Archive for October 29th, 2008

THE $58 TRILLION ELEPHANT IN THE ROOM – The roots of this year’s financial crisis go back to a small team of bankers at J.P. Morgan in New York. Now, their invention—credit derivatives—has helped bring down Wall Street and has left Morgan with its biggest exposure of all

Posted by Gilmour Poincaree on October 29, 2008


Jesse Eisinger by Jesse Eisinger

At a time when the reputation of bankers has been shredded, Bill Demchak is a throwback. The day I meet him, the financial world is once again poised on the brink of destruction. The Dow Jones Industrial Average lost 358 points the day before and is already down another 150 this morning. Yet Elephant and man in office setting - Photograph by Phillip Toledanothe green-eyed Demchak, in pleated khakis hiked up unfashionably high on his waist, seems preternaturally calm—especially for a man who, unwittingly, has had a hand in bringing Wall Street to its knees.

Demchak, now the vice chairman of PNC Financial in Pittsburgh, returned to his hometown in 2002 to help rescue the bank after it became mired in an accounting scandal. Under Demchak and the rest of its new management team, PNC has avoided most of the terrible mistakes of its Wall Street peers by spurning bad mortgages, dubious off-balance-sheet deals, and questionable corporate loans. It’s now one of the best-performing banks in the country.

But before he had this life, Demchak had another, as the leader of a small group at J.P. Morgan in New York that pioneered the kind of financial instruments that eventually led to this autumn’s wreckage on Wall Street. The J.P. Morgan team created and then industrialized credit derivatives, which have enveloped the global markets, growing to a mind-numbing $58 trillion worth of credit contracts. They have spread and morphed in ways that Demchak never intended but always feared.

Long celebrated as a way for banks to diffuse their risks, the credit derivatives invented by Demchak’s team have instead multiplied them. The new credit vehicles encouraged banks and other financial firms to take on riskier loans than they should have; helped increase leverage in the global financial system; and exposed a much wider array of financial firms to the risk of default. (View an interactive timeline of derivatives.)

Credit derivatives aren’t, of course, solely to blame for the pandemic that has helped bring down Wall Street. They didn’t single-handedly force Bear Stearns and Lehman Brothers to bulk up on toxic debt, dooming them to collapse. But they made the financial world more complex and more opaque. Ultimately, they have exacerbated the market panic, as financial firms and regulators have belatedly come to grips with the enormity of the problems. Merrill Lynch ultimately capitulated to a sale because investors had no confidence that the firm had a handle on what its problems were. When the federal government took over A.I.G. in September, it was largely because of the insurance behemoth’s exposure to credit-default swaps, a type of derivative that flourished in the wake of Demchak and his team’s creations. By mid-September, Treasury Secretary Hank Paulson was forced into proposing the largest bailout in U.S. history. Securities and Exchange Commission chairman Christopher Cox (S.E.C. No Evil, October) called for regulating credit derivatives.

Morgan’s derivatives project began in the wake of the Asian financial crisis in 1997 as an attempt to protect the bank from bad loans. Demchak’s innovations worked—for his bank. Morgan came to dominate this corner of the financial world while preserving a culture of prudence. Morgan—deemed to be so safe that it snagged two of the victims of the financial-system collapse, Bear Stearns and Washington Mutual—is still swimming in credit derivatives, far more than any other firm on Wall Street, though the bank says it’s hedged. As of the second quarter of 2008, the bank had written derivatives contracts backing credit valued at $10.2 trillion, roughly three-quarters the size of the U.S. economy.

But Demchak’s innovation has a more troubling legacy. J.P. Morgan, rather than being inoculated, was actually becoming the Patient Zero of Wall Street, eventually carrying the credit virus to the far corners of the global financial system. The structure of the first derivatives deal wasn’t as solid as Demchak’s team had intended. That initial, flawed financial instrument was later replicated thousands of times by J.P. Morgan and other banks, with the same defects repeated and magnified over and over again.

The creation of credit derivatives, only a decade ago, is more responsible than anything else for binding the global financial world together more closely. Now some of the trailblazers are puzzling over what has been wrought. “How can we have a financial system so precariously balanced after such an extraordinarily profitable period?” asks Andrew Donaldson, a former colleague of Demchak’s who runs an asset management firm in London.

Demchak spends his days in an unassuming office in PNC’s headquarters, situated amid a slightly seedy collection of streets in downtown Pittsburgh. Demchak warned for years about excesses in lending and is now baffled by, and even somewhat contemptuous of, his peers’ disastrous mistakes: “At the end of the day, I’m never going to be—knock on wood—a guy you see in the paper and say, ‘Look at this stupid, self-serving decision.’ ”

Later, as he thinks back to 1997 and the days in New York when his team helped get the derivatives market off the ground, he lights up. “Oh, God,” Demchak says. “It was absolutely the best time ever in my life.”

In the mid-1990s, Demchak, along with his boss, Peter Hancock, an effervescent Briton, became converts to the closest thing the banking industry has had to a religious reformation. Back then, relationships drove the commercial-banking business. Glad-handing bankers with tight connections to corporate boardrooms made the rain.

These guys never met a loan from a corporate client they would turn down, even if they weren’t sure it would be profitable in the long run.

Hancock and Demchak’s creed was simple: Banks should know whether their loans were going to make money. The pair insisted that loans be priced to their current value in the market. Because of the legacy of the old relationship bankers, J.P. Morgan was struggling. The problem, in the view of the stock market, was that the bank had the wrong clients. They were sleepy American icons, some of whom John Pierpont Morgan himself had lent to and even helped build. Though bank officials were promising Wall Street that it could generate returns of 20 percent, the return on many of its loans was much lower, forcing the bank to run the race while dragging lead weights on its ankles.

The Asian financial crisis highlighted the problem. Morgan lost money on loans to Asian companies. That prompted the bank to take a look at all of its corporate lending practices, abroad as well as at home. When it did, top executives came to a sobering realization: Not only was J.P. Morgan not making nearly enough profit on these blue-chip corporate loans, the bank had also made far too many of them. Most weren’t loans at all but lines of credit promising funds at some later date. Hancock and Demchak realized that in a crisis, many of these companies would probably ask J.P. Morgan for access to the money they were promised. Worse, they wouldn’t do it unless they were on the brink of collapse—exactly the wrong time for a banker to make a loan. The bankers who made those loans thought the odds of that happening were too small to even consider. “The old banking mentality viewed them as riskless,” Demchak says. But the mentality was wrong.

