Monday, October 27, 2008

Democrats and Republicans Must Share Blame for Financial Crisis

The Bush administration has been the target of attacks by Democrats for the international financial crisis that began on Wall street earlier this year. The critics' main argument is that the Bush-era anti-regulation environment allowed unregulated derivatives contracts, called "weapons of mass destruction" by Warren Buffett, to grow into a mushroom cloud.

While it is true that the dramatic growth of derivative contracts such as credit default swaps happened on Republicans' watch, the fact is that the seeds of the current crisis were sown during Clinton years. It all began with an obscure but critical piece of federal legislation called the Commodity Futures Modernization Act of 2000. And the bill was a big favorite of the financial industry it would eventually help destroy.

It not only removed derivatives and credit default swaps from the purview of federal oversight (on page 262 of the legislation), Congress prohibited the state and local governments from enforcing existing gambling and bucket shop laws against Wall Street.

As the recent CBS 60 Minutes segment explained, "In retrospect, giving Wall Street immunity from state gambling laws and legalizing activity that had been banned for most of the 20th century should have given lawmakers pause, but on the last day and the last vote of the lame duck 106th Congress, Wall Street got what it wanted when the Senate passed the bill unanimously." Though CNN has only picked Senator Phil Gramm as one its top 10 Culprits of Collapse, the entire senate is responsible for it.

Clearly, the unanimous Senate passage of the Commodity Futures Modernization Act of 2000 demonstrated the power of Wall Street over both Republicans and Democrats. In fact, the data of the financial services industry's recent campaign contributions shows that two of the top three recipients of the largess from Wall street are Democrats Barack Obama and Hilary Clinton. John McCain is in a distant third position. Overall, Sen Obama's campaign is awash with record, massive cash contributions.

Since the current financial crisis has its roots in easy, plentiful mortgages and the housing bubble facilitated by the Democrats' unabashed and reckless support for home ownership via Fannie and Freddie and community re-investment legislation, a larger share of the blame for the current crisis should be assigned to the Congressional Democrats such as Barny Frank and Chris Dodd.

Saturday, October 25, 2008

IMF Reforms Imminent as Crisis Intensifies

The International Monetary Fund has come under severe criticism as the financial crisis that started on Wall Street is spreading to the developing world. IMF is the most important multi-lateral financial institution. It is responsible for overseeing the global financial system and the economic policies of its 185 members. The IMF is supposed to act as an early warning system for markets and economies. The institution is also charged with diagnosing economic problems and proactively regulating and stabilizing the international financial system to prevent and manage the kind of financial crisis the world is facing now.

Pakistan's former Prime Minister Shaukat Aziz, credited with reviving Pakistan's economy, is taking the IMF to task for being absent, or at least tardy. Mr. Aziz accused the International Monetary Fund last week of failing to show leadership during what he described as a "historic" global financial crisis.

As world leaders met to shore up distressed financial institutions, Mr Aziz charged that "this global institution which is supposed to look at everything going on was not even in the room where meetings are going on."

Speaking at an international business conference in Manila, the former Wall Street banker said interest rate cuts, recapitalization of banks and liquidity injections, while helpful, would not be sufficient to solve the problem.

"The very fabric of the global financial system is under threat," Aziz said, according to AFP.

Mr Aziz suggested there was a need to boost the IMF's regulatory powers and create a more powerful body.

"The world is becoming increasingly specialized," he said, adding that existing systemic threats beyond the agency's traditional monetary policy role must be addressed. "A robust regulatory regime must touch all the stakeholders," he said, with reference to the credit rating agencies that have come in for criticism amid the crisis.

Mr. Aziz was pointing out the fact that the banks and capital are now global. Most major financial institutions operate in multiple countries on different continents, and it is hard to draw national boundaries on regulation. In such an environment, international regulatory regime and international action to correct problems are required.

In its defense, it can be said that the IMF is not alone in being taken by surprise by the depth of the crisis, said Mr. Michael Mussa, IMF's former Chief Economist. Even Alan Greenspan, the former US Federal Reserve Chairman, has expressed shock and disbelief at the extent and speed at which the crisis has grown.

The Bank for International Settlements, which groups the world's central banks, and the Paris-based Organization for Economic Cooperation and Development did not fully realize the gravity of the situation either.

"The explosion of the crisis, particularly in the past few weeks, is something that was not anticipated by anyone in official circles," Mr Mussa says, according to a BBC report.

As the unprecedented credit crunch hits even the countries with a good record of managing their economies, the IMF is considering urgent measures and reforms to rapidly respond to the developing crisis. According to the Associated Press, among the ideas under discussion is to provide a credit line in hard currency to countries that otherwise would have no access to foreign capital.

The IMF's 24-member executive board is expected to meet next week to examine the various proposals under consideration.

The immediate beneficiaries would be developing nations with good economic track records such as Turkey, Brazil and South Korea that normally have no difficulty borrowing but have seen access to money dry up as Western banks simply stopped lending.

Another idea under consideration is to let member countries borrow against the amount they have contributed to the fund, known as a quota. For example, if South Korea borrowed against its quota, it could obtain almost $22 billion.

The IMF already is discussing loan packages with close to a dozen countries and is examining ways to speed up the process in line with instructions it received this month from its policymaking committee.

IMF loans often serve as an incentive to other lenders, generating other financing from private and public sources such as the multilateral development banks.

The loans also come with stringent conditions that involve budget cutting and other belt-tightening measures that some governments have said should be eased in the current crisis. Many developing nations and NGOs have criticized the IMF for its insistence on cuts that hurt the poor the most. IMF supporters counter that the developing nations require close IMF supervision because they have not been good stewards of their economies.

A case in point is Pakistan. It has just returned to ask for IMF's help after a break of several years when its economy was considered one of the fastest growing in the world. But times are different now. The country's economy is in freefall. Inflation is running at about 30%. The rupee has devalued by about 25% in just three months. The fiscal deficit is a whopping 10% of GDP. Foreign-exchange reserves cover just six weeks of imports. A $500m Eurobond matures next February, but the market has already decided it is junk. The country needs at least $3 billion immediately, and a further $10 billion over the next two years to plug a balance-of-payments gap. Without it, default abroad might well coincide with political anarchy at home.

