Archive for April, 2008

Forget about NYC ever recapturing London’s financial crown. What sane hedge fund manager would de-privatize all his information, and submit to “surveillance” by the very Praetorians who have exacerbated every shock of the last 20 years?

Treasury eyes stronger powers for Fed

By Gillian Tett in London and Krishna Guha in Washington

Published: April 29 2008 23:23 | Last updated: April 29 2008 23:23

Meanwhile, data showed accelerating US house price declines and further declines in consumer confidence.

The Federal Reserve could use proposed new regulatory powers to try to stop credit and asset market excesses from reaching the point where they threaten economic stability, the US Treasury said on Tuesday.

David Nason, assistant secretary for financial institutions, said the Fed could even use its proposed “macro-prudential” authority to order banks, hedge funds and other entities to curtail strategies that put financial stability at risk.

By “leaning against the wind” in this way, the US central bank could “attempt to prevent broad economic dislocations caused by potential excesses”, he said.

His comments come amid debate inside the Fed as to whether it should try to do more to contain asset price bubbles, following the housing and dotcom busts. Some see enhanced regulatory powers as a better tool for this than interest rates.

The proposed new powers – outlined in a Treasury blueprint published last month – require legislation and may never be authorised. But policymakers see the plan as offering a template for future regulation.

The blueprint envisages giving the Fed roving authority to collect, analyse and publish market data from a wide range of institutions, from banks to hedge funds.

“The market stability regulator must have access to detailed information about all types of financial institutions,” said Mr Nason.

Hedge funds are uneasy about this proposal. However, many European central bankers are eager to acquire the kind of macro-prudential powers the Treasury would like to give to the Fed.

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The Bank of England has imposed a permanent news blackout on its £50bn-plus plan to ease the credit crunch.

Ferocious and unprecedented secrecy means taxpayers will never know the names of the banks that have been supported through the special liquidity scheme, which was unveiled by Bank Governor Mervyn King last week.

Requests under the Freedom of Information Act are to be denied. Details will be kept secret even after 30 years – the period after which all but the most sensitive state documents are released.

Any Bank of England employee leaking the names of institutions involved will face court action for breach of contract.

Even a figure for the overall amount advanced will not be published until October. Meanwhile the Bank is expected to issue at least £50bn of Treasury bills to banks in exchange for their mortgages – entirely in secret.

This hypersensitive official stance is thought to be a response to the events of last year when a huge stigma was attached to any lender suspected of going to the Bank for cash help.

The scheme is intended to steady the markets, but it is feared that reports of banks making widespread use of the facility could trigger further instability.

Barclays and HBoS have both confirmed they will use the Bank of England scheme. ‘We welcome the Bank facility and we will participate in it,’ confirmed Andy Hornby, chief executive of HBoS.

Other banks declined to comment, but it is expected that this week all of the leading banks, with the exception of Lloyds TSB, will tender some of their mortgages to the Bank of England.

HBoS confirmed last week it had packaged up £9bn of mortgages ready either for securitisation – in effect, selling them on in the wholesale financial markets – or to be offered to the Bank in return for Treasury bills.

The scheme, drawn up by King and approved by Chancellor Alistair Darling, aims to improve banks’ liquidity by temporarily swapping bundles of mortgages and credit card debt for Treasury bills, which are short-dated Government debt that matures within nine months.

The scheme will run for three years so these bills will be replaced by new ones when required.

Under the plan, bills will be exchanged only for securities rated triple-A – the highest possible grade of security – by at least two of the three big ratings agencies, Fitch, Moody’s and Standard & Poor’s.

It would not normally be considered acceptable for big companies to arrange billions of pounds of financial support without telling their shareholders.

But one source close to major institutional investors said: ‘I can see why there may be a case for secrecy.

‘It may be the lesser of two evils.’

The £50bn or more of Treasury bills involved will dwarf the £17.6bn currently in issue, but the authorities are adamant this will not destabilise the Government debt market.

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Turkish tremors

Not much new here, but a good summary nonetheless.

April 28 (Bloomberg) — For proof that Turkey’s economy and the government of Prime Minister Recep Tayyip Erdogan may be unraveling, look no further than the lira.

The ruling Justice and Development Party touts the lira’s growing “prestige” on its Web site following the currency’s record 21 percent rally in 2007. Those gains are evaporating as inflation and political instability grip the Muslim nation of 72 million seeking membership of the European Union. The lira has fallen 8.4 percent against the dollar this year, to 1.2785.