Morgan realized it needed to act quickly to reduce its exposure. It had to free up capital for more profitable business. But it couldn’t sell the loans without alienating its longtime, blue-chip customers.

Demchak put the new religion into action. “Demchak was the first person I know of who had the vision that the credit-derivatives market could be anything like it is today,” says Charles Pardue, who worked for Demchak at J.P. Morgan before moving to a hedge fund in London.

Over the coming months, Demchak would put his assault team of math whizzes and marketers to work on fixing the problem. Within the bank, the project was called the Credit Transformation.

Demchak received crucial help from his lieutenant, Blythe Masters, a rising star and formidable presence at the bank. She interned at Morgan while still in college at Cambridge, in Britain, and joined the bank after graduating. Ultracompetitive and driven with a passion for debate, she would give talks and seminars proselytizing about the promise and power of credit derivatives, ultimately becoming their “poster child,” according to credit-­markets consultant Eileen Murphy.

“When you are doing something new, it gets done only by imposing your force of will,” says a former colleague of Masters’. “She was that person.”

Wall Street likes to call its innovations “technologies” to convey a weighty sense of importance. What Demchak and Masters did was combine two of these technologies—securitization and credit derivatives—for the first time.

Securitization has been around since the 1970s. In such a transaction, a group of loans—for example, mortgage, credit card, or corporate loans—is bundled together and sliced up into pieces called tranches. The lowest portion, called the equity, is exposed to the first losses. The next slice up is exposed to the following losses, and so on, until you get to the top. The slices are usually rated by the rating agencies. (Often, the media and even some on Wall Street colloquially refer to tranches of securitizations as derivatives; they aren’t. Tranches are securities backed by a pool of cash-producing assets.)

The Demchak group’s breakthrough was to inject a little magic into standard securitizations. Instead of putting a particular loan into the sliced-up instrument—say, a 30-year loan to I.B.M.—it put a piece of J.P. Morgan’s exposure to I.B.M. into it. For this, the team used credit-default swaps, a burgeoning form of credit derivative. In a C.D.S. transaction, the buyer is protected against a default. These contracts had been floating around in small, experimental form for several years, having been created by Bankers Trust, a scrappy cowboy investment bank.

Demchak’s team was the first to take them wholesale, using credit-default swaps in a huge deal. They mashed up J.P. Morgan’s exposure to more than 300 giant corporations, created an off-balance-sheet vehicle, then sold slices of that to investors. The vehicle then protected J.P. Morgan from defaults. In effect, Morgan was paying insurance premiums to investors who now were on the hook if one of Morgan’s clients went belly-up. “The innovation of not being tied to specific loans or bonds is what made the credit-derivatives market what it is today,” says Romita Shetty, who was part of Demchak’s team at J.P. Morgan.

Development on the project continued slowly through the second half of 1997, involving painstaking and tedious legal and accounting work, quantitative analysis, and hand-holding and persuasion of banking regulators and credit-rating agencies. Demchak and Masters wanted their first deal to hit the market by the end of the year so that Morgan could get credit for it when the bank reported its earnings. The period was so intense that Masters, an avid equestrienne, at one point took a conference call from atop her horse.

Finally, in December 1997, Demchak’s team closed on this first big credit-derivatives deal, the Broad Indexed Secured Trust Offering, or Bistro for short. Insurance companies and banks, the initial customers, were enthusiastic, snapping it up in just two weeks. The deal was enormous for the time, off-loading more than $9.7 billion of J.P. Morgan’s exposure. Morgan had succeeded in reducing its balance-sheet risk and was able to free up capital to buy its stock back.

J.P. Morgan would go on to launch a credit-­derivatives assembly line, becoming the Henry Ford of the new financial market. Throughout the 1990s, the bank was a major player in persuading lawmakers to allow the derivatives markets to remain unregulated—a move regulators are now reevaluating. Bistro helped J.P. Morgan traders in London kick-start the expansion of the “single-name” C.D.S. market, where individual contracts that cover just one company or entity trade hands. This market became liquid and deep by the early 2000s. “We had 100 people,” Demchak recalls. “We helped create the regulatory framework, the legal and accounting framework, and we did billions. We industrialized the product.”

J.P. Morgan continues to dominate the world of derivatives. It has derivatives contracts tied to $90 trillion of underlying securities. Of that, $10.2 trillion are credit-derivatives contracts. Those mind-boggling totals are somewhat misleading. They reflect what is called the “notional” amount in the world of derivatives, based on the underlying amount of the contract, not its current value. When offsetting contracts are taken into account, that figure is whittled down to a much smaller—though still enormous—$109 billion of derivatives, of which $26 billion are credit derivatives. That’s the amount the bank could lose if all its trading partners went out of business, an extremely remote event. But the exposure is climbing, up 17.4 percent from the end of 2007. That’s equal to 20 percent of the bank’s net worth.

Bistro “was the most sublime piece of financial engineering that was ever developed. It was breathtaking in terms of beauty and elegance,” says Satyajit Das, a risk consultant and the author of Traders, Guns, and Money, a financial history. But “in many ways,” Das adds, “J.P. Morgan created Frankenstein’s monster.”

For J.P. Morgan, Bistro worked wonderfully. But even in that first deal, the weaknesses in structured finance and credit derivatives that would come to the fore in the 2007 credit-market crash were already there.

Despite its blue-chip assets, Bistro didn’t perform pristinely. The initial slice, the equity layer that Morgan retained as a cushion against trouble, was so thin that it couldn’t weather even one default from one of the bigger companies in the bundle. That ultimately happened, wiping the slice out entirely. The investors who were one notch up, in what’s called the mezzanine layer, lost money as well. Even the buyers of the top-rated tranches, which were thought to be rock solid, had to endure bumpy periods before they got their money back.