In the first loan made in the current global economic turmoil, Iceland and the IMF tentatively agreed to a $2 billion loan over two years in response to the collapse of the country's banking system.

The government said the deal, which still must be approved by the IMF's board in Washington, also will give Iceland immediate access to $830 million to head off the financial threat to its entire economy.

The IMF has helped several troubled developing economies earlier this decade. IMF was also very active during the Asian financial crisis of 1997-98. In the current financial crisis, Iceland became the first Western country to borrow from the IMF since Britain in 1976.

Other countries thought to be close to reaching a loan agreement with the IMF include Hungary, Ukraine and Pakistan, even though Pakistani government publicly denies it.

The head of the IMF, Dominique Strauss-Kahn, said this month that the fund has more than $200 billion available for bail out and could obtain additional resources quickly if needed. The consensus among the experts is that IMF will need a lot more than $200 billion as the list of countries lining up for IMF help grows longer by the day, including non-traditional borrowers such as Iceland.

Friday, October 24, 2008

Are Jews Responsible for Financial Meltdown?

The high-profile role played by Jews on Wall Street has never been a secret. Many of the wheelers and dealers responsible for shaping the current US financial system are Jewish, including former AIG CEO Hank Greenberg, former Citcigroup CEO Sandy Weill, recently-retired Lehman Bros. CEO Richard Fuld, former Fed chairman Alan Greenspan, former Treasury Secretary Bob Rubin, current Fed chairman Ben Bernanke,etc. One of the "weapons of mass destruction" described by the legendary investor Warren Buffet is the Credit Default Swap. Greenberg's AIG is the biggest purveyor of CDS. In spite of the warnings by Buffet in 2006, Greenspan and his successor Bernanke argued against regulating derivatives such as credit default swaps. Unregulated financial derivatives are now considered the biggest cause of the financial collapse.

Credit derivatives is one of the most successful innovations of financial engineering over the last ten years. The current active credit derivatives market has produced an array of new products. For example, credit-default swaps are an indicator of the cost of bond "insurance" that varies with the risk of bond default. Credit default swaps are privately traded derivative contracts usually bought by bond holders from CDS issuers like AIG, Ambac, FGIC, and MBIA and other entities. Like other derivatives, CDS are not regulated by government agencies. The CDS issuers are expected (not gauranteed or back-stopped by governments) to reimburse bondholders in case the bond issuing companies or governments default. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. The buyers of CDS do not have to be bondholders. Any one can buy a CDS to bet on the probability of default by debt issuers. Many of these derivative contracts were bought to bet that the housing bubble would pop and many homeowners would default on their mortgages. That is exactly what happened this year. Once issued, the credit default swaps are bought and sold like any other contract. These derivative contracts have produced enormous profits for Wall Street firms in the last decade. But now the Fortune magazine calls these derivatives "a $55 tillion problem".

The world of finance is not unique in the dominant role played by Jews. Other businesses including media and entertainment and professions such as medicine, law and accounting have powerful Jewish presence. American Jews are disproportionately over-represented in the US Congress, the Senate and the Supreme Court as well. US policies in all spheres are heavily influenced by the Jewish minority in the United States. The exclusive club of Nobel laureates is dominated by its Jewish members, a testament to Jewish culture of hard work, commitment and achievement. Many significant levers of power are controlled by American Jews, a constant that does not change with election winners or losers in Washington. Both Obama and McCain teams boast of powerful Jews as key policy advisers on foreign affairs, finance and national security. Robert Rubin and Dennis Ross are advising Obama. Joe Lieberman is advising McCain.

When former President Pervez Musharraf of Pakistan addressed a dinner meeting of the American Jewish Congress in September 2005, his Jewish audience were described as the American business, political and social elite.

When things go wrong in any of the major US businesses or institutions, people looking for scapegoats often blame influential Jews because of the large Jewish presence in each of them. The current financial crisis is no exception.

Abraham Foxman, President of Anti-Defamation League, has written in Jerusalem Post about the recent "anti-semitic" response to the financial crisis. He writes, "It never fails. Whenever there is a financial crisis or trading scandal in the stock markets, the anti-Semites come out of the woodwork. The classic stereotype of the Jewish Shylock out to have his Christian pound of flesh dies very hard, if at all. The Jew as economic opportunist sucking the financial life-blood out of a nation or of the whole world is continually reborn".

Mr. Foxman does have a point. Stereotypes, whether Jewish or Muslim, are hard to change. The reality is that there are only three Jews on the CNN's latest top ten list of the culprits of collapse even if one argues that these three are the most important of the top ten. They are: Former Fed Chairman Alan Greenspan, Current Fed Chairman Ben Bernanke and the Lehman Brothers CEO Richard Fuld. As some of us blame the few who made serious mistakes and happen to be Jewish, let us not forget that a large number of Jewish workers and investors on Wall Street are victims of the financial meltdown. Many Jews have lost their jobs while others are suffering major declines in their investment portfolios.

Related Links:

Jewish Lobby Blamed for Economic Crisis

The Israel Lobby and US Foreign Policy

The Rise of Jewish Power-Nothing Short of Astounding

Jewish Tribal review

Financial Crisis Brings Out Anti-Semites

Jews on Wall Street

Wall Street's WMDs

Credit Default Swaps

$55 Trillion Problem

Thursday, October 23, 2008

Karachi Stocks Poised for Major Crash

Karachi stock market is fearing the worst as the authorities contemplate removing an artificial floor of 9144 for KSE-100 imposed on August 27, 2008.

Karachi stocks have remained unscathed through the meltdown of major stock market indices around the world in the last few weeks. This has happened in spite of the precipitous drop in Pakistan rupee and the widely feared default on sovereign debt by Pakistan.