Once-bullish traders lured by a benchmark interest rate of 15.25 percent are dumping the currency as the Constitutional Court weighs an attempt to remove Erdogan and his government from office. The decline is undermining the central bank’s efforts to curb inflation, which rose at a 9.2 percent rate in March, more than any member of the EU. Merrill Lynch & Co. and JPMorgan Chase & Co. recommend investors either avoid or reduce their holdings of Turkish assets.

“It’s not going to be a good year for the lira because of deepening political uncertainty and global risk aversion, which primarily hurts countries with big current-account deficits,” said Yarkin Cebeci, an economist in Istanbul at JPMorgan.

The lira’s decline since January is more than all emerging- market currencies except the Icelandic krona, which is down 12 percent, and the South African rand. Trading in options shows the lira, a bellwether for emerging markets, will be the second- riskiest currency to own over the next 12 months after the rand.

Secular System

A law that would allow university students to wear Islamic- style headscarves, backed by the party this year, has triggered charges by Chief Prosecutor Abdurrahman Yalcinkaya that Justice’s Islamist roots threaten Turkey’s secular system.

Closing the ruling party and banning Erdogan and President Abdullah Gul from public life for at least five years may mean a return to fractious coalition governments that helped spark a financial crisis in 2001, Jean-Dominique Butikofer, who helps manage about $725 million as head of emerging-market debt at Union Bancaire Privee in Zurich, said in an interview with Bloomberg Television this month. Justice won last year’s elections with 47 percent of the vote, more than twice that of its nearest rival.

The risk is that political conflict will distract the government from containing inflation and reducing the budget deficit as called for under its $10 billion loan agreement with the International Monetary Fund, according to Ilker Domac, an economist in Istanbul at Citigroup Inc. The accord, which helped Turkey achieve annual growth of about 7 percent, expires next month.

EU Bid

“The recent political developments are likely to complicate policy-making and the investment climate,” Domac said. “The deteriorating political backdrop will in turn undermine the prospects for restoring fiscal discipline and reviving the reform agenda.”

The lawsuit may jeopardize Turkey’s EU bid, which has underpinned investment and economic expansion. Justice, which is contesting the ban, has presided over 24 consecutive quarters of growth, attracting a record $58 billion of foreign capital.

The EU’s foreign policy chief, Javier Solana, said on April 8 the lawsuit was a “grave” risk to the membership and overturning a legitimate election result would be a violation of European norms.

The lira fell 2.5 percent on March 17, the biggest decline in seven months, after the lawsuit was presented March 14. A day later, Merrill Lynch reduced the amount of 10-year Turkish bonds in a model emerging-markets debt portfolio to 7.4 percent from 9.9 percent.

The `Pay-Off’

Closure of political parties is nothing new to Turkey. The court shut down two predecessors of Erdogan’s party in 1998 and 2001 on similar charges.

“Turkey has always been a risky place, but high returns are the pay-off for those who take the risk,” said Michael Ganske, a strategist in London at Commerzbank AG, Germany’s second-biggest lender. While investors are inclined to bet against the lira, “we expect Justice eventually to stay in place” and foreign direct investment “to underpin the currency,” he said.

The lira may advance to 1.25 per dollar by year-end, he predicted. JPMorgan’s Cebeci said it may weaken to 1.40 before rebounding to 1.32 by the end of the year.

JPMorgan on March 28 cut Turkish bonds to “underweight,” meaning it recommends investors hold a smaller percentage of the securities than contained in benchmark indexes, from “market weight.” Standard & Poor’s changed its outlook on the nation’s BB- credit rating to “negative” from “stable” on April 4, indicating a downgrade is the most likely next step.

`Global Crisis’

“No one knows how the political situation will evolve, how much time it will take the court to decide or what the verdict will be,” said Turker Hamzaoglu, an economist in London at Merrill Lynch. “The political tension coincides with a global crisis in financial markets, and this all weighs on the Turkish currency and assets.”

Investors’ aversion toward the lira has caused the price of imports to rise. That’s created a conundrum for policy makers, who are stuck between a slowing economy and faster inflation.

The Central Bank of the Republic of Turkey said March 31 it would avoid “tough” measures for fear of damaging the economy, which grew 3.4 percent in the fourth quarter, the slowest in more than five years.

Policy makers have cut their benchmark rate by 2.25 percentage points since September, dimming the allure of the nation’s interest-bearing assets and damping demand for the lira. A weaker currency may make it more difficult to finance the current-account deficit, which the central bank said widened to a record $37.4 billion in 2007.