During that first major deal, the credit-rating agencies, which were supposed to be impartial, were already deeply enmeshed in the give-and-take of the process. A former Morgan banker who helped create Bistro recalls that Standard & Poor’s was giving the bank a tough time. The rating firm would run the deal through its models, and “each time, it came up with disastrous results. We did some tinkering and all of a sudden, it could rate the deal,” the banker says.

The pattern was set. The rating agencies would become integral to the creation of the structures. Standard & Poor’s says questioning that first deal was appropriate and stands by its original rating. It further says it doesn’t get involved in structuring deals. But the close relationships between the rating agencies and the Wall Street firms were heavily criticized following widespread mortgage-related securities failures after the housing bubble burst.

After Bistro, investors and regulators embraced derivatives as ways to free up capital to make more loans. Banks around the world used the structures to off-load their own credit risk. Competitors rushed to copy Morgan and Bistro.

The knockoffs and followups were even more flawed than the original model. The second Bistro deal, in 1998, suffered credit downgrades. One of the big deals that followed fast on Bistro’s heels was York Funding, a Credit Suisse structure. “They stuffed it with the worst possible credits,” recalls a former rating-agency employee who examined the deal.

One major problem was that banks had the ability to substitute loans in and out of the structure, as long as the loans had the same credit rating. This allowed managers to scour their books for a loan that looked shaky but still retained a good credit rating and swap it in for a healthier one. The tranche’s credit rating would remain the same, making the whole deal look better on paper than it actually was.

Ultimately, the game became less about reducing risk and more about fooling regulators and the rating agencies. “From 1999 to 2000, there was a lot of innovation for innovation’s sake. A lot of products game the rating agencies and game the regulatory capital requirements,” says a former J.P. Morgan banker who was involved with Bistro.

Warning signs piled up. After the tech bubble burst in 2000, myriad similar deals performed terribly. Some were backed by corporate loans. Many were Bistro-like constructs with credit derivatives. As a class, they hadn’t made it through a cycle of corporate defaults profitably, the acid test of any stable credit product. In his recounting of the period, Das writes, “The credit models failed miserably.”

Despite the obvious failure of the first round of this wizardry, Wall Street was at it again by 2003, this time with mortgages. Investment banks sold billions of structured securities, made up mostly of housing loans to subprime customers with shaky credit. As the market got going, Wall Street bundled leveraged loans made to companies that had junk ratings from the credit-rating agencies. At the peak in 2006, Wall Street issued $89 billion worth of Bistro-like structures called synthetic collateralized-debt obligations. Many of the $415 billion worth of the main type of C.D.O. carried embedded credit derivatives as well.

It’s not surprising that they failed again. Investors and financial firms lost hundreds of billions of dollars as part of the housing and corporate loan meltdown. Only then did the credit-rating agencies come under assault for being too closely involved in helping Wall Street create the complex structures. It took until this year for the structured-finance market to come to a screeching halt.

Today, the financial markets are living in the slipstream of the Bistro deal. “People like to talk about what a shambles the banking system is. But it’s a shambles by design. You are taking on capital, reserving some of it, and lending it out. The whole system is levered,” says a former J.P. Morgan banker. After Bistro, it became more so.

The practice of crafting loans that banks had no intention of keeping on their own balance sheets wasn’t invented by J.P. Morgan, nor was the credit-derivatives market solely responsible for making it possible. Certainly, not all the lending excesses, especially in mortgages, can be laid at the feet of the complex Wall Street structures that used derivatives. But Bistro spread the popularity of this “originate and distribute” model. This experience taught the banking industry that loans designed to be sold to investors for a quick profit performed much more poorly than loans that banks had to keep.

In addition to keeping the very small piece of Bistro’s first-loss equity slice, J.P. Morgan retained part of the very top slice. Demchak’s team christened it “super­senior.” His group knew that there were risks, though slight, in keeping exposure to these slices. A.I.G., Merrill Lynch, and bond insurers MBIA and Ambac ignored them. Knowingly or not, these firms followed the Bistro deal, retaining super­senior exposure on their books to billions of dollars’ worth of structures in recent years. These companies thought—erroneously—that the slices were so unlikely to default that they needn’t set aside much capital for that eventuality.

The problem was that the underlying assets propping these slices up weren’t blue-chip loans but rather loans to subprime borrowers and junk companies. The supersenior slices turned out to be enormously risky, exposing these companies to huge losses.

Bankers have lost their heads in the past several years. The financial system has run amok. When the federal government took control of mortgage giants Fannie Mae and Freddie Mac, the takeover was deemed a “credit event,” triggering the credit-default swaps that other companies held as insurance against such an event. A week later, Lehman filed for bankruptcy, shrouding the market in an even greater fog. And then, investors in A.I.G. panicked. The insurance giant had written hundreds of billions of dollars’ worth of protection on the supersenior slices of mortgage-backed securities. Because of its high credit rating, A.I.G. hadn’t needed to post any initial collateral. But as the market sent the cost of default protection soaring, A.I.G.’s trading partners demanded collateral from the insurer. A.I.G. didn’t have it. Credit-rating agencies downgraded the insurance company, requiring that it post even more collateral. This left A.I.G. teetering on the edge of bankruptcy, and in an unprecedented intervention, it had to be nationalized by the federal government. For the first time, the C.D.S. market shrank in the first half of the year, after doubling every year since 2001.

Bistro had tied the world together, taking credit risk from the banks and passing it on to anyone who wanted it. For years, proponents of credit derivatives, including then-Federal Reserve chairman Alan Greenspan and current chair Ben Bernanke, had celebrated the way they spread risk. Everyone might share a little bit of risk, but no firm would collapse from it. Yet in this credit crisis, everyone has become infected.

You can almost detect a crisis of faith in Demchak. In the past eight years, he’s seen one market failure after another. First came the Chase takeover of J.P. Morgan. Chase’s stock soared in the ’90s as investors credulously rewarded its growth. Although it was able to take over the languishing J.P. Morgan, Chase had exposure to almost every big blowup in the wake of the bursting of the 1990s stock market bubble. Much of Demchak’s good work to off-load risk was for naught. (After Demchak left J.P. Morgan in 2002, almost every member of his team followed except Masters, who now runs the bank’s commodities businesses and is regarded as a possible C.E.O. candidate one day.)

