For the week 9/22-9/26

Wall Street…the turmoil continues… 

I was golfing with three friends who work in the financial industry this week and we were talking about the mess Wall Street and Main Street find themselves in when Jude said “We really need a revolution…the system is old. Just freshen it up a bit.” It’s a sentiment I would guess almost every single one of you has had, joking at a cocktail party, the golf course, or in the line at the grocery store in small talk about this or that, but if you watched Washington in action this past week the thought of a big shake up certainly would have crossed your mind more than once. There are virtually zero honest politicians and the system has been long corrupted. Then you have Wall Street, also corrupt, with financial markets that often are little more than a casino. Yet, despite all this we still have the best, most dynamic market economy in the world and somehow we’ll get through this period…really. 

This week our leaders, including of the unelected variety, strode forth to scare the hell out of us. Federal Reserve Chairman Ben Bernanke said our nation faces “grave threats” to our financial stability. President Bush spoke of the “serious financial crisis” and how we risked a “long and painful recession,” adding we could see a true “financial panic.” In a joint statement early in the week, presidential candidates Barack Obama and John McCain spoke of the need to prevent “an economic catastrophe.” 

Investor Warren Buffett, perhaps the most respected figure in America today, said “We can’t take another week like the last one,” meaning two weeks ago, though in the end this past week was just as bad. Bernanke said, “Economic activity appears to have decelerated broadly.”  

That’s what happens when the credit spigot is turned off. Every business in America is already being impacted. In a highly-publicized item, even the best corporation in the world, McDonald’s, told its franchisees that Bank of America, savior of Merrill Lynch, declined to extend credit so the franchisees were on their own in terms of obtaining financing for store improvements. Of course it trickles on down from there. The system is frozen, and confidence on both the part of corporations and individuals has dried up. 

In Newsweek, Treasury Secretary Paulson said “We can spend a lot of time talking about how it happened and how we got here. But we have to get through the night first.” Then in congressional testimony, Paulson added this whole episode is “embarrassing for the United States of America,” echoing my favorite statement from years ago; the securities that helped cause the crisis “are overly complicated and complex” and the firms peddling them “didn’t understand (what they had created) themselves.” 

Ah yes, Hank Paulson. King Henry I. Through his bailout/rescue plan he is asking for a ton of power and a lot of us aren’t comfortable with this. But there is no time to debate this particular topic. We need action. 

I come at this job from a unique perspective because of my Wall Street background and at times like these, in my own small way, I’d like to think I can bridge Main and Wall.  

There is no doubt Wall Street is deserving of the opprobrium being cast on it. Many of its leaders should be strung up in the public square and it’s the hope here that those guilty of outright fraud receive life in prison, not 6-12 months in Club Fed. 

But when it comes to Paulson’s rescue plan, yes, the details of the proposal are vague at best. And, should the plan go through in its basic form, there are zero guarantees that once the bad paper is stripped out of the banks and put into the marketplace, the lending institutions will in turn go back to lending. 

What, though, is the alternative? As Bernanke and Paulson have said on countless occasions, you don’t want to know. 

So, friends, this is about you and me. Wall Street played no small role in getting us into this mess, but at the same time many of us didn’t fulfill our own end of the bargain in living well beyond our means. One point that hasn’t been made enough in the debate over the crisis is ‘personal responsibility.’ Personal responsibility is not just a key to democracy, it’s a key to capitalism, and many of us failed the test. Those of us who feel we did everything right, including corporations and financial institutions who did act responsibly, and there are many, have a right to be frustrated, and angry, but that doesn’t solve the problem of today. Access to credit. 

Many times in life you have to take a leap of faith. This is one such moment.  Let’s pray not only that Congress gets its act together soon, but that our admittedly waning faith in King Henry and our system in general is warranted. Otherwise we’re headed towards that revolution, only this time it won’t be a joking matter. 

“The leveraging-up in this cycle is reversing, and we are now deleveraging. When a huge system – that is, the global credit system dominated by the investment bank giants that have been the major creators of credit in the last cycle – turns down, the fallout is going to be terrible. 

“Deleveraging is a very painful process, and will run longer and deeper than anybody can imagine. I’ve been fearful of this. 

“So far, what we’re seeing is the pain in the financial system. Later on, we’ll see the echo effect of the pain in the real economy. I can’t understand economists talking about no recession or mild recession. This is the worst financial crisis since the 1930s. It’s different than the 30’s, but is the worst since then, and the consequences will be very, very painful for virtually everybody in our economies.” 

Brazilian President Luiz Lula da Silva: “We must not allow the burden of the boundless greed of a few to be shouldered by all.” 

U.N. Secretary General Ban Ki-moon: “The global financial crisis endangers all our work. We need a new understanding on business ethics and governance, with more compassion and less uncritical faith in the ‘magic’ of markets.” 

Mark Malloch Brown, British cabinet minister: “What you are seeing here is the letting off of some political steam. They are all remembering the very hard, unforgiving advice that they got from American financial institutions” to “deflate your economy, let your banks go to the wall. There is a resentment at what they would see as a further evidence of double standards.” 

German Finance Minister Peer Steinbruck: “The U.S. will lose its status as the superpower of the world financial system” with the emergence of stronger, better-capitalized centers in Asia and Europe. “The world will never be the same again.” Steinbruck emphasized it was “irresponsible” for the U.S. government to oppose stricter regulation even after the subprime crisis broke out. 

“The dangers, as Bernanke and Paulson see them, are in the liabilities. Who knows where they might lead? They include AIG’s obligations to pay off credit-default swaps – private contracts in which AIG promised to support billions of dollars of bonds if their issuers defaulted. These were developed to comfort speculators and make them believe they were investing. 

“It was a delusion: At the worst, credit-default swaps on Lehman Brothers Holdings still were quoted at about 5% of the face value of the bonds being protected less than five days before the firm went under. It was like selling flood insurance on Galveston Island, while Hurricane Ike was in the Gulf of Mexico. 

