

This could also be seen as a reminder of why so many people are worried about abrogating contracts with AIG, since contracts are another piece of paper that only have value based on trust.

As De Soto explains “derivatives are the root of the credit crunch. Why? Unlike all other property paper, derivatives are not required by law to be recorded, continually tracked and tied to the assets they represent. Nobody knows precisely how many there are, where they are, and who is finally accountable for them. Thus, there is widespread fear that potential borrowers and recipients of capital with too many nonperforming derivatives will be unable to repay their loans. As trust in property paper breaks down it sets off a chain reaction, paralyzing credit and investment, which shrinks transactions and leads to a catastrophic drop in employment and in the value of everyone’s property.”

I have always found De Soto’s perspective refreshing in that he manages to balance capitalism and social democratic ideals better than most.   So far it does not seem as if the Obama administration agrees with this perspective, but that could be subject to change.  Considering how volatile things are these days, i.e. populist outrage over AIG bonuses, it wouldn’t take much for this to become the new focal point of the general public’s concern.

What De Soto makes clear is that any ideas of ‘letting the markets work it out for themselves’ should rightly be abandoned.  The neo-liberalism twisting of laissez faire capitalism hopefully has come to an end, but perhaps that is just wishful thinking.  However, as De Soto points out that “Adam Smith and Karl Marx both recognized, finance supports wealth creation, but in itself creates no value.”


The Mugabe of the Andes?

Scanning through headlines can be a surreal experience sometimes, as was the case when I saw this headline in the current issue of the Atlantic (here)  “The Mugabe of the Andes.”  The title of the piece comes from a quote by a member of the Bolivian opposition that says that Evo Morales “had the chance to be the Mandela of Bolivia, but instead he chose to be the Mugabe,”  which though eye catching seems to misrepresent about everyone involved in the quote in some way.  Mainly it is because it is a gross oversimplification and that it is trying to take apples and oranges and make them the same.

Morales is neither a Mandela figure, nor a Mugabe, even if it is an intriguing turn of phrase.  First off, Mandela’s image of being the savior of South Africa stems from the 28 years he spent in prison during apartheid – now it might be possible to compare the racial divide in Bolivia highlands to apartheid in some ways, but this doesn’t seem to be the issue at hand for the man that made the quote Luis Eduardo Siles.  While Mandela has certainly been deemed a saint for what he suffered, Mugabe is the opposite in that his name has become synonymous with evil.  Regardless of what role Mugabe played in Zimbabwe’s independence struggle in the 60s and 70s, he has come to epitomize the dangers of authoritarian rule.  He has stolen the last two elections, bankrupted his country (which used to be one of the wealthiest in Africa), and become and international pariah all while conditions for the people in Zimbabwe have gotten worse and worse.

Now in all fairness, Eliza Barclay’s article is not trying to claim that this Evo is a dictator, but she does seem to see him as more of a divider than a uniter. Ms. Barclay article states that as Evo “has consolidated power among the patchwork of indigenous groups in the western highlands, Morales has deployed a rhetoric studded with racial references aimed at his opposition, which is led by wealthy, mostly white businessmen and concentrated in the lowland eastern region that includes Santa Cruz.”  This seems to be a rather biased point of view, in that Morales has often been left no choice as wealthier people in Eastern Bolivia have talked of seceding and the US has tried to make it seem as if Bolivia is another domino that has fallen in a new version of the Cold War led by Hugo Chavez.

I have high hopes for Evo Morales and think that he will do what is right for the majority of Bolivia’s people, over 2/3 of whom are indiginous and have been marginalized from power for centuries.  And while it is true that his current victory in January (article here) does seem eerily like a play out of the Chavez playbook, it doesn’t mean that he is trying to set himself up as a president for life or a classic caudillo.

What will be interesting to see is how his latest moves to redistribute land (here) unfold.  In general land reforms have either laid the groundwork for long term changes or led to an invasion from the North.  So far it seems like a relatively small amount of land has changed hands, but the elites across Latin America, especially in the poorest countries have never been known to take such actions lying down.

The Many Stories of Carlos Fernando Chamorro

Tina Rosenberg has an excellent piece in the NY Times Sunday Magazine (here) that discusses the stranger than fiction story of Carlos Fernando Chamorro.  Mr. Chamorro is the son of the former president of Nicaragua, Violeta Chamorro de Barrios, and his career path says volumes about how absurd Nicaraguan politics have been in recent decades.

Carlos Fernando Chamorro exemplifies the circular nature of Nicaraguan politics in that he has gone from being a mouthpiece of the Sandanista Party during the revolution as the editor of Barricada only to emerge as one of the leading critics of the FMLN in its currents form.  He has faced growing pressure from those around Daniel Ortega to stop being critical of the current government, which has almost nothing to do with its revolutionary past.