Then the credit markets ran wild, with bankers handing out loans that Demchak knew could never be profitable. Today, the markets are gripped with what he sees as an oft-irrational panic, driving prices to fluctuate wildly.

Since Ronald Reagan’s presidency, the dominant ideology governing the financial world has been what George Soros calls “market fundamentalism”—the belief that we should trust the market when deciding how to allocate our resources. We’ll all be better off, the argument goes, if capital is allowed to flow wherever the prices call for it, with as little central planning and governmental interference as possible.

But we have had two great investment bubbles, first in the stock market and now in the credit markets. For the first time in a generation, even some bankers question whether the markets know anything. If they can’t be trusted, what’s going to replace them?

“I used to be the biggest advocate of marking everything to market at all times, because it keeps everyone honest,” Demchak says, referring to the practice of recording the value on the books at the current value. But he saw markets overreacting, swinging from euphoria to pessimism. Now he thinks the fates of great companies are in the hands of inexperienced traders speculating in thin markets. A colleague com­plained to Demchak recently that “some 24-year-old kid is going to mark me down or up 100 million bucks today. How is that?”

Demchak understands his colleague’s frustration. “He is right.”





Posted by Gilmour Poincaree on October 29, 2008

NEW YORK, Oct. 28 /PRNewswire/ — Sumitomo Corporation of America (SCOA) recently closed on the purchase of Miami Center building, at 201 South Biscayne Boulevard, in the Central Business district of Miami, Florida. The building, with spectacular views of Biscayne Bay and the city skyline has immediate access to Bayside Marketplace shopping & restaurant complex and the adjoining Inter-Continental Hotel Miami. Negotiations with the selling group, Crescent Real Estate Equities Limited Partnership and institutional investors advised by J.P. Morgan Asset Management – Global Real Assets, concluded on September 30, 2008 with a purchase price of $260 million.

Robert Obringer, general manager of SCOA’s Real Estate Unit, sees solid value in this latest acquisition. “We are excited to add Miami Center to our portfolio of commercial properties here in the U.S.,” explains Mr. Obringer.

“As part of our constant management of assets, we are always looking for opportunities that will maximize return on investment, and this property offers a strong upside potential for steady cash flow growth and long-term value appreciation,” adds Mr. Obringer. The building is 96% leased to multiple tenants, including major tenant, Citi Group.

Miami Center contains 782,210 square feet of rentable space on 34 floors. Designed by internationally-acclaimed architect Pietro Belluschi, and clad in Italian travertine marble, Miami Center has been a striking figure in the downtown Miami skyline since 1983. Besides its breathtaking views of Biscayne Bay and the city skyline, Interstates 95 and 395 and other major expressways are easily accessible to tenants and visitors of the complex.

Miami Center is SCOA’s third commercial real estate purchase this year. Earlier in the year, the Company acquired a 156,000 square foot, 12 story office building located at 1750 K Street, in the heart of the central business district of Washington, D.C. and a 299,540 square foot, 12 story office building in an emerging commercial area in Tempe, Arizona. SCOA also has assigned RYAN COMPANIES US, INC. as a management company of all its office buildings so that due diligence, property management, tenant leasing and other daily operations are consolidated by them.

About Sumitomo Corporation of America

Sumitomo Corporation of America (SCOA) is an integrated trading and investment enterprise with offices in 11 major U.S. cities. Established in 1952 and headquartered in New York City, SCOA is the largest wholly owned subsidiary of Sumitomo Corporation, Japan (SC), an integrated global trading firm. SCOA has diversified investments and trading businesses involved in manufacturing and marketing of consumer products, providing financing for customers and suppliers, coordination and operation of urban and industrial infrastructure products, providing logistics and transportation services, developing natural resources, distribution of steel and other products and developing and managing commercial and residential real estate. The Company has a portfolio of commercial properties with a combined market value in excess of $600 million. For more information about SCOA, visit

About J.P. Morgan Asset Management

J.P. Morgan Asset Management is a global asset management leader providing world-class investment solutions to institutions, individuals and financial intermediaries. The firm is responsible for approximately $1.2 trillion in assets under management (based on assets under management for the Asset Management division of JPMorgan Chase & Co. as of June 30, 2008), including more than $58.4 billion in real estate managed by J.P. Morgan Asset Management – Global Real Assets. With a 38-year history of successful investing and a staff of approximately 379 professionals, J.P. Morgan Asset Management – Global Real Assets identifies, analyzes, negotiates, acquires, develops, redevelops, renovates, operates, maintains, finances and sells assets, on behalf of its clients. J.P. Morgan Asset Management’s broad investment capabilities and framework for analyzing opportunities in today’s complex real estate and infrastructure markets provide critical insights for its institutional clients in both the public and private markets.

SOURCE:Sumitomo Corporation of America





Posted by Gilmour Poincaree on October 29, 2008

October 29, 2008

by Anwar Iqbal and Masood Haider

WASHINGTON/NEW YORK, Oct 28: The US is willing to hold direct talks with elements of the Taliban in an effort to quell unrest in Afghanistan, the Wall Street Journal reported on Tuesday, citing unidentified Bush administration officials.

The Washington Post reported that Taliban leader Mullah Omar had shown openness to the idea of repudiating Al Qaeda, which encouraged the Bush administration to explore the possibility of holding direct talks with the militia.

Jane’s Defence Weekly reported that the Taliban had conveyed this message to representatives of the Afghan government during a meeting in Saudi Arabia last month.

Amid these reports of a possible breakthrough in the search for a peaceful solution to the Afghan conflict, Christian Science Monitor noted that on Monday the Taliban militia showed “a new potency” in the fight against coalition forces, bringing down a US military helicopter near Kabul, while a suicide bomber struck and killed two Americans in northern Afghanistan.

The Los Angeles Times on Tuesday highlighted the significance of the attack, noting that “choppers are a crucial mode of transport for troops and supplies” in Afghanistan.

Speculations about a possible breakthrough in the talks with the Taliban follow a series of meetings last month in Saudi Arabia between representatives of the Afghan government and the militia.