“Credit-default swaps created a nation of speculators who don’t want to take their losses. The financial establishment has been afraid to start unwinding these swaps. They know that when you pull on a loose bit of yarn dangling from a sweater, you never know how much sweater you will have left at the end. So the government is buying the sweater. As President Bush declared in the Rose Garden Friday, ‘These are risks America cannot afford to take.’ Too bad. The risks have already been taken. Now: Can America afford to cover its bets?…. 

“Listen carefully to the cries of ‘chaos’ on Wall Street: Some of those shouting loudest are trying to make others pay for bankers’ and borrowers’ mistakes. Finding no others willing to step up, the Fed and Treasury are becoming the nation’s stand-in speculators. 

“The Treasury will borrow to buy mortgages and the Fed will print money to buy Treasuries. The danger is that they are igniting a great inflation to stave off a great depression. If so, this week will enshrine President Bush with President Carter, and Ben Bernanke with G. William Miller. 

“Just as the Weimar Republic printed money to pay war reparations that the Germans couldn’t afford, the United States of America is putting its full faith and credit – until neither remains – behind mortgages that its citizens can’t afford. All investors can do is hope that the ultimate sacrifice of capital destruction won’t be necessary."

“Nobody understands who owes what to whom – or whether they have the ability to pay. Counterparties have become afraid to trade with each other. Sovereign wealth funds are no longer willing to supply badly needed capital because they no longer know what they are investing in. The crisis continues because nobody knows what anything is worth. You simply cannot have a functioning market under such circumstances. 

“Will this latest round of proposals end the crisis? I know the stock market reacted joyously on Friday [9/19], but I’m not hopeful. One solution being promoted by the Securities and Exchange Commission – to make life more difficult for short sellers – is a shameful sideshow. A second solution, which Mr. Paulson announced Friday morning, requires money market funds to create an insurance pool to cover themselves against losses. 

“That may provide comfort to investors who equate money funds with savings accounts, but it is fraught with moral hazard.” 

“It is no easy task to deal with a crisis that, in spite of its similarities to previous ‘financial gales’ is unprecedented because of the complexities of today’s capital markets. We must hope for all our sakes the U.S. government’s solution works and that it is not too late. It was the economist John Kenneth Galbraith who said: ‘One can relish the varied idiocy of human action during a panic to the full, for, while it is a time of great tragedy, nothing is being lost but money.’ Unfortunately, it is not just money, but the lives and hopes of ordinary people that are increasingly likely to be damaged after this week.” 

Anatole Kaletsky / London Times 

“The Emperor has no clothes. If you want to know why American capitalism is on the brink of disaster, but also want to understand what will save it, then log on to the C-Span congressional website and watch the interrogations of Henry Paulson, the U.S. Treasury Secretary, by the Senate and House banking committees. 

“Until last week, I was in a minority of one in arguing that Mr. Paulson was personally responsible for suddenly turning the painful but manageable credit crunch that had been grinding away 18 months in the background of the U.S. economy into a global catastrophe. Mr. Paulson’s appearances on Capitol Hill, marked by the characteristic Bush-era combination of arrogance and incompetence, are turning my once-outlandish view into conventional wisdom: Henry Paulson is to finance what Donald Rumsfeld was to military strategy, Dick Cheney to geopolitics and Michael Chertoff to flood defense. 

“Mr. Paulson may be a former chairman of Goldman Sachs, but as U.S. Treasury Secretary he does not know what he is doing. His recent blunders, starting with the ‘rescue’ of Fannie Mae, have triggered unintended consequences around the world, resulting in the death-spiral of financial values. But last Friday Mr. Paulson outdid even these Rumsfeldian achievements, when he demanded $700 billion from Congress for a ‘comprehensive and fundamental’ solution to the global financial crisis, without apparently having any idea of what he would actually do.” 

Meanwhile, the FBI announced it has been investigating AIG since last March for hiding losses (flat out fraud in manipulating earnings), while it is now looking into the activities of executives at Fannie, Freddie, Lehman and a host of others. 

Eric D. Hovde / Washington Post 

“What is even more remarkable is that (while) firms such as Goldman Sachs and Lehman not only made billions of dollars packaging and selling toxic loans, they also wagered with their own capital that the values of these investments would decline, further raising their profits. If any other industries engaged in such knowingly unscrupulous activities, there would be an immediate federal investigation. 

“Why is Washington so complicit in this intricate and lucrative affair? First, the Fed laid the groundwork for both these asset bubbles by lowering interest rates to historic lows. In an attempt to protect his legacy after the Internet-bubble collapse, Greenspan provided unprecedented stimulus to re-inflate the economy and maintain his popularity with Wall Street. (Remember the ‘Greenspan put’?) But in doing so, he spawned the largest debt and asset bubble in U.S. history. 

“At the same time, federal regulatory agencies such as the SEC stood idly by as Wall Street took advantage of the investment public during both the Internet and the housing bubbles. The SEC took almost no action against Wall Street after the dot-com implosion. And in the midst of the housing bubble, in 2006, only the Office of the Comptroller of the Currency pushed for any level of regulation to address subprime lending. 

“One has to wonder why Treasury secretaries under Presidents Clinton and Bush – Robert Rubin and Hank Paulson, respectively – took no action to curb these abuses. It certainly was not because they did not understand Wall Street’s practices – both are former chief executives of Goldman Sachs. And why has Congress been so silent? The Wall Street investment banking firms, their executives, their families and their political action committees contribute more to U.S. Senate and House campaigns than any other industry in America. By sprinkling some of its massive gains into the pockets of our elected officials, Wall Street protected itself from any tough government enforcement…. 

“Wall Street’s actions are now profoundly hurting American families, communities and the entire U.S. financial system. People are being thrown out of their homes. Once seemingly indestructible financial entities are succumbing to the crisis they have created and have jeopardized the stability of the global financial system. Isn’t it ironic that the same firms that preached free-market capitalism are now the ones begging for a taxpayer bailout?” 