The reason why Karachi stocks have not suffered has nothing to do any "strong" fundamentals seen by astute investors. It is because of an artificial floor imposed on KSE-100 by the authorities. Fearing a complete meltdown of stock prices at Karachi Stock Exchange, Pakistan's Securities and Exchange Commission imposed a floor of 9144 for the market's benchmark KSE-100 index. The index closed at 9144 level on Wednesday, Aug 27, the day the KSE and SEC announced their decision to not allow the KSE-100 to trade below this arbitrary level. This extraordinary action, the first of its kind since the exchange opened its doors in 1948, came after investors pushed down the index to its lowest level in more than two years. Since this highly unusual action, the trading volume at Karachi has been extremely low. Daily trading volume dropped to a record low level last week to less than a million shares.

As a precaution before the KSE-100 floor is removed and to soften the blow for investors, the government is offering a Rs. 50 billion fund to bail out the shareholders. The fund will likely be used to offer "put options" worth Rs 30 billion to foreign investors. Pakistani stock brokers like the idea but they want at least Rs. 15 billion to cover losses by their Pakistani clients, according to media reports.

While Pakistan's Rs. 50 billion bailout package is laudable, it will be no more than a band-aid for a much more serious problem in Pakistan: Major loss of investor confidence. Unless the national leadership takes steps to get the economy on the right track and restore investor confidence, the rupee, the stock market and credit market and the whole financial system will continue to verge on collapse.

Wednesday, October 22, 2008

Credit Markets Bet on Pakistan Default

Amidst a flurry of activity by Pakistani government to seek bailout from friendly nations and possible resort to IMF loans, the credit markets are betting that Pakistan will most likely default on its sovereign debt. Pakistan's sovereign debt now has the dubious distinction of being the riskiest, surpassing Argentina's sovereign debt.

According to The News, the price for insuring $10 million worth of Argentina's debt in September stood at $788,000 while the price to insure the Government of Pakistan-guaranteed debt skyrocketed to $950,000, something that has never happened before.

As recently as June this year, Pakistan sovereign debt credit default swaps (CDS) traded at 530 basis points in Hong Kong, meaning it cost $530,000 a year to protect $10 million of Pakistan's debt from default for five years. A jump from 530 to 950 basis points means the risk of default by Pakistan has almost doubled since June, 2008. The risk has particularly shot up since President Musharraf left office in August, 2008. It should be noted that Pakistan CDS traded at a record low of 146 basis points around the time of the February elections.

Credit-default swaps are an indicator of the cost of bond "insurance" that varies with the risk of bond default. Credit default swaps are privately traded derivative contracts usually bought by bond holders from CDS issuers like AIG, Ambac, FGIC, and MBIA and other entities. Like other derivatives, CDS are not regulated by government agencies. The CDS issuers are expected (not gauranteed or back-stopped by governments) to reimburse bondholders in case the bond issuing companies or governments default. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. The buyers of CDS do not have to be bondholders. Any one can buy a CDS to bet on the probability of default by debt issuers. Once issued, the credit default swaps are bought and sold like any other contract. Many of these derivative contracts were bought to bet that the housing bubble would pop and many homeowners would default on their mortgages. That is exactly what happened this year.

Lately, credit default swaps have come under heavy criticism for being the main contributor to the unfolding financial crisis around the world. Since credit default swaps are unregulated derivatives, they can be issued by any one. Many thinly-capitalized entities are in the business of issuing CDS to make a lot of money fast. In its recent issue, Fortune magazine reports that Wachovia and Citigroup are wrangling in court with a $50 million hedge fund located in the Channel Islands. The reason: A dispute over two $10 million credit default swaps covering some debt. What's most revealing is that these massive banks put their faith in a Lilliputian fund (in an inaccessible jurisdiction) that was risking 40% of its capital for just two CDS. Can anyone imagine that Citi would, say, insure its headquarters building with a thinly capitalized, unregulated, offshore entity?

Fortune compares the CDS market with casino gambling. It says that when you put $10 on black 22, you're pretty sure the casino will pay off if you win. The CDS market offers no such assurance. One reason the market grew so quickly was that hedge funds poured in, sensing easy money. And not just big, well-established hedge funds but a lot of upstarts. The ease and low cost of CDS encouraged a lot of lending and borrowing that would not have occurred otherwise. Both the lenders and borrowers believed they could easily transfer risk to a third party at relatively low cost.

The result of the rapid growth in credit default swaps is a $54.6 trillion problem. In spite of the massive global government intervention, including US government's takeover of AIG, the biggest CDS player, this huge problem will take considerable time and money to unwind. Meanwhile, it will get a lot harder for Pakistan and other economically troubled governments such as Ukraine, Kazakhstan, and Argentina get credit from any one other than the International Monetary Fund. Such credit usually comes with tough conditions and micromanagement of country's budget, taxes, spending and economy by IMF officials.

Related Links:

Pakistan Likely to Avoid Default

The $55 Trillion Question

Pakistan's Debt Riskiest

Can Pakistan Avoid IMF Bailout?

Tuesday, October 21, 2008

Pakistan Building Humvees for US Troops?

A report in Asia Times On Line claims that Pakistan has received secret orders from the US to build 1000 Humvees at HIT (Heavy Industries Taxila). These vehicles are needed urgently for the expected US troop surge in Afghanistan and possibly for more action in Pakistan's FATA region. The apparent reason for secrecy is the political sensitivity amidst strong anti-American sentiments prevailing in Pakistan after recent US military incursions and predator attacks in FATA.

ATOL's Syed Saleem Shahzad claims that the "work on the Humvees has already begun, although the task is being undertaken in secret".

Heavy Industries Taxila (HIT) is the backbone of Pakistan's Engineering Industry for the Pakistan Armed Forces, being a combination of multiple industries that has grown into a large military complex in the last decade. It has six major production units. Heavy Industries Taxila is one of the largest defense production facilities in Pakistan with a manpower of over 6500 highly skilled personnel and engineers trained in the field of defense production. Out of the 6500 employees, about 30% are uniformed personnel.