But even before the Saudis initiated the talks, the Karzai government had been putting out feelers to the Taliban for negotiating an end to its insurgency in exchange for some sort of power-sharing deal.

Though the US has so far been on the sidelines but at a recent news conference Gen David McKiernan, the commander of US troops in Afghanistan, grudgingly said he would support the Afghan government if it chose to go down the path of negotiations.

And now the Wall Street Journal is reporting that the US might get involved in those negotiations directly. “Senior White House and military officials believe that engaging some levels of the Taliban — while excluding top leaders — could help reverse a pronounced downward spiral in Afghanistan and neighbouring Pakistan,” the report said.

Both countries have been destabilised by a recent wave of violence.

Senior Bush administration officials told the Journal that the outreach was a draft recommendation in a classified White House assessment of US strategy in Afghanistan. The officials said that the recommendation called for the talks to be led by the Afghan central government, but with the active participation of the US.

The US would be willing to pay moderate Taliban members to lay down their weapons and join the political process, the Journal cited an unidentified US official as saying. The Central Intelligence Agency has been mapping Afghanistan’s tribal areas in an attempt to understand the allegiances of clans and tribes, the report said.

WSJ noted that joining the talks would only be a first step as the Bush administration was still in the process of determining what substantial offer it could make to persuade the Taliban to abandon violence. “How much should (we) be willing to offer guys like this?” asked a senior Bush official while talking to the Journal.

Gen David Petraeus, who will assume responsibility this week for US military operations in Afghanistan and Pakistan as head of the Central Command, supports the proposed direct talks between the Taliban and the US, the WSJ said.

Gen Petraeus used a similar approach in Iraq where a US push to enlist Sunni tribes in the fight against Al Qaeda helped sharply reduce the country’s violence. Gen Petraeus earlier this month publicly endorsed talks with less extreme Taliban elements.

Gen Petraeus also indicated that he believed insurgencies rarely ended with complete victory by one or the other side.

“You have to talk to enemies,” said Gen Petraeus while pointing to Kabul’s efforts to negotiate a deal with the Taliban that would potentially bring some Taliban members back to power, saying that if they were “willing to reconcile” it would be “a positive step”.

US Afghan experts outside the Bush administration have also been urging the White House to try to end violence “by co-optation, integration and appeasement”, as one of them said.

They urge the Bush administration to give the Taliban a positive reason to stop fighting. This, they argue, would allow Washington to separate hardcore militants from others within the Taliban and would also expose the extremists before the Afghan people.





Posted by Gilmour Poincaree on October 29, 2008

Terça-feira, Outubro 28, 2008

Canal, em 28/10/2008.

A Companhia Brasileira de Energia Renovável (Brenco), associada à União da Indústria de Cana-de-Açúcar (Unica), fechou, em Houston (EUA), um contrato de venda de etanol para a LyondellBasell Industries, uma das maiores companhias do nos Estados Unidos. O biocombustível será produzido nas duas primeiras unidades bioenergéticas da Brenco, em Morro Vermelho (GO) e Alto Taquari (MT). O início da operação está previsto para o segundo trimestre de 2009. ´Acreditamos na construção de relacionamentos de longo prazo com nossos clientes, e o negócio fechado com a Lyondell confirma nossa estratégia´, afirmou o presidente da Brenco, Philippe Reichstul. O etanol de cana será utilizado na composição de ETBE (éter etílico ter butílico), aditivo que contém etanol misturado a derivados de petróleo, que após a industrialização será exportado para o Japão.

A LyondellBasell produzia anteriormente MTBE (éter metil terc butílico), mas está mudando sua planta industrial para produzir a substância a partir do etanol de cana, que não agride o meio ambiente. As usinas Morro Vermelho e Alto Taquari deverão produzir juntas 320 milhões de litros de etanol somente em 2009. Em 2010, as unidades aumentarão sua capacidade de produção para 1 bilhão de litros, e até 25% desse total serão destinados à empresa americana. Além disso, em 2010, três novas unidades da empresa entrarão em operação: uma em Goiás e outras duas no Mato Grosso do Sul, que também fornecerão parte da produção para a Lyondell. O etanol será escoado por meio de estratégia logística desenvolvida pela Brenco. A empresa investirá US$ 1 bilhão na construção de um duto que interligará o Alto Taquari ao Porto de Santos, em São Paulo.





Posted by Gilmour Poincaree on October 29, 2008

October 29, 2008

by our Staff Reporter

ISLAMABAD, Oct 28: President Asif Ali Zardari said on Tuesday the government could ‘ill-afford’ President Asif Ali Zardari - PakistanInternational Monetary Fund’s financial assistance with tough conditions.

“Time is running out and there is an urgent need for the ‘Friends of Pakistan’ to extend a helping hand,” he told Adviser to the British Prime Minister Simon McDonald who had called on him at the President’s House.

Mr Zardari, however, made it clear that Pakistan was not looking for aid, but needed friends’ help to enhance trade and economic and investment opportunities.

According to a Foreign Office news release, the discussion focussed on Friends of Democratic Pakistan Initiative, measures and options being considered by the government to address the economic difficulties, Doha Process, situation in the border region, Afghanistan and bilateral cooperation. The president highlighted the government strategy to handle economic issues, socio-economic initiatives to settle tribal areas, including the Benazir Card for every household, and negotiations with the IMF.

He stressed that the war on terror, which had its roots in other regional events, had now become Pakistan’s war and the country and its people were paying a heavy price that needed to be acknowledged by the international community.

Mr Zardari quantified how one incident of terrorism impacted the already turbulent economy. He stressed the need to identify the forces that were funding militants in this expensive war. He was not convinced that drug money could be the only source of funding.

The president informed the British official about the state of relations with Afghanistan and termed recent exchanges and developments such as mini-jirga a manifestation of growing understanding and forward movement in relations.

Mr McDonald conveyed greetings from Prime Minister Gordon Brown and said that he fondly recalled the president’s visit to the UK in September when they had a fruitful and candid exchange.

The British adviser was highly appreciative of the unanimous resolution adopted by parliament on government’s policy for tackling terrorism.