Lastly, regardless of how successful any rescue plan proves to be, the federal budget deficit, and thus the national debt, is obviously going to soar. Commentator George Will summarizes one aspect of this problem. 

“This crisis has arrived during the ninth month of a vast demographic deluge – the retirement of 78 million baby boomers. As the population ages, the welfare state – primarily, a transfer-payments pump providing pensions and medical care for the elderly – requires more rapid economic growth to generate increasing revenue. To the extent that today’s crisis results in large amounts of capital being allocated by considerations other than those of economic efficiency, the nation will be consigned to less-than-optimal economic growth. 

“The next administration, but especially an Obama administration, will chafe under severely narrowed economic restrictions. But subsequent generations will pay the radiating costs of the rising role of the state in allocating financial resources.” [Washington Post] 

–The Dow Jones fell 2.2% to 11143, while the S&P 500 lost 3.3% and Nasdaq declined 4% to 2183, the latter’s lowest weekly close in over two years.   Aside from all the uncertainty, General Electric didn’t help matters when it slashed guidance for the third quarter and the full year owing both to the global slowdown as well as a reassessment of prospects at its financing arm, GE Capital.   And BlackBerry maker Research In Motion warned on its prospects, sending the stock down a whopping $26.50, or 27%. 

–U.S. Treasury Yields 

The short end of the curve continued to convulse on every rumor of another bank failure or other sign of financial instability. There was also some straightforward economic news and it wasn’t good, with existing home sales plummeting further, and durable goods (big ticket items) tumbling 4.5% for August. The weekly jobless claims number was also atrocious and didn’t augur well for the next monthly payroll report. Finally, 2nd quarter GDP was revised for a final time and it slipped to 2.8%. 

–The 6th-largest bank in America, Washington Mutual, became the biggest bank failure in U.S. history, though in this case no taxpayer dollars were expended. Instead, JPMorgan Chase acquired the deposits, judged to be in the $180 billion neighborhood (as of June 30, though depositors were beginning to walk with their cash the past month in particular), for all of $1.9 billion, while acquiring a loan portfolio of some $300 billion, of which it will immediately write off $31 billion. Bottom line, a total steal for JPM.  [WaMu stock and bondholders were wiped out.]

And Goldman Sachs received a shot in the arm from Warren Buffett, $5 billion in the form of a perpetual preferred, at 10%, plus the right to buy another $5 billion in Goldman stock at a future date, priced at $115. [Goldman finished the week at $137.] 

–Goldman Sachs, Morgan Stanley, and Raymond James are all transforming themselves into bank holding companies, subjecting each to greater federal regulation, significantly reduced leverage, and, particularly in the case of the first two, the end of an era on Wall Street as Goldman and Morgan sought to avoid the fate of Lehman Brothers. 

[Morgan Stanley then received an investment of between 10 and 20 percent from Japan’s Mitsubishi UFJ, details of which are sketchy, while Goldman got the infusion from Buffett.] 

–Barclays Plc, the U.K. bank that bought parts of Lehman Brothers, initially talked of retaining 10,000 employees from Lehman’s trading and investment banking business, but now there is word they may still cut up to 5,000. 

–Ireland and New Zealand are officially in recession as denoted by two consecutive quarters of negative growth, while growth estimates for the U.S., Japan, and Europe in 2009 are all between 1.0 and 1.5 percent, far from good. [And not boding well for corporate earnings.] 

–Energy: Monday saw the biggest jump in history for crude oil, up $16 to $120, but the move had to do with a short squeeze, brought on by the SEC rules on same, as well as the normal volatility associated with a contract expiration. The next day it traded back down. 

–Remember the ban on short-selling? You remember, it was a big deal a week ago? There was virtually zero talk on the topic this week, even as the SEC stepped up an investigation into hedge funds and possible manipulation involving the financials, while the SEC also continued to change the rules of the game, including allowing short selling for those involved in hedging activities, as well as changing some of the disclosure requirements. 

Short seller James Chanos, in an op-ed for the Wall Street Journal. 

“I believe the SEC has every right to obtain and review information about short positions for market surveillance purposes, but forcing public disclosure will have serious consequences for the market. Companies may retaliate against short sellers. Fund managers will lose their ability to manage assets without revealing their strategy. Other traders will ‘pile on,’ and may trigger panicky selling if an investor sees that noted short sellers have shorted the stock…. 

“Economists have long believed that market prices are best set by a variety of viewpoints, including by those with no previous ownership interest. In the financial markets, that latter group is the short sellers. As a former SEC chief economist aptly observed, ‘To ban short selling is to in effect say that the government is going to try to determine what stock prices should be.’ 

“For our investors and our country to emerge with strength from these extraordinarily difficult times, it is imperative that our regulatory bodies respond in a way that appropriately balances vigilant protection of investors with open, vigorous competition. Closing down short sellers will not work to help the U.S. maintain the freest, strongest and most liquid capital markets in the world.” 

–Panic amidst the hedge fund crowd after the collapse of Lehman Brothers led to massive movements of cash from the prime brokerages through which the funds conduct business. The Financial Times reports that Morgan Stanley “lost close to a third of the assets…amounting to hundreds of billions of dollars, as hedge funds…moved to rival banks.” Once markets stabilize, the money could return. 

The hedgies moved their funds to commercial banks, perceived to be safer, a situation exacerbated by the fact $billions is to this day tied up in the Lehman bankruptcy. 

–Good news! Did you know the value of outstanding credit default swaps has actually fallen to $54.6 trillion from $62 trillion? It’s true. Many of the contracts are just being ripped up. [Hope you aren’t on the other side of any of these and weren’t told beforehand.] 

–French President Nicolas Sarkozy has called for those responsible for the financial crisis “to be punished and held accountable.” Off with their heads! 

[One problem with Sarkozy’s comment. He first said this before business leaders who had paid $1,500 to $75,000 each to see Sarkozy receive a “humanitarian award” at a black-tie event. They weren’t too happy to hear this.] 