Perhaps few figures from the Cold War era could embody Marx’s famous line that “history repeats itself, first as tragedy, and the second time as farce”  more than Daniel Ortega.  As Rosenberg points out “whatever ideals Ortega may once have stood for, he now stands for only himself. He was first elected president of Nicaragua in 1984 and, after losing power in 1990, regained the presidency in 2006, this time not as a Marxist-Leninist, not even really as a leftist. His government now embraces business and the Catholic Church warmly. Although he won the presidency with only 38 percent of the popular vote, he has abused the powers of his office to win near-total dominance of Nicaragua.”

Worth the read and a reminder of how even a generation of the Cold War ended there are still any number of figures that have managed to reinvent themselves and stay in the game.

US Hypocrisy Regarding AIG and Clawback Provisions

Populist outrage has been growing for months over the excessive bonuses and spending sprees of the corporate elite, which has made Obama’s task of stimulating and cleaning up the US economy much more complicated.  All of this anger is completely legitimate, since tax payers dollars are being used to bail out the ridiculously poor decisions made by CEOs and high level bankers/investors in the financial sector.  However, there are areas where things are extremely ironic and others that are reaching flat out farcical at this point.

Robert Weissman, the editor of the Multinational Monitor (and old favorite publication of mine), has a timely piece about what lessons can be learned from the whole AIG scandal (here).  Mr. Weissman wisely points out that

“What is vital now is that the public’s righteous anger is not expressed only as “no.” There are a lot of things to which We The People do need to say “no.” But we need a lot of “yes’s,” too. We need to demand that policymakers impose public controls over the financial sector. The financial sector restraint, shrinkage and displacement agenda is long and diverse, but there are a number of lessons that flow directly from the AIG debacle.”

He goes on to list four areas that should be looked at dealing with government control over bailed out companies; executive compensation; financial re-regulation; and revitalized anti-trust legislation to break up the number of companies that have been deemed to big to fail.  All sensible critiques of the current situation, but also based on his 20 plus years of calling for such changes and warnings about the dangers of deregulation.

The more farcical end of things appeared in a NY Times article (here) that outlined the growing fear many AIG and corporate executives are feeling based on this public backlash.  As the story reports:

“One A.I.G. executive, who spoke on the condition of anonymity because he feared the consequences of identifying himself, said many workers felt demonized and betrayed. “It is as bad if not worse than McCarthyism,” he said. Everyone has sacrificed the employees of A.I.G.’s financial products division, he said, “for their own political agenda.”

Saying that their treatment is potentially worse that McCarthyism say volumes about how out of touch they are with history and reality.  McCarthyism destroyed thousands of lives based on mere suspicion of colluding with the enemy or being a fellow traveller, whereas these financial geniuses have managed to redefine greed and bring the global financial system to its lowest point since the 1930s.  If AIG and others that received bail out money were more open and transparent about all of this, they might have actually spared themselves some of the most virulent criticism, but once again their arrogance and sense of entitlement got the better of them (and plenty of US politicians connected with them).

Personally, I think at this point that they CEOs and financial industry leaders that are responsible for this should be fired and these bonus returned.  I understand that contracts must be honored if the US economy is to continue function, but these are a small group of elites that should not be excused.  The irony of all of this is that such issues have come up countless times, just not in the US.

Over the last thirty years or so any number of corrupt dictators were forced out of power in the developing world after having stolen millions or even billions of money that was loaned to them by the World Bank, IMF, Inter-American Development Bank and others – but when a new leader was elected or came to power, what did these bankers and US political leaders say – the contracts must be honored.  You must repay the debts run up under the former regime, regardless of whether or not you are able to do so.  Well you can’t have it both ways.  Hopefully, as the financial crisis continues, the untold billions of dollars squirrelled away offshore and in Swiss bank accounts by a range of corrupt authoritarian figures will be returned to the people of those countries as well.

Let us hope that such ironies are not lost among the pitchforks calling for a few executives heads.

Leftist Party Wins Salvadoran Vote

It seems as if the Pink Tide is continuing to rise across Latin America with the latest example being the FMLN’s victory in El Salvador.  Mauricio Funes, a former television reporter, successfully edged out the right wing ARENA party that has managed to stay in power since the end of the civil war in 1989.  Articles on the FMLN’s victory – NY Times (here), BBC (here) and Washington Post (here).

Funes is the most moderate candidate that the FMLN has run, which is likely to be considered the reason for their success.  However, a more likely explanation is that this was the first election where the US didn’t intervene.  The Bush administration’s former ambassador to El Salvador Charles Glazer admitted the US intervened in the 2004 due to their fears that the FMLN was on the verge of victory.

Funes’ victory is somewhat like Obama’s in that he is inheriting a host of problems that are going to be extremely difficult to solve.   Over 25% of El Salvador’s population live outside of the country, primarily in the US; gang related violence and juvenile delinquency are endemic; and the maquilla sector and the 15 free trade zones were developed for a global economic order that is now completely changed.