Posted by Gilmour Poincaree on October 29, 2008

29 Oct, 2008, 0126 hrs

IST,Sangita Mehta, ET Bureau

The stock market has fallen around 60% from its peak level in January. Given that foreign institutional investors who hold 35% ($71 bn) of Indian stocks are still in a flight-to-safety mode, there is scope for the market to fall some more.

Although the market crash is not unique to India, there are key differences between India and other markets which have declined. In the US and most of the West, there is a problem in the real sector. The economies are slowing, the financial sector is in a mess because of bad loans and the financial sector crisis has passed on to the stock markets.

In India, it is the other way round. The economy is the second-fastest growing among all reasonably-sized markets and bank balance sheets are sound, but stock markets have collapsed because of the flight of foreign funds to perceived safer havens. But even this flight of capital has not thrown the economy out of kilter.

Reserve Bank of India has over $280 bn of foreign exchange reserves in liquid assets. Bankers say that more money will go out and point to the $89 bn of short-term debt to be repaid. But nearly half the debt is non-resident deposits, which in all likelihood will stay. The only problem is the $40 bn short-term debt that may be too expensive too renew. But the economy seems to be in a position to absorb the impact of these outflows.

There are mixed opinions on the extent to which the US slowdown would hurt service exports — the growth driver and the largest forex earner for the country. But given the weakening of the rupee, it is almost widely expected that the West would continue to depend on India for IT and ITES. However, it would be foolhardy to assume that a 60% crash in the markets would not have an impact on the real sector. The crash has been so swift that its impact is yet to be transmitted to the real sector.

From financial to real

According to bankers, the first casualty will be projects in the pipeline. “Some promoters have pledged shares with lenders when prices were high to raise money to fund their projects. Now that prices have fallen, either the promoter has to top it up with more securities or the lenders will be forced to sell shares.

Also, banks may put further lending on hold, affecting the project. If lenders do sell shares pledged to them, promoters’ holding in the company will come down, making them vulnerable for takeovers,” says Jitendra Balakrishnan, deputy managing director, IDBI Bank.

According to Mr Balakrishnan, those corporates who were looking at private equity route will find it difficult raising them. This, in turn, would affect their projects. Rights issues which have been launched in the midst of the crisis have bombed. Others planning rights issues may be forced to shelve them. “Those who were looking at acquisition of companies through share swaps will have to rethink,” he adds.

In the last two months, two sources of funds — foreign borrowing and capital markets — have completely dried up. This has forced companies to rush to banks. But going forward, getting money from banks will also prove to be tough. “Companies which are dependent on the equity market to adhere to the debt-equity ratio will be affected. A bank can lend only when the company brings equity to the table.

If a part of the equity funding is coming from the capital market, promoters may rethink lending, considering low valuations, affecting the project,” says MV Nair, chairman, Union Bank of India. He adds that existing businesses would be hurt to the extent that there will be a decline in consumption, as the wealth effect caused by rising markets had boosted consumption so far.

According to AC Mahajan, chairman, Canara Bank, not a single sector is unaffected. “Even sectors that are not linked to markets have started getting affected. For instance, a person may resist buying a house or consumer durables on hopes that prices will fall further; this, in turn, slows down the pace of growth. Similarly, the service sector would also be affected, as demand may come down due to the slowdown.”

The central bank, which has its ear to the ground as far as the performance of corporate India is concerned, is quite optimistic on this front. In a recent interview to Financial Times, RBI governor D Subbarao had said: “This is not like the 1990s for India. It has changed. In the 1990s, our growth resilience arose from debt-financed growth. Today, it is private sector-driven productively-financed growth and there is resilience. And even in the rural sector, I’m told there is a vibrant economy growing there. There’s improvement in the social sector, education and health. So there is a spin-off effect of all this.”

RBI continues to bet on 7.5-8% growth, expecting services, which contribute 65% to GDP to grow by at least 10%. “We are better off this time. In the past, even in the best of time, the economy saw a growth of 4-5% and now, in the worst of times, we are talking of 7-8% growth,” says Mr Mahajan. Some like Balakrishnan feel that at present levels, share prices are reflecting the true value of the real economy.

A fall in asset prices, particularly real estate assets, will make houses more affordable. Fortunately for India, its leading banks have raised over $10 bn in equity capital when markets where at their peak level last year. This places them in a stronger position in the event of a slowdown.

The impact of the slowdown on asset quality of the banking sector will be felt only in a couple of quarters from now. Lenders and policymakers can apply learnings from the slowdown in the 1990s and in other countries to alleviate the pain of the slowdown.





Posted by Gilmour Poincaree on October 29, 2008

29 Oct, 2008, 1206 hrs IST, REUTERS

BEIJING: Boeing Co said on Wednesday that China will need 3,710 new commercial airplanes worth BOEING 747$390 billion over the next 20 years, maintaining its position as the world’s fastest growing aviation market.

China will account for 41 percent of the Asia-Pacific region’s airplane demand, Randy Tinseth, a Boeing vice president for marketing, said in a statement.

The mainland’s air travel and air cargo market growth will more than triple the country’s fleet to 4,560 airplanes by 2027, about the number of airplanes flying in Europe today, according to the statement.

The company said global demand for new commercial airplanes over the next two decades will total $3.2 trillion, or about 29,400 aircraft.

Single-aisle and intermediate twin-aisle planes will make up 91 per cent of China’s total demand in terms of value, while only a limited number of large airplanes (747-size and larger) will be needed.

China is the focus for Boeing and rival EADS’ Airbus unit, which has equally rosy forecasts for the mainland market as its booming economy demands more long-haul planes.





Posted by Gilmour Poincaree on October 29, 2008

Staff Report

Published: October 28, 2008, 23:32

Dubai: Limitless, Dubai-based master developer with Dh367 billion development portfolio, on Tuesday said it has invited construction firms to bid for the second phase of earthworks on Arabian Canal, its $11 billion (Dh41 billion) waterway that will reshape part of New Dubai and add a 75-kilometre long waterfront for real estate development.

The contract will involve the excavation of around 300 million cubic metres of earth along an 8.5 kilometre stretch of the canal’s route.

It follows the appointment last month of Abu Dhabi-based Tristar for phase one, where 100,000 cubic metres of earth is being moved each day and more than 200 million cubic metres will be excavated in total.