The Organization provides facilities for the overhaul, rebuilding and manufacturing of Main Battle Tanks, Armored Recovery Vehicles and Armored Personnel Carriers and has recently developed and produces MBT-2000 Al-Khalid Tank. In addition it rebuilds, upgrades and modernizes Armored Vehicles of various origins.

Humvees for the US troops are currently produced by AM General, an American heavy vehicle manufacturer based in South Bend, Indiana. While HIT has been exporting heavy armaments to many countries, the reported Humvee order represents the first major HIT deal for the U.S.

Earlier in July of this year, Major General Mohammad Farooq, Director General of the Defense Export Promotion Organization, had indicated that collaboration with the United States had increased in manufacturing armored personnel carriers "with transfer of technology".

According to a July report in Pakistan's Dawn newspaper, General Farooq claimed that Pakistan’s defense exports have tripled to around $300 million because of the quality of its ammunition, anti-tank guided missiles, rocket launchers and shoulder-fired surface-to-air missiles. He said exports to South Asian, Middle Eastern and African countries had increased significantly.

General Farooq said optical instruments like night vision devices, laser range-finders and designators, laser threat sensors, artillery armor mortars and munition, mine detectors, anti-tank rifles, missile boats, different types of tear gases, fuses of unarmed vehicles, security equipment and sporting and hunting guns were also being manufactured in Pakistan.

“The fuses are being purchased by countries like Italy, France and Spain,” he said.

In reply to a question, he told Dawn, Pakistan’s military exports were higher than India’s. “Indians started working on Arjun tank but, they are yet to induct it in their army, while Pakistan has built and handed over Al Khalid tank to the army, although it started the program later,” he said.

Lately, Pakistan has come under severe criticism by human rights groups for being a leading manufacturer and exporter of land-mines, cluster bombs and depleted uranium munitions.

While the reported US order for a thousand Humvees is an opportunity for Pakistan to earn badly needed foreign exchange, it could become a serious political headache for Zardari administration. The deal could also raise hackles of those in the United States who oppose any vehicle-related outsourcing when the US auto industry is in deep trouble.

Monday, October 20, 2008

India in Moon Race with Big Asian Dogs

"If you want to run with the big dogs, you have to stop pissing with the puppies". These words are attributed to Robert Blackwill, former US Ambassador to India, in his oft-repeated lectures to the Indian government earlier this decade. The "puppies" reference here is apparently a dig at India's obsession with Pakistan.

Finally, after years of futile focus on Pakistan, India is heeding the advice of Ambassador Blackwill. The country began the countdown Monday to the launch of its first unmanned mission to the moon that will signify a major catch-up step with Japan and China in the fast-developing Asian space race, according to media reports published today.

"Everything is going perfectly as planned," the center's associate director M.Y.S. Prasad told AFP from Sriharikota, 80 kilometers (50 miles) north of Chennai, after the official countdown began in the early hours of Monday.

Earlier this year, India did a successful launch of a mission with 10 satellites from the Sriharikota space center to become a serious contender in the fast growing $2.5B commercial satellite launch business.

Beyond the Indian commercial ambitions, this milestone for India represents a strategic capability as an emerging economic and military power on the world stage. This is also a great comeback for ISRO about two years after a launch in 2006 had to be destroyed less than a minute after lift off when it veered from its path.

India still has a long way to go to catch up with China which, along with the United States, Russia and the European Space Agency, is already well-established in the commercial launch business. Chinese officials are already planning a manned mission to the moon in the future, after following the United States and the former Soviet Union last month by a successful space walk, although a more immediate goal is the establishment of an orbiting space lab. AFP reports that Beijing's long-term ambition is to develop a fully-fledged space station by 2020 to rival the International Space Station, a joint project involving the United States, Russia, Japan, Canada and several European countries. Japan has also been boosting its space efforts and has set a goal of a manned mission to the moon by 2020. Japan's first lunar probe, Kaguya, was successfully launched in September last year, releasing two mini-satellites which will be used to study the gravity fields of the moon among other projects. The development of a space race in Asia has both commercial and security implications, with the potential for developing military applications such as intelligence gathering and space-based weapons. Earlier this year, Japan ended self-imposed prohibition on militarization of space, hoping to remove any legal barriers to building more advanced spy satellites.

The Pakistan Space Agency or Space and Upper Atmosphere Research Commission (SUPARCO), the equivalent of ISRO in India, is the Pakistani state-run space agency responsible for Pakistan's space program. It was formed in September 1961 by the order of President Ayub Khan on the advice of Professor Dr Abdus Salam, Nobel Laureate, who was also made its founding director. The headquarters of SUPARCO is located in Islamabad, however with the development of Sonmiani it is expected that the new headquarters will be moved in the near future. The agency also has offices in Lahore and at Karachi (an engineering installation). SUPARCO has no launch capability of its own. It has relied on Chinese and Russian space agencies to launch its satellites Badr-1 and Badr-2.

SUPARCO saw major cuts in its budget in the 1980s and 1990s. Last year, its annual budget was a modest $6m. In fact, Pakistan had no communication satellites in space until 2003. The urgency to place its first satellite in a geo-stationary orbit was keenly felt in the middle of 2003, by which time Pakistan had already lost four of its five allocated space slots. The five slots were allocated to Pakistan by ITU (International Telecommunication Union) back in 1984, but the country failed to launch any satellite till 1995. That year Pakistan again applied for and received the five slots, but once again the government failed to get a satellite into orbit, losing four of it slots in the process. According to officials, if Pakistan had failed to launch its satellite by April 19, 2003, the country would have lost its fifth and last 38-degree east slot when the availability of these space slots is getting difficult every day.

With the current economic crisis, it is unlikely that Pakistan will boost space spending to try and follow its bigger, better funded neighbor into space.

Sunday, October 19, 2008

Can Pakistan Avoid IMF Bailout?