Foreign investors have withdrawn $6 billion in “the past few months,” Sabah newspaper said on April 3, citing a report by the Banking Regulation and Supervision Agency. The stock market’s capitalization has fallen to $197 billion, from $282 billion in December, Bloomberg data show.

Still waiting on Eastern Europe …

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“Greenspan came onto my radar screen in the late sixties as a seller
of economic and financial advice to the investment industry. To be
brutally honest, he was considered run of the mill by anyone I knew
then or have met later who knew his service then. His high point in
most memories, was a famous call in January 1973 that, “it is rare
that you can be as unqualifiedly bullish as you now can,” a few days
before a market decline of over 60% in real terms, second only to the
Great Crash in a century, accompanied also by a bitter recession.
This was one of the first of a long line of terrible prognostications
for which he has remarkably not been remembered, except by a handful
of us amateur historians. “

–Jeremy Grantham, on Alan Greenspan

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… In Washington, nuclear experts were puzzled by the timing and quality of the evidence released by the Bush administration. Democrats suggested hardliners around Dick Cheney, the vice-president, had forced the issue to try to wreck the talks with Kim.

However, there is a more persuasive argument. Analysts in Seoul see the American disclosures as a sly way to keep the negotiations alive. Kim had refused to make a “full declaration” of his nuclear programme by a December 31 deadline; now, in effect, the CIA has done it for him. “The revelation was a highly orchestrated one,” commented The Korea Herald, adding that it “enabled” Pyongyang to “make its declaration without losing face”.

One indication is that Christopher Hill, the US State Department negotiator, flew to Singapore for an unusual session with his North Korean counterparts shortly before the United States went public. “There must have been some sort of secret agreement or deal,” said Taewoo Kim, of the Korea Institute for Defence Analyses in Seoul.

Last year Hill persuaded the White House that the talks offered a realistic chance to accomplish a peace treaty formally ending the 1950-3 Korean war, in which more than 50,000 Americans died. His critics, such as John Bolton, the former United Nations ambassador, say North Korea has a long recidivist history of selling missiles and unconventional weapons to unstable Middle Eastern regimes such as Syria, Iran and Libya.

Whatever the truth, even by the standards of North Korean politics the atomic intrigue half a world away – with its multinational cast of spies, scientists, diplomats and airmen – makes an exotic story.

The alliance between the two clan dictatorships in Damascus and Pyongyang is more than 35 years old. In another tunnel, this one under Mount Myohang, the North Koreans have kept as a museum piece the Kalashnikov assault rifle and pistols sent as gifts from President Hafez al-Assad of Syria to Kim Il-sung in the early years of their friendship.

Today North Korea and Syria are ruled by the sons of their 20th-century dictators – Bashar al-Assad succeeded his father in 2000 and Kim Jong-il took over in 1994. They inherited a hatred of America and a fondness for authoritarian family rule.

Syria possesses the biggest missile arsenal and the largest stockpile of chemical weapons in the Middle East, built up over the past two decades with arms bought from North Korea.

North Korea, which detonated a nuclear device in October 2006, has become pivotal to Syria’s plans to enhance and upgrade its weapons.

Syria’s liquid-fuelled Scud-C missiles depend on “essential foreign aid and assistance, primarily from North Korean entities”, said the CIA in a report to the US Congress in 2004.

Diplomats based in Pyongyang have said they now believe reports that about a dozen Syrian technicians were killed in an explosion and train crash at Ryongchon, North Korea, on April 22, 2004. North Korea blamed a technical mishap, but there were rumours of an assassination attempt on Kim, whose special train had passed through the station en route to China some hours earlier.

No independently verified cause of the disaster was made known. However, teams of military personnel wearing protective suits were seen removing debris from the section of the train in which the Syrians were travelling, according to a detailed report quoting military sources which appeared on May 7, 2004, in the Sankei Shimbun, a Japanese newspaper.

The technicians were said to be from Syria’s Centre D’Etudes et de Recherche Scientifique, a body known to be engaged in military technology.

Their bodies were flown home by a Syrian military cargo aircraft which was spotted on May 1, 2004 at Pyongyang. There was speculation among military attachés that the Syrians were transporting unconventional weapons, the paper said at the time. Diplomats said the Sankei Shimbun report was now believed to be accurate.

Last year Jane’s Defence Weekly reported that dozens of Iranian engineers and Syrians were killed on July 23 attempting to load a chemical warhead containing the nerve gases VX and sarin onto a Scud missile at a plant in Syria.

The Scuds and warheads are of North Korean design and possibly manufacture. Some analysts think North Korean scientists were helping the Syrians to attach air-burst chemical warheads to the missiles.