–The median home price in the six-county Southern California region is off 34 percent from a year earlier to $330,000. San Diego County’s is down to $350,000, which was Josh P.’s initial target years ago (Josh being my expert here), but now he’s thinking it could sink to as low as $280,000. 

–Homebuilder Lennar, in announcing its latest dreadful earnings, with new orders down 42 percent, said “While we expected the housing market to remain constrained throughout the third quarter, the weakness in the market actually accelerated as a result of increased foreclosures, weakened consumer confidence and tightened mortgage lending standards.” KB Home’s loss widened to $144 million. CEO Jeffrey Mezger said “Market fundamentals appear unlikely to improve significantly in the near term.” 

–New York Mayor Michael Bloomberg ordered budget cuts totaling $1.5 billion over two years to deal with declining tax revenues as a result of the crisis on Wall Street. He told agency heads who were whining to “suck it up.” Of course this is happening in one shape or form across all states and municipalities these days. 

–Hong Kong experienced its first bank run since 1997, thanks to rumors, later shown to be unproven, that were spread on the Internet about the condition of Bank of East Asia. The situation calmed down later after authorities issued reassurances.  

–SEC Chairman Christopher Cox has received his share of criticism, almost all of it deserved, including the just-released inspector general’s report slamming his tenure. Scot J. Paltrow, from the October issue of Conde Nast Portfolio. 

“(A) look at (Cox’s) record since he became chairman in 2005 suggests that, behind the scenes, Cox has engineered a series of procedural and tactical changes, effectively reducing the SEC enforcement division’s power…. 

“In the coming months, the SEC will be expected to sort out whether malfeasance contributed to the current economic crisis – and if so, whose. But the fundamental changes at the enforcement division will make this all the more difficult. The division has been significantly weakened by the exodus of top supervisors and is hamstrung by the new limits on its powers…. 

“At the time President Bush named him SEC chairman, Cox had served 17 years in Congress, where he stood out as one of the most effective pro-business representatives in a strongly pro-business class of House Republicans….The departing chairman, (William) Donaldson, was a Bush family friend who had been appointed by the White House with the expectation that he would temper the SEC’s activism. Instead, he embraced the agency’s role as cop. The business community felt ‘that Donaldson was too tough on corporate America and Wall Street,’ says a former enforcement official. ‘Cox was brought in to chill it out.’…. 

“Almost from the moment Cox took office, former enforcement officials say, he began chipping away behind the scenes at the SEC’s enforcement division.” 

–Phil W. first alerted me to massive gas lines in Charlotte as the impact of Hurricane Ike began to bite in terms of greatly reduced supplies from Texas refineries and production issues in the Gulf. The situation in Atlanta and other major metropolitan areas in the South was equally bad. 

–The head of an Indian auto parts manufacturer, Italian-headquartered Graziano Transmissioni, was bludgeoned to death by workers who had been laid off. Labor unrest has been skyrocketing in India, but this is a bit severe, don’t you think? 

–U.S. ad spending dropped another 3.7 percent in the second quarter. 

–Three Broadway shows have shuttered in the past week, including “Legally Blonde” and “Xanadu,” victims of the economy. For the season, however, ticket sales are still up 1% over last year. 

–New York City is proceeding with some experimental projects involving tidal power, using turbines that look like giant windmills in the first of its kind nationwide. The flows of the East River could power up to 10,000 homes through the initial venture with operator Verdant Power. [Reader Chris C. has always touted this form of energy and should be celebrating with a premium lager.] 

–Should the bank rescue proposal go through in its basic form, I’m hoping toxic sports contracts can be included; such as the New York Knicks’ Stephon Marbury’s, slated to earn an unbelievable $19 million this season. Or New York Mets second baseman Luis Castillo, who the team stupidly signed to a four-year, $6mm per offering even though his best days were long behind him. 

–My portfolio: The Senate and the House both passed legislation extending the tax credits on items such as wind, solar and geothermal. But…I couldn’t pop a bottle of Pilsner Urquell because the two bills have major differences, including how to pay for it all, and there may not be time to rectify them. Failure to do so would be crushing for some of my holdings, small companies already facing hard times because of the credit crisis. 

Pakistan: Al Qaeda or its acolytes was responsible for a horrific truck bomb attack on the Islamabad Marriott, killing over 50, that appears to have been targeting Pakistan’s leadership, which had originally scheduled a dinner for the hotel, only to cancel hours before. Earlier, newly-elected President Zardari pledged to resist violations of the country’s sovereignty amidst internal pressure to prevent the United States from attacking Taliban and al Qaeda bases inside Pakistan. Pakistani soldiers have been firing in the air at any American soldiers they identify, upon which the U.S. exits the scene, but the situation has begun to escalate and on Thursday the two sides exchanged fire along the border for five minutes after Pakistan fired at two helicopters being used by the U.S. At the same time Zardari, in a meeting with President Bush, vowed to fight terrorism. In an attempt to stand back, both sides are claiming the shots in the last incident were fired in warning, nothing else. 

But here’s the reality, as gleaned from a piece by Sean Naylor in Defense News. 

“Pakistani military forces flew repeated helicopter missions into Afghanistan to re-supply the Taliban during a fierce battle in June 2007, according to a Marine Corps officer, who says his information is based on multiple U.S. and Afghan intelligence reports.” 

Lt. Col. Chris Nash said his embedded training team was alongside Afghan forces that month. As he told Defense News: 

“At a critical point in the battle, the Pakistanis flew several re-supply missions into a Taliban base about 15 to 20 kilometers inside Afghanistan, Nash said. None of the Marines witnessed the helicopter flights during the four days they were there…But the flights had been reported to them by Afghan soldiers and local civilians in the village…. 

“The Afghan government’s intelligence service, the National Directorate of Security, had sources in the camp who confirmed that the helicopters were on a re-supply mission…. 

“This was consistent with multiple other reports Nash and his Marines received during that period.” 