Pakistan may have to accept politically unpopular aid from the International Monetary Fund to ward off possible economic meltdown if wealthy nations turn it down, the government said Sunday.

Battered by high inflation and a plunging currency, nuclear-armed Pakistan needs up to US$5 billion to avoid defaulting on sovereign debt due for repayment next year.

Foreign Minister Shah Mehmood Qureshi said Sunday the "IMF was an option" but no decision had been made yet.

Shaukat Tareen, the finance official leading the country's efforts to secure the money it needs, said he was confident Pakistan would not default but that IMF aid may be needed as a "backup."

He predicted the country would soon receive more than US$4.5 billion through the acceleration of planned development loans and direct assistance from rich countries.

The crisis comes as the country's new civilian leaders struggle against Islamist militants in the northwest blamed for soaring violence at home and in neighboring Afghanistan.

Seeking help from the IMF would be politically difficult for the government because the agency's help is often on condition of deep cuts in public spending that can affect programs for the poor.

Pakistan hopes its front-line status in the war on terrorism will mean the international community will not have the stomach to see it default. But its plea for help comes as many countries are distracted by the global economic crisis.

President Asif Ali Zardari returned Friday from wealthy China with no public commitment of help.

Through much of its history, Pakistan has struggled with chronic economic instability and foreign debt, but the current crisis comes at an especially dangerous time.

The country has seen more than 90 suicide blasts since July last year.

Last month, a suicide bomber struck the Marriott Hotel in Islamabad, killing 54 and leading the U.N. and foreign embassies to withdraw the families of foreign staff.

Pakistan's overwhelmingly poor population of 160 million is already suffering from skyrocketing food and fuel prices and enduring daily power cuts caused by energy shortages.

Defaulting on debt risks shattering any remaining local and foreign investor confidence in the battered economy. It could escalate into an economic meltdown with out-of-control price increases, fewer jobs, more power shortages and a general breakdown in law and order.

"Bankruptcy, should it happen, could unleash a massive tidal wave of social unrest," the U.S.-based intelligence risk assessment agency Stratfor said in a report. "Exactly what the jihadists on both sides of the Afghan-Pakistani border would like to see to advance their goals."

The financial crisis was caused in part by the previous administration of President Pervez Musharraf, which subsidized fuel and food even as international commodity prices soared last year.

That created a huge hole in public finances, meaning the new government has had to borrow heavily from the central bank, stoking inflation that this month reached 25 percent.

The Pakistani rupee has lost about a third of its value this year. The benchmark 100-stock index had already fallen more than 40 percent from a record high in April when its board of directors put a floor under it at the end of August.


Associated Press writers Stephen Graham in Islamabad and Ashraf Khan in Karachi contributed to this report.

Source: International Herald Tribune

Saturday, October 18, 2008

Son of Kashmir Named to Rescue US Economy

"I'm a free-market Republican." said Neel Kashkari at an American Enterprise Institute conference on Sept. 19, 2008, just days before he was asked to lead an unprecedented and massive U.S. government intervention to rescue the U.S. financial system from total collapse.

Who is Neel Kashkari? He is the 35-year-old son of Kashmiri-Americans who grew up in Akron, Ohio. Trained as an aerospace engineer before attending Wharton Business School, he comes from a family of scientists. Father Chaman has a doctorate in engineering, and won a Presidential award for his work in getting water to African villages. Kashkari's mother, Sheila, is a retired pathologist, and his sister Meera, specializes in infectious diseases.

Kashkari has been a close adviser to Treasury Secretary Henry M. Paulson Jr. on the credit crisis and helped draft the legislation for the massive rescue plan. He has been designated as the Interim Assistant Secretary of the Treasury for Financial Stability. In this capacity, Mr. Kashkari is overseeing the Office of Financial Stability, including TARP, the $700b Troubled Asset Relief Program. As TARP chief, he will have the powerful position to determine what non-performing assets and out-of-favor mortgage-backed securities to buy and at what price. In a way, his decisions will have long term impact on how the US financial system performs now and in the future.

The choice of young Kashakari has come under criticism by the respected Wall Street Journal in a recent editorial. The editorial said: A problem now is that Treasury Secretary Hank Paulson still hasn't shown he knows how to use his new tool, and his appointment of a 35-year-old former Goldman Sachs employee as the auction czar doesn't call to mind Paul Volcker arriving at the Fed in 1979. With no disrespect to Neel Kashkari, who is Mr. Paulson's choice, a financial panic is a bad time to be introduced to global markets. At a minimum, Treasury should have done better than leak his name to the newspapers. This is the kind of roll out that needs to be better than seat-of-the-pants -- and continues the problem of weak execution at Treasury.

Time magazine says this about Kashkari in its recent issue: For a position this important, Kashkari, the American-born son of Kashmiri immigrants, may seem an unlikely pick: he's been in finance for only eight years, two as a student at the Wharton School and four as an executive in the San Francisco office of Paulson's old firm, Goldman Sachs. At Goldman, Kashkari was so low on the food chain that he only got to know Paulson well after they both moved to the Treasury in 2006.

But Mr. Kashkari has powerful defenders. A spokesman for Congressman Barney Frank, the liberal head of the House Financial Services Committee, calls him "very knowledgeable and very smart."

Kashkari's assignment offers him a great opportunity to learn to deal with tough issues in the company of the best, the smartest and the most experienced economic leaders with plenty of scars. But this is also a dangerous assignment with uncertain results. Young Kashkari's mettle will be mightily tested in his powerful but temporary job which will last at least until a new president is inaugurated in January 2009.

Kashkari is not the only high-profile South Asian making news in the midst of the biggest financial crisis US has faced since the Great Depression of the 1930s. Vikram Pandit, also an engineer and the current the CEO of Citigroup, is credited with saving his firm from meeting the same fate as Lehman Brothers. He engineered the rescue without Uncle Sam's help. Recently, though, he suffered a setback when Wachovia spurned Citigroup's bid to buy it and chose to go with Wells Fargo instead.