Syria possesses more than 100 Scud-C and ScudD missiles which it bought from North Korea in the past 15 years. In the 1990s it added cluster warheads to the Scud-Cs that experts believe are intended for chemical weapons.

Like North Korea, Syria has an extensive chemical weapons programme including sarin, VX and mustard gas, according to researchers at the Center for Nonproliferation Studies at the Monterey Institute in California.

The Scud-C is strategically worrying to Israel because Syria has deployed it with one launcher for every two missiles. The normal ratio is one to 10. The conclusion: Syria’s missiles are set up for a devastating first strike.

Since 2004 there have been a series of leaks designed to suggest that Syria has renewed its interest in atomic weapons, a claim denied by Damascus.

In December 2006 the Kuwaiti newspaper, Al-Siyasa, quoted European intelligence sources in Brussels as saying that Syria was engaged in an advanced nuclear programme in its northeastern Hasakah province.

It also quoted British security sources as identifying the man heading the programme as Major Maher Assad, brother of the president and commander of the Republican Guard.

Early last year foreign diplomats had noticed an increase in political and military visits between Syria and North Korea. They received reports of Syrian passengers on flights from Beijing to Pyongyang, almost the only air route into the country. They also spotted Middle Eastern businessmen using trains between North Korea and the industrial cities of northeast China.

Then there were clues in the official media. On August 14 Rim Kyongman, the North Korean minister of foreign trade, was in Syria to sign a protocol on “cooperation in trade and science and technology”. His delegation held the fifth meeting of a “joint economic committee” with its Syrian counterpart. No details were disclosed.

Initially, the conclusion of diplomats was that the deal involved North Korean ballistic missiles, maintenance for the existing Syrian arsenal and engineering expertise for building silos and bunkers against air attack. Now it is known that Israeli intelligence interpreted the meeting as the last piece in a nuclear jigsaw; a conclusion that Israel shared with President George W Bush.

For years the United States and Israel saw North Korean weapons sales to the Middle East as purely a source of revenue – apart from seafood, minerals and timber, North Korea is impoverished and has little else to sell. The nuclear threat in Syria was also believed to be dormant, as Damascus appeared to rely on a chemical first-strike as an unconventional deterrent.

In a period of detente, the United States and its allies concurred when China sold a 30kw nuclear reactor to Syria in 1998 under international controls.

Then, in 2003, American intelligence officials believe that Syria recruited Iraqi scientists who had fled after the fall of Saddam Hussein. Like other countries in the region, Syria renewed its pursuit of nuclear research.

The calculus changed for good after North Korea tested a nuclear bomb in 2006 and admitted to a plutonium stockpile sufficient for 10 more.

The danger to Israel is multiplied by the triangular relationship between North Korea, Syria and Iran. Syria has served as a conduit for the transport to Iran of an estimated £50m of missile components and technology sent by sea from North Korea to the Syrian port of Tartous, diplomats said.

They say Damascus and Tehran have set up a £125m joint venture to build missiles in Syria with North Korean and Chinese technical help. North Korean military engineers have worked on hardened silos and tunnels for the project near the cities of Hama and Aleppo.

Israel also noted reports from Pyongyang that Syrian and Iranian observers were present at missile test firings by the North Korean military last summer and were given valuable experimental data. Israeli sources said last week that Iran was informed “in every detail” about the nuclear reactor and had sent technicians to the site.

Such was the background against which Israel took its decision to strike. Two signals from the North Koreans in the aftermath showed that the bombs hit home.

On September 10, four days after the raid, Kim sent a personal message of congratulations to Assad on the Syrian dictator’s 42nd birthday.

“The excellent friendly and cooperative relations between the two countries are steadily growing stronger even under the complicated international situation,” Kim said.

The next day, in a message that went largely unnoticed, the North Koreans condemned the Israeli action as “illegal” and “a very dangerous provocation”.

Just days later a top Syrian official, Saeed Elias Daoud, director of the ruling Syrian Arab Ba’ath party, boarded a Russian-made vintage jet belonging to the North Korean airline, Air Koryo, for the short flight from Beijing.

Daoud brought counsel and sympathy from Assad, whose father Hafez was famed as a strategic gambler with a talent for brinkmanship.

Now Kim is waiting to see if his own gamble has paid off.

Additional reporting: Sarah Baxter in Washington

Interesting ….

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What would happen when non-government T-bill chumps figure out that they’re getting between negative 5 percent and negative 9 percent real interest on a 2-year Treasury note?