Hopefully, Funes will succeed where ARENA has so often failed and that the US will continue to let the people of Central and Latin America vote freely for the candidates of their choice without fear of being cast aside by the US.

US Torture: Voices from the Black Sites

Today’s NY Times op-ed page has an excellent piece by Mark Danner (here) that summarizes some of the most alarming findings about the ‘alternate set of procedures’ used to extract actionable intelligence from 14 of the most high level suspects picked up in the ‘War on Terror.’  The editorial is based on a longer article that Mr. Danner wrote for the NY Review of Books (here) that gives even greater amounts of detail and commentary on what was happening at the various ‘black sites’ around the world and interrogations rooms at Guantanamo.

The accounts are based on testimonies gathered by the International Committee for the Red Cross (ICRC) when they were given permission to interview each of these high value detainees in late 2006.  Their findings were supposed to only reach the upper echelons of the Bush administration and US intelligence community.  However, it is clear that the 43 page report has been leaked or deliberately passed on to members of the media in hopes of bolstering Patrick Leahy’s call for a Truth Commission or War Crimes Tribunal based on the clear human rights violations and instances of torture that occurred between October 2001 and 2006.  Thankfully, Mark Danner’s longer article also provides a link to Patrick Leahy’s speech at Georgetown in February 2009 (here) in which he spells out the reasons why such a body needs to be created:

“One path to that goal would be a reconciliation process and truth commission.  We could develop and authorize a person or group of people universally recognized as fair minded, and without axes to grind.  Their straightforward mission would be to find the truth.  People would be invited to come forward and share their knowledge and experiences, not for purposes of constructing criminal indictments, but to assemble the facts.  If needed, such a process could involve subpoena powers, and even the authority to obtain immunity from prosecutions in order to get to the whole truth.  Congress has already granted immunity, over my objection, to those who facilitated warrantless wiretaps and those who conducted cruel interrogations.  It would be far better to use that authority to learn the truth.

During the past several years, this country has been divided as deeply as it has been at any time in our history since the Civil War.  It has made our government less productive and our society less civil.  President Obama is right that we cannot afford extreme partisanship and debilitating divisions.  In this week when we begin commemorating the Lincoln bicentennial, there is need, again, “to bind up the nation’s wounds.”  President Lincoln urged that course in his second inaugural address some seven score and four years ago.

Rather than vengeance, we need a fair-minded pursuit of what actually happened.  Sometimes the best way to move forward is getting to the truth, finding out what happened, so we can make sure it does not happen again.  When I came to the Senate, the Church Committee was working to expose the excesses of an earlier era.  Its work helped ensure that in years to come, we did not repeat the mistakes of the past.  We need to think about whether we have arrived at such a time, again. We need to come to a shared understanding of the failures of the recent past.”

Such words have widely resonated with the American public and the international community that want to see justice served and the truth revealed.  A USA Today/Gallup poll taken in February (here) clearly showed “finds majorities in favor of investigating some of the thorniest unfinished business from the Bush administration:  Whether its tactics in the “war on terror” broke the law.”

As pressure continues to mount on the Obama administration to take some type of action I am getting more optimistic that it might actually happen.  In many ways, it is possible that Obama has had to take a stance of “wanting to look forward, not backward” and on wanting to focus on the economy so that it can not be claimed that his administration gave the green light on this out of vengeance and/or partisanship.  To me it is beside the point.  The simple matter is that laws have been broken and the reputation of the US was tattered by the Bush administration, now the historical record must be set straight and a Truth Commission would be a good place to start addressing the events references in Mark Danner’s articles.

Haiti’s despair, continued

The UN Security Council is visiting Haiti this week on a four day trip to evaluate how the clean up efforts are going from last years hurricane season and to measure the effectiveness of the 9,000 troop peacekeeping force that has been in the country since 2004.

As Jonathan Marks wrote (here) “the 15-member group will meet with President Rene Preval, lawmakers, election officials and the private sector.  It will continue efforts to increase investment and prevent chaos that Secretary-General Ban Ki-moon and former President Bill Clinton promoted during a visit earlier this week.”  The Security Councils visit also prompted stories in the BBC (here), Al Jazeera (here) and a brief editorial in the International Herald Tribune (here).

The IHT editorial mentions the potential repatriation of upwards of 30,000 Haitians from the US (see older story here) and all of them mention how much the country has struggled to rebuild from the devastation of last years hurricanes.

All of this is unfolding as Haitian Senate elections are rapidly approaching in April that could weaken Rene Preval’s hold over power.  Plenty of leaders have struggled to control criticism of their efforts to deal with a natural disaster, but in Haiti the public’s growing frustration could easily lead to yet another period of political instability.

As the BBC article reports: “last year, there were riots over high food prices. And then came the four hurricanes and tropical storms.

This fragile country is on the brink.

In Gonaives, people are piecing together their lives, aware of how precarious their existence is.

Uncertainty about the future is a way of life here…”