Ian Raine, who is the Project Director for Arabian Canal, said: “This is the second of around 10 packages that will be awarded for the excavation of our 75 kilometre waterway. Work is well underway on phase one.”





Posted by Gilmour Poincaree on October 29, 2008

October 16, 2008

by Arjun Swarup @ – 10:32 pm

An article of mine got published on TCS Daily on the evolving political and business landscape in India. The article can be found here. The article is reproduced below as well –

The decade and a half following India’s economic reforms of 1990-91 has been an exciting and transformational one for India and its people, and has also had a significant impact on the entire world. Much good has happened, with increasing growth and prosperity benefiting millions. The world has observed the rise of a large and vibrant middle-class, an aggressive and innovative private sector, and the growth of a soft culture. It is true that severe challenges still remain, caused mainly by massive disparities in income and access to resources, which mean that over 300 million people remain desperately poor, and large parts of the country not benefiting from growth.

A lot of India’s growth and stability today has been credited to its overall political structure and institutions. This is what has kept the nation united through the numerous challenges it has faced, and continues to face. The federal nature of the government, coupled with the presence of an independent judiciary and a powerful media have all combined to create the unique phenomenon that is Indian democracy. There are notable flaws, such as weak law enforcement, and an excessive bureaucracy, but, for better or for worse, Indian democracy has worked.

However, over the past few years, a major development has occurred in India, almost silently, which illustrates the uglier side of this system. While the growth rates clocked by the economy over the years have been impressive, most of the major policy changes benefited big established business houses. This has resulted in the India of today being a highly oligarchic economy, with a relatively small population enjoying disproportionate power, wealth and influence (four of the world’s ten wealthiest individuals are from India). Actual market friendly policies, which would help the middle-class and poor by boosting entrepreneurship would often be to the detriment of this group, and are often inhibited. In the 1950’s, Eisenhower warned the Americans of a “military-industrial” complex which could skew American priorities. His fears might have been unfounded, or at the very least, quite exaggerated. However, India today does the face the danger of a political ? big business complex distorting its priorities.

This phenomenon was partly displayed during the debate over the Indo-US nuclear deal. A seemingly innocuous bilateral treaty, it created frenzied debate, polarized the polity and the nation, and forced the government through a no-confidence motion. To a complete outsider, it all seemed a lot of action for something which appeared quite routine. To Indians though, it all seemed wearingly familiar.

The nuclear deal holds many ramifications for India, and the general consensus amongst the scientific, business and intellectual community is that it would be beneficial, if negotiated properly. Power generation is one area where the deal is said to have probable benefits. India remains critically deficient in power generation, with large parts of the country, including metros, suffering from severe power shortages. This has had a major impact on the growth of small business units, especially in manufacturing.

Since nuclear energy can be used to generate power, it appears that the deal could help meet the shortage, and thus, presents a huge opportunity for big business houses. Each major political alliance in India has its support base comprised of various business houses, and each alliance feels the pressure to make sure the deal goes through when it is in power, to ensure the maximum benefit for its support base. Simultaneously, policy changes such as decentralizing power production, removing subsidies or limiting power theft are often prevented, as those would enable the entry of other players into the sectors. It is like a double whammy effect.

Two other areas where the impact of the political-business nexus can be seen are agriculture and retail. Organized retail presents a massive opportunity for India to broad base its growth, and help kick start the agriculture sector, with estimates ranging from $ 500 billion to over $ 1 trillion. A large amount of agricultural produce in India is wasted each year due to the lack of cold storage, to the tune of $ 7 billion. Investments, both foreign and domestic, should be welcomed in this sector, as well as initiatives to promote local small businesses. Yet, the whole sector has been dominated by big players, who would rather establish consolidated supply chain which would squeeze prices all along the retail chain.

On a broader governance level, the negative impact of the political business nexus can be observed. Running for public office in India is an incredibly expensive proposition and campaign financing remains murky, with virtually no accountability. This works perfectly to the advantage of the business lobbies, in exercising control over political parties. The labor market also remains highly informal and unorganized, as this keeps labor prices cheap. Another good example is the real estate sector, where acquisition of land for commercial or private purposes remains incredibly difficult, for businesses which want to establish themselves. It needs to be pointed out that these phenomena were not the creation of the big players today, but it works to their benefit today to ensure that the status quo remains.

It is entirely likely that the influence of this group would diminish with the passage of time, and that fears about it would prove unfounded (as some of Eisenhower’s were, in the case of the US). Yet, in the Indian context, there needs to be a greater awareness of the dangers posed by such developments, and how they could impact the overall growth story.



Posted in ASIA, ECONOMY, INDIA, INTERNATIONAL | Leave a Comment »


Posted by Gilmour Poincaree on October 29, 2008

Oct 24, 2008

by Zhiqun Zhu

John Hay, the 37th United States secretary of state, said in 1889, “The Mediterranean is the ocean of the past, the Atlantic, the ocean of the present, and the Pacific, the ocean of the future.”

The future is now. The “Asia-Pacific century” is not a prediction any more; it’s reality. Based on purchasing power parity, three of the four largest economies in the world are in Asia – China, Japan and India. And if the United States is included, then all the top four economies are in the Asia-Pacific region.

The United States has longstanding interests in Asia. Two of the world’s potentially most explosive places are located in East Asia: the Korean Peninsula and the Taiwan Strait, where the United States has significant economic, geopolitical and strategic interests. Since the end of World War II, the US has had extensive economic interactions with Asian nations. It played an instrumental role in Japan’s post-war recovery and the economic takeoff of the four Asian “tigers” – South Korea, Hong Kong, Singapore, and Taiwan. Since the early 1980s, China has also benefited enormously from America’s huge investment and its insatiable consumer market. It is not an exaggeration that East Asia is of critical importance to America’s future.

One wonders whether the fact that Asia has not been a major foreign policy issue in the 2008 US presidential election is good news or bad news. The new US president must move beyond President George W Bush’s preoccupation with the “war on terror” and pay more attention to Asia.