… In March, consumer prices rose 0.34 percent, for an annualized rate of more than 4 percent, according to the U.S. Department of Labor. That’s only slightly lower than the 2007 annual rate of 4.1 percent – which was the highest inflation rate this decade.

On the other hand, so-called core inflation – which excludes energy and food prices because they are considered volatile – rose only 0.15 percent, or 2.4 percent over the past year, which is close to the Federal Reserve’s 2 percent comfort zone.

For the Federal Reserve, the core inflation rate amounts to a green light to continue its policy of lowering interest rates in order to keep the economy from falling into a deep recession. A higher inflation rate could conceivably make the central bank freeze or raise interest rates.

But many economists say the core rate does not show how inflation is affecting the typical consumer. Because salary raises for most people are not keeping pace with the rising cost of living, people are using a greater percentage of their wages to buy a smaller amount of goods.

“Food prices and the price of gas are really eroding the purchasing power not just of the working class, but people in the middle class, who are already beginning to have a hard time making ends meet,” said business-trend consultant Joel Kotkin.

John Williams, who spent more than two decades as an economic consultant to Fortune 500 companies, said the government figures understate the true rate of inflation. …

I am getting a little tired of hearing about food inflation, by the way. I bet that a hedge fund got about 100 people to buy massive amounts of food at bulk wholesalers around the country, loaded them on a container for China, and sold the rice for a gigantic profit. The food inflation meme is getting deafening.

Having said that, there’s no doubt that the Fed’s inflation statistics are dripping with phoniness. “Core inflation” is a joke and everyone knows it.

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April 25, 2008 1511 GMT
At least one shot has been fired at an Iranian vessel from a ship contracted by the U.S Military Sealift Command, Reuters reported April 25, citing a U.S. military official. No other details were immediately available.
Additionally, Debkafile (yes yes, I know) reports that Hamas’s number two has been killed in Damascus by a hit and run. The Saudis seem to be the ones with the most ins into Syria, in which case this would show them doing their fair share of the heavy lifting.
These “confrontations,” by the way, happen a lot. What’s revealing is which ones get played up, and why.

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I generally agree with Stratfor’s take on the issue.

… it would appear that the United States briefed deliberately against Israeli wishes. Certainly, the Israelis didn’t participate in the process. One answer could be that the United States is unhappy about Israeli Prime Minister Ehud Olmert’s moves on Syria and wants to derail them.

… there are two plausible answers to today’s show. One is to increase pressure on North Korea. The second is to derail any Israeli-Syrian peace process. The problem is that it’s hard to see why North Korea is going to be moved by the official declaration of what Washington has been saying from the beginning. The second is hard to believe because it would assume that U.S.-Israeli relations had deteriorated to the point that the U.S. had to use this as a lever. That’s tough to believe.

The senior Republican on the House Intelligence Committee, Peter Hoekstra, said afterward the briefing, “This administration has no credibility on North Korea. A lot of us are beginning to become concerned that the administration is moving away from getting a solid policy solution to ‘let’s make a deal.’”

So that seems to undermine the prep for strike theory. That leaves tension between the United States and Israel as the last standing theory. Not a good theory, but the last standing one.

The CIA is once again trotting out its “high confidence” and “low confidence” howlers. For example:

Nevertheless, top US intelligence officials who briefed reporters said they had only low confidence for the conclusion that the nuclear facility was meant for weapons development, partly because it had no reprocessing facility, which would be needed to enrich nuclear material for use in a bomb. The officials said they had high confidence, however, in the judgment that North Korea had aided Syria with its nuclear program.

That sounds like a pretty blatant way of saying, “We’re trying to turn the screws on North Korea here, not Syria.”

The White House spun it differently:

The strike on Sept. 6, 2007, ripped open the structure and revealed even more evidence to spy satellites: reinforced concrete walls that echoed the design of the Yongbyon reactor. After the attack, Syria erected a new building over the site.

“This cover-up only served to reinforce our confidence that this reactor was not intended for peaceful activities,” White House press secretary Dana Perino said. “The Syrian regime must come clean before the world regarding its illicit nuclear activities.”

The White House also used its statement as an opportunity to denounce the nuclear activities of Iran, which it says is a threat to the stability of the Middle East. Perino said the world must take further action, beginning with full implementation of U.N. Security Council resolutions.

It almost seems as if the CIA is putting pressure on North Korea to come cleaner in negotiations, while the White House is using the event to retrench their hawkish position against Syria and Iran.

I would also guess that most, if not all of the American administration is pissed off at Olmert, who threw away a lot of US-Israeli leverage to buttress his shambolic political position:

Prime Minister Ehud Olmert’s reported gestures to Syria have harmed Defense Minister Ehud Barak in the battle between the two men over votes from the center-left in the next general election, a senior Labor official said Thursday.