With dozens of people of South Asian origin, including former Pakistani prime minister Shaukat Aziz, having served or serving in responsible positions in the US financial services industry, South Asian banking and finance expertise is coming of age.

India-based Debt Collection Business Soars

With the U.S. economy slipping into a potentially deep and prolonged recession, and increasing number of Americans unable to pay their debts, the debt collection call-center business in India is soaring.

According to a report in The Washington Post, India handles an estimated $16 billion -- or about 5 percent -- of delinquent U.S. accounts. More complicated health insurance bills and mortgage payments are still largely handled inside the United States, industry executives say. The debt collection business is expected to continue to grow as debt rises and companies look to cut costs, industry experts said. Aegis call center in New Delhi, which handles nearly a fourth of debt collection outsourced from the United States, is experiencing rapid growth. The company is setting up a second office building for 5,000 employees, many of them to be hired over the next few years. Most employees are college-educated and in their 20s. They earn about $5,000 a year, a competitive starting salary in India, but less than a quarter of what their counterparts in America make. There is almost a cult following of America among call center workers, a fantasy where hopes and dreams are easily achieved by people who live in a wonderland of well-paid jobs, big homes and expensive vacations. This perception seems to be changing, at least among the Indian debt collectors who regularly listen to sob stories of trouble in paradise.

U.S. household debt has increased from about 50% of GDP in 1980 to a peak of 100% in 2006, according to Harvard Business Professor Nial Ferguson who recently wrote a column for Time Magazine. In other words, households now owe as much as the entire U.S. economy can produce in a year. Much of the increase in debt was used to invest in real estate. The result was a bubble; at its peak, average U.S. house prices were rising at 20% a year. Then — as bubbles always do — it burst.

Professor Ferguson believes that U.S. banks and other financial institutions are in an even worse position: their debts are accumulating even faster. By 2007 the financial sector's debt was equivalent to 116% of GDP, compared with a mere 21% in 1980. And the assets the banks loaded up on have fallen even further in value than the average home — by as much as 55% in the case of BBB-rated mortgage-backed securities.

The heavy debt and deflating asset prices are now forcing "deleveraging", the sales of assets in a down market to pay debt that is contributing to an even greater drop in the value of stocks, bonds and real estate. With the banks trying to build up their capital reserves, they are not lending to even the most credit worthy customers, or to each other. Such caution is resulting in heavy job losses at businesses unable to borrow to meet their business needs. This climate has caused a significant loss of confidence among consumers, businesses and investors making matters worse. It is becoming a vicious cycle that the US Treasury and the Federal Reserve are trying to break by pumping over a trillion dollars into the banking system. However, the banks' continuing reluctance to lend is forcing a change in strategy by Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke. Both leaders are now buying stakes in the banks to try and change their behavior to relieve the continuing credit crunch.

The massive consumer and corporate debt and the unprecedented debt-addiction has brought the U.S. into this crisis. Ironically, it is the sudden withdrawal of debt that is making the situation worse. The contagion has now spread to the rest of the industrialized world. We are in uncharted waters now. Let us hope the captains of U.S. economy can navigate us out of the severe storm with as little damage as possible. Meanwhile, it is an opportunity for debt collectors in India to see the seamy side of the life in US while they make a few extra bucks to improve their own lives.

Thursday, October 16, 2008

No Money, No Energy, No Government

Draft of a new US National Intelligence Estimate (NIE), leaked to the media recently, paints a bleak picture of Pakistan.

A US official who participated in developing the report summarized the estimate's conclusions about the state of Pakistan as: "on the edge" with "no money, no energy, no government." According to him, the NIE report also talks about "Pakistani army's reluctance to launch an all-out crackdown" on the insurgents.

This latest US NIE seems to imply that the situation is far worse than the earlier reports of economic meltdown and President Zardari's plea for a $100b bailout request to the US and friends of Pakistan consortium.

The economic difficulties are compounded by growing insurgency, infighting within Pakistani government and deep mistrust between the civilian and the military leadership, according to the estimate.

Mr. Juan Cole, a Pakistan watcher, views this NIE leak with suspicion. He says, "I'm suspicious that all the talk about instability and 'no government' is really a way of saying that US intelligence agencies liked having a military dictatorship there much better than they like having an elected parliamentary regime."

Mr. Cole adds, "American reports about Pakistan are schizophrenic, because they say the Pakistani army is not fighting the Taliban. But the Pakistani military has chased 300,000 from their homes in Bajaur, one of 7 tribal agencies, and has engaged in firefights with dissident Muslim groups there. I mean, what do the authors of the NIE want?"

The accuracy of the NIE and the motives behind it are hard to gage, but it is clear that the situation in Pakistan is very chaotic with growing unrest among the population because of the falling rupee, dwindling foreign exchange reserves and skyrocketing prices of food and fuel. President Zardari is trying to line up significant emergency economic aid from the US, the Europeans and the Chinese to bail out Pakistan. His government will probably not last long if he fails.

Saturday, October 11, 2008

A Preview of Obama's South Asia Policy

Lately, Senator Barack H. Obama has been taking a tough, even hostile stance toward Pakistan. He is threatening to send US ground troops into FATA if there is "actionable intelligence" to end "terrorists' safe haven" inside Pakistan. His opponent, Senator John McCain has said Obama "doesn't understand" the situation in FATA and chided him for being naive and "talking loudly" about Pakistan. Many Obama supporters dismiss Obama's tough talk as merely designed to assert his commander-in-chief credentials to appease his critics.

Is Obama's tough talk just an act? Or is it based on considered advice from the experts of the liberal think tanks to whom Democrats generally outsource policy? While there is a small chance that Obama does not really mean what he says, it is also a fact that foreign policy experts such as Bruce Reidel are advising Obama on South Asia policy.