Iraq: If you read Bob Woodward’s latest, a key player in promoting the surge was Ret. Gen. Jack Keane, who did an end run around the Joint Chiefs of Staff and was able to appeal directly to President Bush that more troops were needed and Gen. Petraeus was the man to lead the effort. So with this in mind, I found the following interesting, from a piece by Keane and Frederick and Kimberly Kagan in The Weekly Standard, Sept. 22. 

“The existence of malign sectarian actors in the Iraqi parliament and in the prime minister’s inner circle is not news. Nor is it news that Iraqi politicians, elected under a closed-list system that emphasized ethnosectarian identity at the expense of political interest, have weak electoral bases and much reason to fear the results of open and honest elections. It is similarly well known that Iran seeks to drive the United States out of Iraq and has been putting tremendous pressure on Iraq’s leaders to obey Tehran and reject Washington. These three factors help explain the development of significant negative trends in Iraq in recent months: the downward spiral of negotiations over the Strategic Framework Agreement, delays in the passage of an electoral law, escalating tensions along the Arab-Kurd border, and Iraqi government attacks on certain Sons of Iraq groups in and around Baghdad. 

“American errors have contributed to these developments. At the outset of negotiations over the Strategic Framework Agreement, for instance, we should have offered Iraq a security guarantee. Iraq’s signing a Strategic Framework Agreement would have openly and publicly committed themselves to the United States – and against Iran, in the zero-sum thinking of Tehran. It was only reasonable that (Prime Minister) Maliki and others in the Iraqi government should have expected an American commitment to match their own, and we should have given it to them. But American domestic politics made that impossible.” 

Iran/Israel: Russia is pulling out of talks on Tehran’s nuclear program, with a Foreign Ministry spokesman saying “We do not see any sort of ‘fire’ that requires us to toss everything aside and meet to discuss (it)….On the contrary, there are more urgent questions – for example, the situation in Afghanistan and along the Afghan-Pakistan border – but our Western partners for some reason aren’t rushing to discuss these.” [I said the weekend of the Russian invasion of Georgia that this would be the case, though the administration was hopelessly naïve as to this point.] 

A top Israeli intelligence officer told the cabinet “Iran is concentrating on uranium enrichment, and is making progress” and that they are essentially half way to building a bomb. Brig.-Gen. Yossi Baidatz said “The time when (Iran) will have crossed the nuclear point-of-no-return is fast approaching.” 

“The Iranians are pleased….their confidence is growing with the thought that the international community is not strong enough to stop them.” 

IAEA chief Mohamed ElBaradei said Iran’s stonewalling was a “serious concern. Iran needs to give the agency substantive information” to clear up suspicions, he said. 

Richard Holbrooke, R. James Woolsey, Dennis B. Ross, and Mark D. Wallace / op-ed Wall Street Journal 

“Tehran claims that it is enriching uranium only for peaceful energy uses. These claims exceed the boundaries of credibility and science. Iran’s enrichment program is far larger than reasonably necessary for an energy program…. 

“Iran is a deadly and irresponsible world actor, employing terrorist organizations including Hizbullah and Hamas to undermine existing regimes and to foment conflict. Emboldened by the bomb, Iran will become more inclined to sponsor terror, threaten our allies, and support the most deadly elements of the Iraqi insurgency. 

“Tehran’s development of a nuclear bomb could serve as the ‘starter’s gun’ in a new and potentially deadly arms race in the most volatile region of the world. Many believe that Iran’s neighbors would feel forced to pursue the bomb if it goes nuclear…. 

“No one can suggest that a nuclear Iran would hesitate to use its enhanced leverage to affect oil prices, or would work to ease the burden on the battered economies of the world’s oil importers…. 

“We do not aim to beat the drums of war. On the contrary, we hope to lay the groundwork for effective U.S. policies in coordination with our allies, the U.N. and others by a strong showing of unified support from the American people to alter the Iranian regime’s current course.” 

Editorial / Washington Post 

“There’s no indication that (any new sanctions such as an arms embargo) will change Iranian behavior soon – nor is a military strike by the United States or Israel likely in the coming months. That means the next major initiative to stop an Iranian bomb will probably be a new effort by the next U.S. president to launch negotiations; Barack Obama has made it a centerpiece of his policy, and John McCain has said he’s willing to support talks as well. Both also say they will work to stiffen sanctions. That, of course, is the strategy the United States and European governments have already been pursuing for several years – without success. Why do the candidates believe they will succeed where the Bush administration has failed? That would be a good topic for Friday’s foreign policy debate.” 

As for Iranian President Ahmadinejad, he used his U.N. General Assembly speech to say “A few bullying powers have sought to put hurdles in the path of Iran’s peaceful development of nuclear power. These are the same countries that possess stockpiles of nuclear arms that no one is monitoring.” 

Weapons expert Daniel Pipes of the Hoover Institute, in an op-ed for the Jerusalem Post: 

“After Hitler, the policy of appeasing dictators…appeared to be permanently discredited. Yet the policy has enjoyed some successes and remains a live temptation today in dealing with the Islamic Republic of Iran. 

“Academics have long challenged the facile vilification of appeasement. Already in 1961, A.J.P. Taylor of Oxford justified Neville Chamberlain’s efforts, while Christopher Layne of Texas A&M currently argues that Chamberlain ‘did the best that he could with the cards he was dealt.’…. 

“Neville Chamberlain mistakenly declared ‘peace in our time’ on Sept. 30, 1938…. 

“However dysfunctional these days, appeasement abidingly appeals to the modern Western psyche, ineluctably arising when democratic states face aggressive ideological enemies. With reference to Iran, for example, George W. Bush may bravely have denounced ‘the false comfort of appeasement, which has been repeatedly discredited by history,’ but Middle East Quarterly editor Michael Rubin rightly discerns in the realities of U.S. policy that ‘now Bush is appeasing Iran.’” 