Syria was the only issue that had allowed Barak to differentiate himself from Olmert, who had positioned himself to the Left of Barak on the Palestinian issue but had refrained from pursuing the Syrian track until recently, and even told the haredi newspaper Mishpacha, “As long as I am prime minister, the Golan will stay in our hands.”

Barak had been seen as the government’s main proponent of talks with Damascus until this week’s reports.

“Olmert knows he cannot get votes from the center-right of the political map, so he is trying to prove to people between Meretz and Labor that he is the hope for reaching peace with both the Palestinians and Syria,” the senior Labor official said. “There is no doubt that this move helped Olmert and hurt Barak politically.”

In March, Barak and his loyalists discussed running on the Syrian issue in the next election to highlight the differences between him and Olmert.

“Focusing on Syria shows people who think that Olmert leads the peace camp that Barak is willing to take a risk for peace that Olmert is not,” a Barak supporter said following those deliberations last month. “It also reminds people that the man who took a risk for peace with [Palestinian Authority head Yasser] Arafat was Barak, not Olmert.”

In the same deliberations, Barak and his loyalists said that the other possible issue that could differentiate Olmert from Barak would be if Barak would come out in support of releasing Fatah terrorist Marwan Barghouti from prison.

Barak’s close ally, National Infrastructures Minister Binyamin Ben-Eliezer, has championed Barghouti’s release, but Barak has refrained from speaking on the issue because of the sensitivity of his job as defense minister and because he did not want to be seen as undermining the diplomatic process with PA President Mahmoud Abbas.

It is possible that the likelihood of Barak eventually endorsing Barghouti’s release increased when Olmert took away Barak’s advantage on the Syrian issue. …

This is exactly the kind of duplicitous narcissism that has so damaged Israeli credibility over the past two years.

It appears that Olmert got absolutely nothing concrete for giving away the Golan Heights. He cost the United States leverage in its own negotiations with Iran over Iraq, while Iran reconstitutes the Mehdi Army as a super-Hezbollah in southern Iraq.

Saudi Arabia, not Israel, has been at the forefront of the American axis in the Middle East, assassinating anti-American clergymen in Syria and southwestern Iran, funneling money to the Iraqi Sunni militias, and so on. Sure, it’s in their own interests even more than it’s in ours, but the point is that the Saudi royal family can be relied upon to act in their rational long-term interest. That makes them effective and reliable. Israel clearly is not capable of that.

Olmert has taken out still more equity on America’s mortgage in the Middle East to pander to the Jews who apparently hate themselves the most (the Israeli left). My guess is that the CIA and the Bush Administration are in general agreement, that the Israelis’ recent behavior merits punishment, and the heretofore State Department -dominated approach towards North Korea needs less carrot and more stick. The difference in their tones reflects which parts of this hearing the two factions are more eager to exploit: the CIA is not as hawkish as Bush is regarding Syria and Iran (hence the CIA’s muted reaction to the report’s implications for Syria, especially compared to Perino’s), but more so regarding North Korea.

Both want to make Olmert look like the POS he is.

Meanwhile, Ehud Barak, whom Israelis allowed to throw away territory in a land for peace deal eight short years ago, is now mulling the release of Marwan Barghouti, a major Palestinian terrorist.


The Obama administration will not give a rat’s ass about Israel. At the rate Olmert is going, I just might vote for Obama.

Update: Apparently I wasn’t the only one who thought the timing of Ben-Ami Kadish’s arrest was related to Israel’s recent foreign-policy freelancing (although again there are multiple interpretations as to exactly what behavior Washington is trying to punish; there’s also an argument that the arrest was designed to influence the trial of two AIPAC lobbyists held on spying charges).

Kadish was apparently one of many Mossad “sayanim” (Jews living in Gentile lands who lead ordinary lives, except when their services are called upon by the Mossad. (e.g., if a Mossad agent needed to pose as an electronics vendor, he would call upon the services of a sayan who sold electronics to temporarily put his inventory at the Mossad’s disposal.)) Kadish’s “indiscretions” were known by US authorities for at least three years. There was a reason he was arrested now.

This also demonstrates the magnitude of (justified) hostility to Israel in some security circles, tarred and feathered as “anti-Semitism” by the usual suspects. The Israelis horribly abused American trust during the 1980’s, and in all likelihood still do so — exacerbated, perhaps, by the domestic weakness of the Bush Administration.