Riedel says that there will be a renewed focus on Afghanistan and Pakistan under an Obama presidency. “Obama is determined to put a lot more resources into the war in Afghanistan — and it’s overlapped into Pakistan — than either a McCain presidency would or the Bush administration did.” He adds that Obama sees Afghanistan and Pakistan as “the central front of the war against al Qaeda and the war against extremism.” Translation: The war in Afghanistan will escalate and expand into Pakistan.

Who is Bruce Reidel? What are his credentials? How does he view US role and policy in South Asia? Bruce Riedel is a Senior Fellow in foreign policy at the Saban Center for Middle East Policy of the Brookings Institution. He served with the Central Intelligence Agency for 29 years and retired in 2006. Riedel served as Special Assistant to the President and Senior Director for Near East Affairs on the National Security Council (1997-2002), Deputy Assistant Secretary of Defense for Near East and South Asian Affairs (1995-97), and National Intelligence Officer for Near East and South Asian Affairs at the National Intelligence Council (1993-95). His areas of expertise include counter-terrorism, Arab-Israeli issues, Persian Gulf security and India and Pakistan.

Riedel says Obama will take a tougher line with Pakistan, and make military aid conditional upon Pakistan’s performance in combating the Taliban and al Qaeda. But he disagrees with the view, prevalent in Pakistan, that Obama dislikes that country. Instead, he says that Obama is a strong critic of the “Musharraf-centric Pakistan policy” pursued by the Bush Administration. He believes that Obama is likely to be supportive of the present PPP-led government, unless it were to engage the Taliban, a move which would prove extremely unpopular in the United States.

On India policy, Reidel says, “The Democrats are much more likely to want to revisit the nuclear proliferation implications [of the nuclear deal]". He adds, "That would complicate the relationship with New Delhi.”

“There’s talk of a strategic partnership with India. The Obama campaign buys into that,” says Riedel. “As president, he will place the same priority on India as Bush did, and Clinton did before him.”

In his speech to the Democratic National Convention, Obama pledged to halt tax sops to companies that ship jobs overseas. If Obama sticks to this promise, it will mean trouble ahead for India's IT industry. India's software and services exports stood at about $40 billion during the financial year 2008, a growth of 29%, with US as its largest market. Can Obama really curb outsourcing? It seems unlikely.

In an interview with Fox News' Bill O'Reilly, Riedel's candidate Obama seemed to agree with the narrative of the Indian lobby when he accused Pakistan of "preparing for war with India".

In a recent article, Riedel wrote that “fear of India is the driving force” behind Pakistan's pursuit of relationships with Islamic fundamentalism and Islamic terrorism". He added, “The conflict with India affects all aspects of Pakistan's worldview and its self-image.”

"Coming to grips with Pakistan's obsession with India and Kashmir is critical to killing the monster," and the "time may be ripe in 2009 to move," Reidel writes, hinting at the likely policy of the new administration that is likely to be in office next year.

Answering a question about Pakistan and the war on terror at a meeting of Council on Foreign Relation, Reidel said, "Pakistan is an extremely dangerous and unstable country. We need to tread carefully. We need to get the Pakistanis to see this as their war. And that's going to require some major new initiatives on the American side. Commando raids and Predator strikes are not a long term solution to this problem".

If history is any guide, it can be fairly safely predicted that the a Democratic administration will pursue a punitive policy toward Pakistan while tilting heavily toward India, much more so than the Bush administration. Given the caution sounded by Bruce Reidel about Pakistan, the hope is that better sense will prevail in the potential Obama administration on policy toward Pakistan. However, if "President" Obama does follow through on his tough talk on Pakistan, there will be an expanded regional war involving Afghanistan and Pakistan leading to massive destabilization of the entire region and extremely dangerous consequence for the world.

Related Links:

Reidel Interview at Council on Foreign Relations

Sunil Adam on Obama's Kashmir Policy

Who is Bruce Reidel?

Tuesday, October 7, 2008

Manmohan Says India Loves Bush

"The people of India deeply love you", said Indian Prime Minister Manmohan Singh to President Bush on a recent visit to the White House.

The Prime Minister continued with the theme of affection and gratitude by adding, “In the last four and half years that I have been Prime Minister, I have been the recipient of your generosity, your affection, your friendship. It means a lot to me and to the people of India.”

Later, India's Foreign Secretary Shiv Shankar Menon explained: “I think, if you look at the public opinion polls, the ratings for President Bush are higher in India than in any other country. That is the factual basis.”

The Program on International Policy Attitudes (PIPA) poll that Mr. Menon referred to shows that India tops the world in its admiration for President Bush who is deeply unpopular in the United States and most of the rest of the world. The survey found that 62% of Indians thought his second term as US president was positive for global security.

Another most recent PIPA poll conducted in 2008 shows that the one country with a majority expressing a positive view of Bush is Nigeria with 60 percent saying they have some or a lot of confidence. Indians also lean positive (45 to 34%). Interestingly, this year Chinese views have softened (41% positive, 45% negative)--with the number of those expressing positive views up 10 points since Pew's 2007 poll.

India has benefited from the Bush policies of closer economic and nuclear cooperation which led to India's rapid economic growth in recent years, and its acceptance as a legitimate member of the prestigious nuclear club, a distinction not bestowed on nuclear rival Pakistan. The US-led war on terror has also legitimized India's crackdown on Islamic and other insurgents and helped India regain influence in Afghanistan and South Asia. Bush's pressure on Musharraf was instrumental in reducing violence in Indian held Kashmir and India, a Musharraf policy that angered the Islamists who started targeting Pakistani civilians and military. Bush popularity is, therefore, based on concrete results India achieved from the support of the outgoing US president.

A grateful Prime Minister acknowledged Mr. Bush’s part in ending India’s nuclear isolation: “For 34 years, India has suffered from a nuclear apartheid. We have not been able to trade in nuclear material, nuclear reactions, and nuclear raw materials. And when this restrictive regime ends, I think a great deal of credit will go to President Bush. And, for this I am very grateful to you, Mr. President.”