With the above in mind, the Jerusalem Post reports that when President Bush visited Israel in May to meet with Prime Minister Olmert, Bush refused to give Israel the green light for an attack on Iran’s nuclear facilities, “and added that his position was unlikely to change as long as he is in office.” 

For his part, Olmert handed in his formal resignation but will remain prime minister until his successor, Tzipi Livni, forms a new government. 

As for former British Prime Minister Tony Blair, who heads up the Middle East Quartet – the United States, European Union, United Nations and Russia – a report by various aid groups in the region (such as CARE and Save the Children) claims the community Blair represents suffers from a “vacuum of leadership” as he has failed to halt the expansion of settlements in the West Bank or tackle poverty in Gaza. 

Lebanon: Media here is reporting that Syria has massed 8,000 to 10,000 special forces on the border in what may be a prelude to the first incursion since Syrian forces pulled out three years ago. The deployment is a total surprise to Lebanon’s leadership. 

North Korea: Pyongyang demanded the seals and surveillance equipment from its Yongbyon nuclear facility be removed, is barring inspectors from further work there, and claimed it would resume plutonium production, i.e., it’s restarting the plant. Is this just gamesmanship, looking for further concessions from the Bush White House, or waiting for a new administration? Or are hardliners taking control as leader Kim Jong il recovers from a stroke? Is Kim able to make decisions? It’s more than a bit disconcerting as any signs of instability in the regime itself could be followed by action on the part of South Korea and China to secure the nukes and prevent a rush of refugees. 

China: The milk/baby formula crisis deepened, with over 53,000 sick and at least four deaths attributed to the contaminated supply. One report said up to 5 percent of infants in Shanghai could have kidney stones after drinking melamine-laced product. 

Editorial / South China Morning Post 

“In an attempt to ensure that the media would be suffused with good news, the Communist Party’s propaganda department put out a directive to the nation’s media in the months leading up to the Olympics. The eighth point said: ‘All food safety issues, such as cancer-causing mineral water, are off limits.’ 

“So, the success of the Olympics was given priority over the health of the Chinese people. And, in the weeks and months leading up to the Games, the government’s attention was narrowly focused on such things as the Olympic torch relay.” 

China can take a bow on one topic, however. It is now officially the world’s biggest carbon emitter, leapfrogging the United States, according to the Global Carbon Project, which states China took the lead in 2006. Until 2005, rich countries emitted most of the world’s man-made CO2. Today, the developing countries now account for 53 percent of the total, says the GCP. The speed of the change is incredible. India is soon to be No. 3, besting Russia. 

And we congratulate China for its latest space mission, including its first ever space walk. As Josh P. noted, while the U.S. flounders, China just keeps plowing ahead. 

Japan: Conservative Taro Aso took power as Japan’s new prime minister. I didn’t know he was an Olympic sharpshooter, a skill that could come in handy as the world is engulfed in war amidst the global depression. [Just kidding, sports fans!] 

Russia: President Bush accused Russia of violating the U.N.’s charter by invading Georgia in his speech to the U.N. General Assembly. 

“Alongside the various human atrocities, such as the bombing and purging of civilian areas, the invaders looted and destroyed numerous historical sites, some of which were profoundly revered by the Georgians as sacred building blocks in their national identity. This is especially true of the region around South Ossetia that served as a kind of cradle of early Georgian culture. The Georgian Ministry of Culture lists some 500 monuments and archaeological sites now mostly under Russian occupation and out of sight. 

“After the interminable Soviet decades, the Georgians from 1990 onward made a special push nationwide to reconsecrate churches and build local museums to revive their own interrupted national narrative. No doubt that in itself acted as a kind of provocation to Russia’s hairtrigger sensitivities over loss of empire. Using satellite imagery and interviews with refugees from the August invasion, the Georgian government is in the process of identifying damage to the most important monuments.” 

Meanwhile, Russia sent a warship to the Caribbean to participate in naval exercises with Venezuela. The Peter the Great evidently is armed with 20 nuclear cruise missiles and up to 500 surface-to-air missiles…one of the most formidable ships in the world. So if you’re on one of those Carnival Cruise ships in the area and you see this behemoth, consider it a cheap thrill. Deputy Prime Minister Igor Sechin said Russia is challenging U.S. supremacy in Latin America. 

Russia’s recent actions, however, have stirred Scandinavia’s governments into action as they seek to increase defense spending and, in the case of Finland and Sweden, look into joining NATO. [Norway and Denmark are already members.] 

Britain: Prime Minister Gordon Brown pleaded with his fellow Labour Party members to allow him to continue to lead the country, saying this is “no time for a novice.” He has a very short time to turn things around. 

South Africa: This will be the story on the continent next year…massive chaos. Eleven members of the South African cabinet resigned along with President Thabo Mbeki, who was ousted in a coup by his own party the other day. Rival Jacob Zuma, the certifiable nut job, as documented in these pages, will take over next year after the caretaker presidency of Kgalema Motlanthe (Sarah Palin won’t be quizzed on this). 

Zimbabwe: And the power-sharing deal here is close to collapse as Robert Mugabe’s henchmen seek to rip it up. As the London Times reported: 

“(Diplomats) gave warning of catastrophe if the deal collapsed. One spoke of Zimbabwe’s ‘final implosion,’ with ‘Ethiopian-style’ mass starvation and another million desperate people flooding into neighboring countries.” Part of the coming chaos in South Africa will be the result of these same refugees. 

Somalia: Lastly, the BBC reported Somali pirates seized a Ukrainian ship carrying 30 T-72 tanks. Well these ought to be easy to track. If I’m a Somali, I wouldn’t ride around in one. 

–Gerard Baker / London Times 

“Victorious Roman generals were reminded of the fickleness of their glory by a slave carefully positioned in earshot on the triumphal parade route. 

“ ‘Memento mori,’ the hapless servant would whisper to the wreathed victor as his chariot rattled along Rome’s jubilant streets: ‘Remember you are mortal.’ 