Mixed legacy

On the positive side, US alliances with Japan, South Korea and Australia remain strong. In the past eight years, Japan, South Korea and Australia all had leadership changes, and in Japan’s case there have been four different prime ministers. All these Asian leaders have firmly supported America’s “war on terror”. They have all visited Washington to show solidarity with Bush.

One of the rare bright spots in Bush’s foreign policy is China. A stable and strong relationship between the United States and China is probably Bush’s greatest foreign policy achievement. Bush and his family are now considered “friends” by the Chinese government and Bush’s decision to attend the Summer Olympic Games in Beijing, though controversial at home, was welcomed by China where members of the Bush family were warmly received.

Prodded by the United States, the new Kuomintang (KMT) government in Taiwan headed by Ma Ying-jeou has abandoned the pro-independence policies of his predecessor Chen Shui-bian and has endeavored to improve cross-strait relations. As a result, military conflict in the Taiwan Strait is becoming much less likely now.

However, Bush has also failed miserably in East Asia overall, most notably with regard to the unresolved issue of North Korea’s nuclear program. Opportunities to denuclearize North Korea have come and gone during the eight years of the Bush administration.

An agreed framework was reached between the US and North Korea in 1994. Denuclearization of the Korean Peninsula seemed to be within reach. President Bill Clinton sent his secretary of state Madeline Albright to North Korea in October 2000 to talk to North Korean leader Kim Jong-il directly. Clinton was even prepared to visit North Korea himself to improve relations.

After Bush came to office in January 2001, he refused to honor the 1994 agreement and rejected direct talks with North Korea directly. After the September 11, 2001, bombings he labeled North Korea as part of the “axis of evil”. North Korea was outraged and felt cornered; it hardened its position on the nuclear issue and decided to proceed with nuclear technology. Even many South Koreans felt offended: North Korea is poor, but it is not evil.

Eventually China launched the six-party talks in 2003. The US accepted this multilateral forum for discussion but still refused to deal with North Korea directly. After tough negotiations, North Korea finally agreed, in February 2007, to shut down its main nuclear reactor in exchange for food and aid from the other five parties.

In June 2008, North Korea blew up the cooling tower of its Yongbyon nuclear reactor and handed over to the US a declaration of its nuclear activities. However, by August, the US had not removed North Korea from the state sponsors of terrorism list, as it had promised earlier, while insisting that it wanted independent verification of North Korea’s nuclear disarmament. Accusing the US of breaking its promise, North Korea then announced it had suspended disabling its nuclear facilities.

In a dramatic development, on October 11, Bush decided to remove North Korea from the list of states that sponsor terrorism. This was an encouraging step, but it may have come too late.

As a result of Bush’s policies, the new US president will face several serious challenges in East Asia.

The immediate security challenge is a nuclear-capable North Korea. Recent reports about Kim Jong-il’s poor health added complexity and uncertainty to the nuclear issue and security in East Asia.

For Washington, the shortest diplomatic route to Pyongyang is through Beijing. China has a strong interest in preventing the nuclearization of the Korean Peninsula, in part because it does not want to give Japan an excuse to go nuclear.

North Korea has not accounted for dozens of Japanese citizens abducted by North Korean agents in the 1970s and 1980s, and the new US president needs to explain to Tokyo that as important as the matter is, it should not be linked to North Korea’s denuclearization. Japan can seek to resolve the abduction issue through other channels, preferably by engaging with North Korea directly. The United States must coordinate its policy closely with China and other nations in the region in order to break North Korea’s nuclear stalemate.

Asia also poses tough economic challenges to the new president. The US must become actively involved in economic integration with Asian nations, otherwise it risks being marginalized in Asia. It cannot afford to continue to stand on the sidelines as the 10-member Association of Southeast Asian Nations and northeast Asian nations discus a regional free-trade zone.

The United States had been the dominant economic power in Asia, but now China has become the largest trading partner of almost every country in Asia. Economically, the US is already playing second fiddle. Asian economies are some of the biggest holders of US Treasury bonds with Japan and China together holding about half of all Treasury bonds sold abroad.

China has become America’s third-largest export market after Canada and Mexico, and its foreign exchange reserve is quickly approaching US$2 trillion. The recent financial crisis in the US makes it imperative for the new president to work more closely with East Asian nations. Shortly after the US Congress passed the $700 billion financial rescue package in September, the People’s Bank of China (central bank) reportedly expressed interest in purchasing $200 billion worth of US Treasury bonds. Undoubtedly, East Asia will be part of the solution to the current financial problems in America.

The biggest challenge for the US and its new president is China. The challenge from the re-emerging power of the Middle Kingdom is on all fronts. China’s economy continues to gallop forward, despite the impact of the financial crisis in the West. For many developing countries, China’s development model, the so-called “Beijing Consensus” of economic liberalization under tight political control, offers an attractive alternative to the “Washington Consensus” of the US.

After Beijing passed the Olympic test with flying colors, and after Chinese astronauts successfully conducted their first space walk, the Chinese people have every reason to celebrate. As a result, nationalism has grown even stronger in China. Dealing with this increasingly powerful and proud nation of over 1.3 billion people is no easy task – and China-US relations have become increasingly complex.

From issues ranging from trade imbalances to independence protests in Tibet, the two countries have many differences. The recent US sale of $6.5 billion worth of weapons to Taiwan certainly does not bode well for bilateral ties. The rise of China – a nation that does not share core values with the United States – will be the most pressing foreign policy challenge for the next American president.

Bush has preferred unilateralism in foreign policy, and in Asia he has preferred strong bilateral alliances built upon historical ties with key allies. But this bilateral alliance structure is rooted in Cold War ideology and is outdated today. The new American president must go beyond unilateralism and bilateralism and move towards multilateralism on a wide range of issues.

In Asia, the new American president must be a uniter, not a divider. In addition to resolving North Korea’s nuclear dilemma, fighting infectious diseases, piracy on the high seas, global warming, and financial crises all require multilateral cooperation between the United States and the nations of Asia and the world.

Zhiqun Zhu, PhD, is MacArthur Chair in East Asian Politics and associate professor of political science and international relations at Bucknell University in Pennsylvania. He can be reached at

(Copyright 2008 Zhiqun Zhu.)

Speaking Freely is an Asia Times Online feature that allows guest writers to have their say.