This is yet another balloon payment Israel will pay after November 2008, especially in light of such dismal returns on American security investment in Israel in the past three years, Olmert’s current mercenary positioning, and the fact that Israel will never come clean about its espionage against the United States.

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I agree with Ritholtz that the “Murdoch WSJ” is significantly inferior to its predecessor in many respects. I don’t think that leaves much of an opening for the NYT, which most businessmen see as fluffy, verbose, hyperpolitical, and melodramatic (focusing on issues with a very high emotion:predictive value ratio)–or succinctly, “just a gay paper,” as I have heard more than a few times.

Murdoch’s WSJ has deteriorated in notable respects. Before Murdoch, I don’t remember a single instance of a fashion show making the WSJ front page. Murdoch is going after the gay and young professional female demographic, which may or may not be lucrative. But it’s dumbing down the paper in very noticeable ways.

The NYT, in my view, will never gain much of a financial foothold. However, the WSJ risks squandering a largely captive audience to a plethora of very well-informed internet writers. Static corporate expense accounts have somewhat shielded the WSJ from the neo-Great Depression gripping the rest of the MSM. Risking that to fight over the soap-opera melodrama crowd is dumb.

If the WSJ got some credible security consultants who at least know what they’re talking about most of the time (Stratfor comes to mind) to do their political writing, then their expanded political coverage would add real value, at disproportionately low marginal cost. But that’s not what the WSJ is doing.

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One handy way

of measuring Mideastern tensions is the average distance of all US carrier battle groups from the 5th Fleet Area of Responsibility (the eastern Mediterranean Sea, Persian Gulf, and Arabian Sea).

That number is at its lowest in years, fwiw (and plunged very steeply over the past 7 days). This will coincide with Congressional hearings on Syria’s alleged plutonium reactor which the Israelis bombed last September.

I suspect that, if the details are mentioned, we will also learn that the Israelis fried Syrian radars with EMP bombs. Thousands of Israeli satellite TV systems were somewhat damaged on the date of the strike and well afterwards. Considering that the Israelis didn’t nuke the targeted site, the disruption almost certainly came from EMP detonations of Syrian radar installations next on the Israel-Syria border.

Syria wants to cut a deal very badly. The question is whether Iran/Hezbollah will allow the Assad family to live long enough to act so obviously against Teheran’s interests. My guess is not.

Update: Stratfor notes:


Syrian Foreign Minister Walid al-Moallem held a press conference in Tehran on April 23 with his Iranian counterpart, Manouchehr Mottaki, during which al-Moallem stated, “if Israel is serious and wants peace, nothing will stop the renewal of peace talks.” … At this point, it is still unclear what exactly the Iranians are calculating.

Kudos to Stratfor for noting and extrapolating upon the fact that Iran is tacitly signing off on this announcement.

As I see it, Israel and Iran have zero — zero — common ground that would not entail prohibitive unilateral disarmament as a first step. Eg, Iran would have to throw Hezbollah overboard, which it won’t, because it has invested a mind-boggling amount of money, expertise and credibility in Hezbollah. Hamas is much more expendable from Iran’s perspective, rather like the Golan Heights for Israel.

Assuming that, one can only conclude that Iran and Syria are trying to head off the likelihood of war. Congressional hearings in the next couple of days will probably reveal that Israel preemptively bombed a Syrian nuclear reactor last September, laying bare the necessity to confront Syria/ Iran/ Hezbollah. Iran seems to be preempting that news with a peace offer that almost certainly is not in good faith.

The al-Maliki/ ISCI crackdown on al-Sadr appears to have been motivated by Iran, as well. Iran seems to have consolidated its power in Iraq under one major aegis (ISCI) at Sadr’s expense.

As for the Israelis, perhaps Olmert is buckling as he already has; or perhaps Olmert figures he can play along for another week or so, and if something happens, he can always tell his center-left constituency, “Gosh, you know, we worked so hard for peace, and we almost got there, but those damned [whoevers] walked out on us at the last minute.” Or something.


What an inscrutable part of the world.

I just know that American assets in, and on the periphery of, the “Iran AOR” (the 5th fleet AOR) are not concentrating as if peace is just around the corner.

It’s been a long time since the US has had more than one carrier battle group stationed in the 5th AOR. Right now, the Harry S Truman and Abraham Lincoln carrier battle groups are both there. A Marine expeditionary strike force has arrived in the 5th AOR from the east, while a different ESG remains positioned off the coast of Lebanon. The Nimitz and Kitty Hawk are both around the Philippines; the Kitty Hawk was supposed to be heading for Hong Kong for a port call, but it is sailing well clear of Hong Kong.