“They don’t have slaves in America any more but perhaps the winner of November’s presidential election should consider having one of his lower-paid deputy-assistants mutter something similar in his ear as he takes the tribute on Inauguration Day next January. 

“It is highly probable that that moment, the very hour that he takes office, will be the high point of his presidency. Whoever wins on November 4 will be ascending to the job at one of the most difficult times for an American chief executive in at least half a century. When the votes are counted his people might ruefully conclude that the victor is not Barack Obama or John McCain. The real winner will be Hillary Clinton, or Mitt Romney, or Mike Huckabee, or some now happily anonymous figure whose star will rise in the next four turbulent years. 

“2008 may be the best year there has been to lose an election.” 

–Richard Haass, president of the Council on Foreign Relations / Newsweek 

“Consider the inbox of the 44th president of the United States. He will face ongoing conflicts in Iraq and Afghanistan; a Pakistani government that is unable or unwilling to take on the terrorists who have set up shop in the country’s western reaches; and an Iran apparently intent on developing nuclear weapons. Beyond the greater Middle East, there are the challenges of a more assertive Russia, a rising China, a warming planet and a cooling world economy. 

“Making matters worse is that the new president will have to deal with these and other threats with his hands partially tied. The U.S. military is stretched. The American economy faces a financial-market meltdown. The country is politically divided at home and unpopular abroad. Only Washington, Lincoln and FDR faced comparable international challenges and domestic constraints upon taking office…. 

“In the end, what matters when it comes to foreign affairs is not so much knowledge – leaders can be expected to learn who is the prime minister of some country – as judgment. More important than what candidates don’t know about the world is what they do. One can only hope the first debate sheds light on this.” 

–The latest polls reveal the following. Washington Post/ABC News, Obama 52-43; NBC/Wall Street Journal, Obama 48-46; Bloomberg/L.A. Times, Obama 49-45. 

In the NBC/WSJ survey, 49% now believe Gov. Palin is not qualified to be president, a significant increase from the post-convention bounce. 44% worry about McCain’s age. 

–And so on Friday night we had our first debate. Normally, with my 24-hour rule, I would hold off on any sweeping commentary, especially because, frankly, it’s now 11:30 p.m. and I’m tired and still have a lot to do before I sleep on the column (a little window into my routine), but I thought both did well and at least for today feel a little better about the choice we face. 

I watched NBC and Fox afterwards to gauge opinion and I disagree with conservative William Kristol that McCain won 7 of 8 rounds. I thought Obama made a good case on the foreign policy front, for his followers, I hasten to add. I don’t agree with much of what he said but he sounded presidential on key areas that are of import to me. 

Remember, on an issue like Iran, I’m a guy who wanted to cut dirty, backroom deals with Ahmadinejad’s rivals, so it would be more than a bit disingenuous of me to adopt McCain’s harder line stance on negotiating with one’s enemies. 

I also don’t see how you can nitpick with McCain on the one or two flubs he had. Neither made a major mistake in my book. 

So I score the first debate a draw. Now it’s onto the veep contest next Thursday. This promises to be most entertaining. I understand supporters of the two won’t like what I’m about to say, but this could be a real laugh riot…a real gaffathon. We could all use some comic relief these days. 

–Reminder, this coming Friday, Oct. 3, is the last time during the campaign we will receive monthly employment figures from the government; in this instance the data for September. I believe this is critically important and most would be shocked were the figure to be positive after 8 straight months of declines. [The unemployment rate itself isn’t as important in terms of talking points as Obama’s ability to tell a crowd, “We have now had nine straight months of job losses.”] 

“Last we checked, the President of the United States was still George W. Bush, the Secretary of the Treasury was still Henry Paulson, the Chairman of the Federal Reserve was still Ben Bernanke, and Congress still had 533 members not running for President who are at last nominally competent to debate and pass legislation. 

“So count us as mystified by Senator John McCain’s decision yesterday to suspend his campaign and call for a postponement in Friday’s first Presidential debate so that he and Barack Obama can work out a consensus bill to stabilize the financial system. This is supposed to be evidence of leadership?…. 

“Whatever the motive, this is not what the country expects from its Presidential candidates…. 

“The behavior of both candidates has an air of running for political cover. Neither of them need master the subtleties of credit default swaps and mortgage-backed securities in time for their debates. But it would be reassuring to know that they are at least capable of holding, and sticking to, a coherent position on what is now the most important issue of the campaign. When one of them becomes President, he won’t have the luxury of pressing the ‘pause’ button at the next crisis.” 

[Neither said anything worth a damn on this paramount topic during the debate. Neither understands the issue.] 

–Bruce Bartlett / Washington Post 

“If the events of recent days prove anything, it is that we cannot believe a word that John McCain or Barack Obama has said about what he will do as president. It’s not that they have lied. Simply put, the underlying premise of everything the candidates have proposed – that the economy is fundamentally sound – is no longer operational…. 

“What this means is that we cannot afford either candidate’s tax and spending plans. The money that Obama would like to spend on the poor will have to be used to clean up the financial mess. Similarly, the tax cuts that McCain would like to hand out are off the table. The federal government is going to need new revenue and fast. We cannot continue to cut taxes as if the budget deficit doesn’t matter. The fundamental problem of the U.S. economy is too much debt. Fixing that will require belt-tightening from everyone – including the federal government, which must get its fiscal house in order to help the financial sector heal…. 

“The time for free lunches is past. We must get McCain and Obama to put forward new economic plans. The people deserve to know what is really going to happen in January, and our next president should know whether voters support his vision. With an electoral mandate, quick action in Congress may be possible. And right now we need quick and decisive action if we are to right the economy.” 

George Will / Washington Post 

“McCain’s smear – that (SEC chairman Christopher) Cox ‘betrayed the public’s trust’ – is a harbinger of a McCain presidency. For McCain, politics is always operatic, pitting people who agree with him against those who are ‘corrupt’ or ‘betray the public’s trust,’ two categories that seem to be exhaustive – there are no other people. McCain’s Manichaean worldview drove him to his signature legislative achievement, the McCain-Feingold law’s restrictions on campaigning. Today, his campaign is creatively finding interstices in laws intended to restrict campaign giving and spending…. 