President Bush's lame duck status was clearly on Dr. Singh's mind. Turning to Mr. Bush, Dr. Singh said with apparent sincerity: “So, Mr. President, this may be my last visit to you during your presidency, and let me say ‘Thank you very much’. The people of India deeply love you.”

The Americans clearly see India as a strategic partner and a counterweight to China's growing influence in Asia, Middle East and Africa. While the US has made the effort to cultivate close friendship with Indians, it is not clear how this partnership will unfold in terms of specific Indian policies to help the US.

Isolating Iran is one its goals where the US wants India's help. Energy-hungry India needs Iran-Pakistan-India gas pipeline project to move forward. The US is clearly opposed to it. How will India respond to the US pressure? Alastair Scrutton, Reuters Chief Correspondent in Delhi, has addressed this in an analysis of the nuclear deal, saying those hoping that India will now fall into line with western policy will be disappointed.

Scrutton quotes Brahma Chellaney as saying that India will be reluctant to get sucked into U.S. efforts to isolate Iran.

“Now the (nuclear) deal has been sealed, India will have to mend ties with Iran,” Chellaney said. “For India’s strategy, to give up Iran would be a very difficult proposition … There is no way India can pursue an effective Afghan, Central Asian policy without Iran.”

I have a feeling that the I-P-I gas pipeline will be built with or without the US blessing. The reason is simple: Both India and Pakistan are energy-hungry and Iran is the closet source of abundant natural gas for South Asia. It is in their own best national interest to defy the U.S. on this particular issue. The only thing that is likely to delay it significantly is the deep distrust between India and Pakistan where U.S. can and must play a role regardless of the I-P-I project. It is in U.S.’s best interest to do so for its own economic and strategic interests in South Asia.

Monday, October 6, 2008

Zardari Signals Policy Shifts, Wants $100b Bailout

Mr. Asif Ali Zardari, Pakistan's new president, spoke to Brett Stephens of the Wall Street Journal last week. His interview covered a wide range of subjects including the ongoing insurgency, Afghanistan, FATA, and relations with US and India. He repeatedly brought up the subject of financial help for his government from the US and the world to deal with Pakistan's growing economic crisis. He is clearly pleading for a US-led economic bailout of Pakistan to halt rapid deterioration and to consolidate his power.

Here are some of the key points Mr. Zardari made:

1. India is "not a threat" to Pakistan. "India has never been a threat to Pakistan," he said, adding that "I, for one, and our democratic government is not scared of Indian influence abroad."

2. Those fighting Indian rule in Kashmir are "terrorists". He spoke of the militant Islamic groups operating in Kashmir as "terrorists" -- former President Musharraf would more likely have called them "freedom fighters" -- and allowed that he had no objection to the India-U.S. nuclear cooperation pact, so long as Pakistan is treated "at par." "Why would we begrudge the largest democracy in the world getting friendly with one of the oldest democracies in the world?"

3. Pakistan has given consent to US air strikes inside FATA. Mr. Zardari seemed eager to downplay any differences with the U.S. "I am not going to fall for this position that it's an unpopular thing to be an American friend. I am an American friend." The firing on the U.S. aircraft was, he said, merely an incident, "and while incidents do happen, they are not important." He went off the record to describe sensitive military subjects, but acknowledged that the U.S. is carrying out Predator missile strikes on Pakistani soil with his government's consent. "We have an understanding, in the sense that we're going after an enemy together."

4. With foreign reserves to cover only two months worth of imports and Pakistan's dire economic situation, he wants US and world's help to the tune of $100b to support his democratic government and its war against militants. "I need your help," he said more than once. "If we fall, if we can't do it, you can't do it." "Aid is proven through the researches of the World Bank . . . [to be] bad for a country," he says. "I'm looking for temporary relief for my budgetary support and cash for my treasury which does not need to be spent by me. It is not something I want to spend. But [it] will stop the [outflow] of my capital every time there is a bomb. . . . In this situation, how do I create capital confidence, how do I create businessmen's confidence?"

Brett Stephens characterized the economic crisis Mr. Zardari spoke of as "at least in part, a crisis of confidence in him."

Speaking of the recent Islamabad Marriott bombing, Mr. Zardari again brought the subject around to his economic problem. "If I can't pay my own oil bill, how am I going to increase my police?" he asked. "The oil companies are asking me to pay $135 [per barrel] of oil and at the same time they want me to keep the world peaceful and Pakistan peaceful."

5. He used phrases such as Pakistan's war is "my war," its fighter jets "my F-16s," its Intelligence Bureau "my IB." In recent weeks there have been reports that Pakistan has deployed F-16s against tribal insurgents, in part because the army's own frontier troops have been routinely routed in ground fighting. Their problems aren't simply tactical. "What kind of a joke is this that I cannot pay my security personnel more than the Talibs are paying?" he asked. "Those terrorists are paying their soldiers 10,000 rupees; I'm paying seven or six thousand rupees."

6. On the corruption issue, he said, it "has been used for a long time as a political tool," particularly by "radicals" trying to give democracy a bad name. Foreign investors, he said, have been coming to Pakistan for decades, and "none of them have complained about corruption."

A lot of what President Zardari said to Brett Stephens in this interview will be seen as highly controversial in Pakistan by the military leadership, policy think tanks and analysts, as well as the opposition parties. Much of it will likely be a surprise to Pakistan's foreign policy establishment, career diplomats and the government bureaucracy that has the responsibility of developing policy toward India and the United States. It seems that he was not briefed or, if he was, he simply chose to ignore the briefing he was given.

Does this interview signal a fundamental shift in Pakistan's posture and policies toward India and the US? On the face of it, it does seem so. However, only time will tell if and when such changes are practically implemented, and how they are received by Pakistanis, Indians and Americans. Regardless of Mr. Zardari's real intentions in strongly hinting at a major policy shift, it is unlikely that a US-led bailout of Pakistan would be forthcoming at a time when the US economy is headed into a recession, limiting the options open to any incoming administration in Washington.