“On ’60 Minutes’ Sunday evening, McCain, saying ‘this may sound a little unusual,’ said that he would like to replace Cox with Andrew Cuomo, the Democratic attorney general of New York who is the son of former governor Mario Cuomo. McCain explained that Cuomo has ‘respect’ and ‘prestige’ and could ‘lend some bipartisanship.’ Conservatives have been warned. 

“Conservatives who insist that electing McCain is crucial usually start, and increasingly end, by saying he would make excellent judicial selections. But the more one sees of his impulsive, intensely personal reactions to people and events, the less confidence one has that he would select judges by calm reflection and clear principles, having neither patience nor aptitude for either. 

“It is arguable that, because of his inexperience, Obama is not ready for the presidency. It is arguable that McCain, because of his boiling moralism and bottomless reservoir of certitudes, is not suited to the presidency. Unreadiness can be corrected, although perhaps at great cost, by experience. Can a dismaying temperament be fixed?” 

Couric: You’ve cited Alaska’s proximity to Russia as part of your foreign policy experience. What did you mean by that? 

Palin: That Alaska has a very narrow maritime border between a foreign country, Russia, and, on our other side, the land-boundary that we have with Canada. It’s funny that a comment like that was kinda made to…I don’t know, you know…reporters. 

Couric: Well, explain to me why that enhances your foreign-policy credentials. 

Palin: Well, it certainly does, because our, our next-door neighbors are foreign countries, there in the state that I am the executive of. And there… 

Couric: Have you ever been involved in any negotiations, for example, with the Russians? 

Palin: We have trade missions back and forth, we do. It’s very important when you consider even national security issues with Russia. As Putin rears his head and comes into the air space of the United States of America, where do they go? It’s Alaska. It’s just right over the border. It is from Alaska that we send those out to make sure that an eye is being kept on this very powerful nation, Russia, because they are right there, they are right next to our state. 

“John McCain has found his inner vision and it’s William Jennings Bryan.” 

“A senior’s moment or a genuine hardline stance against Spain from Republican John McCain? Comments made by the presidential candidate in an interview with a Miami radio station this week about his attitude to the Spanish Prime Minister, Jose Luis Rodriguez Zapatero, have caused consternation in the European nation. 

“In an interview this week, a reporter asked the senator whether, if elected, he would receive Mr. Zapatero in the White House. 

“He answered; ‘Honestly, I have to analyze our relationships, situations and priorities, but I can assure you that I will establish closer relationships with our friends, and I will standup to those who want to harm the United States.’ 

“The question about Mr. Zapatero came after a series of questions on how Senator McCain sees relations with Venezuela, Bolivia and Cuba, whose leftist leaders are persona non grata with the Bush Administration. 

“Then came the question about Spain and Senator McCain’s less-than-friendly answer. 

“The interviewer, perplexed, tried several times to get a clear answer, reminding him at one stage that Spain was in Europe, not Latin America. 

“But the senator gave no answer on his attitude towards the European leader who, as a NATO ally, has sent about 1000 troops to Afghanistan to fight with the U.S., but also withdrew Spanish troops from Iraq soon after his election in 2004, and has had a frosty relationship with President Bush. 

“In Spain, much of the press has concluded Senator McCain confused Spain with one of the pesky Latin American countries.” 

–Pakistan’s new leader, Asif Zardari, met Gov. Palin in New York. “You are even more gorgeous than you are on (television),” he gushed, according to the New York Post. 

“You are so nice. Thank you,” Palin said. “Now I know why the whole of America is crazy about you,” replied Zardari. Good god, keep your pants on, Asif.  

–Then there’s Cong. Charlie Rangel, who the other day was asked by a local New York television reporter if Democrats are afraid of Palin and responded, “You got to be kind to the disabled.” 

“You got to be kind to the disabled?” a surprised Marcia Kramer pressed. 

“There’s no question about politically,” said Rangel. “It’s a nightmare to think that a person’s foreign policy is based on their ability to look at Russia from where they live. It is insulting to Americans.” 

–I watched an NBC News story from Galveston on Wednesday, as residents finally returned to the most battered areas, and there was a heart wrenching moment with an 84-year-old woman who had lost everything. “I can’t imagine why it happened,” she said and you couldn’t help but shake your head as at the same time you pray God takes care of her.  

“Can’t imagine why it happened”? You’re living on the coast and Galveston has been hit numerous times by hurricanes. It happens. 

–No need to worry about black holes for a while as the Hadron Collider in Geneva is on the shelf for at least two months thanks to a magnet failure. Just an incredible boondoggle at $6.6 billion. Then again, maybe the physicists can sneak it into the bailout pool. 

“It’s that time of year again, and the new White House Historical Association Christmas ornament is ready. This year, it’s a beaut. Harking back to the 1889-1893, one-term administration of Benjamin Harrison, the colorful ornament is of a large Christmas tree decorated with roping, candles, and presents. And that’s appropriate because Harrison was the first president to display a Christmas tree in the White House. He even gave out staff gifts. Married men received turkeys and single men fine gloves. The assumption was that families ate Christmas dinner at home, while singles had to dress up to go out.” 

I’m thinking Christmas is going to be so dreadful this year we’ll all be very happy with a turkey. 

–Lastly, we really are so small.  As BBC News reported, the Swift space telescope detected a gamma-ray burst some 12.8 billion light-years from Earth – a record. Now since one light year is 5.88 X 10(12) miles, this explosion is “coming to us from near the edge of the visible Universe,” explained a researcher with the Goddard Space Flight Center. 

“The distance this flash has had to travel means Swift is seeing the event less than 825 million years after the Universe came into being.”   

Returns for the week 9/22-9/26 

Returns for the period 1/1/08-9/26/08 

Have a great week. I appreciate your support.