Anyway, that makes 2 CBGs and 2 ESGs in the 5th AOR, with another 2 CBGS only a few days away.. while Petraeus has replaced Fallon at Centcom and Congress will be told about an Israeli strike on a Syrian reactor.

Secdef Gates had unusually biting words for Iran, as well.

Asked if Petraeus’s elevation signaled a hardening U.S. position toward Iran, Gates said there was no disagreement among senior commanders — including Fallon — about the need to confront Iran over its conduct in Iraq.

View of Iran

“General Odierno and General Petraeus and Admiral Fallon were all in exactly the same position when it came to their views of Iranian interference inside Iraq,” Gates said. “And it is a hard position, because what the Iranians are doing is killing American servicemen and women inside Iraq.”

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Gold stocks, more so.

This morning’s commercial EURUSD models showed a major dollar bias, which largely corrected itself today, greased by some more “we don’t like currency volatility!” hot air from ECB honcho Jean-Claude Juncker.

Meanwhile, the Treasury yield curve has steepened again. The difference between 30-year and 3-month Treasury rates widened by 9 bips today, to a very high 327 bps.

Private equity has $1 trillion of dry powder. China’s trade surplus, particularly the euro-denominated part, is still dilating. There is a lot of money sitting around that wants to move — into (credible) US equities, raw materials, and precious metals.

The P/E of Barrick has dropped to 33 (Goldcorp is at 60 ! — bad 1Q earnings for major miners from over-hedging).

Until there’s a run on the Chinese banking system, flow of funds from “funny money” (Treasuries, paper cash) isn’t going to slow down.

Before I lose myself in bullish pronouncements, how credible is official CPI when, after oil’s “real” adjusted high of $102, oil is kissing $120/barrel today — despite

  1. no second oil embargo (1979);
  2. no revolution in Iran (1979);
  3. no massive, public unrest quaking the foundations of the Saudi state (Grand Mosque of Mecca seizure, 1979); and
  4. no massive slowdown in Asia/ end to the commodities bull run is looming; therefore, the peak this time will probably well exceed even its $120 peak so far.

Yeah, there was no China then, but on the other hand, Russia also didn’t produce as much oil, world economies in general were much less oil-efficient, there were not as many viable substitutes for oil then as now, etc.

I think going short paper cash (Treasuries and eurobonds) and long inflation-protected cash (gold and silver) is the great one-way trade of the next five years, as I have said for months. Global savings glut in the East, global inflation glut for the West.

By the way, Ambrose Evans-Pritchard’s latest is mandatory reading.

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the monolines (Ambac and MBIA — remember them?) are going to be the next “crisis” … again. (h/t Alea)

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A point of order

I love comments on this blog. If they are at all insightful they raise traffic here a lot more than a post will. Plus, I almost always learn something, which is even better.

However, comments in which you say (for example) “Hillary … be very afraid: [link back to your blog]” are of no relevance to any debate and do not add any value here. They are not differentiable from spam comments. If you are going to throw a link back to your blog, at least pretend to bring a new piece of information, or a new interpretation of a set of data, to whatever the subject matter is.

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Clinton wins PA by 7 points.

Even if she won by double digits, it wouldn’t be enough.

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PARIS (MNI) – With eurozone HICP at a record high and inflation
risks on the horizon as far as the eye can see, the European Central
Bank’s Governing Council is stiffening its resolve as the defender of
price stability, even at a time of great uncertainty about economic
growth, well-informed monetary sources have told Market News

The ECB is still piloting the monetary aircraft in a thick fog as
inflation rises well above the bank’s comfort level and ongoing market
turmoil, accompanied by a sharp slowdown or recession in the United
States, clouds the view, these sources said.

But the thinking in Eurosystem monetary circles appears to have
shifted recently, as oil continues its steady rise and workers in
Germany win bigger-than-usual pay increases.

In recent months, as unabated turbulence roiled markets and the
U.S. economy slipped towards the abyss, many eurozone monetary
policy-makers saw price risks as an obstacle to cutting rates. Now, the
ascending view is that a lack of clarity over how sharply growth will
slow is what’s keeping the ECB from putting up rates.

“Nobody talks about an interest rate cut anymore,” said one source.
“It’s a wait-and-see policy, as it has been for awhile, but the bias has

That is not to say the ECB has formally returned to a tightening
bias. But there is an awareness that unless inflation behaves, the next
move could very conceivably be a rate hike — in contrast to market
expectations, albeit receding ones, for a cut.

“With inflation running at 3.6%, the ECB could be forced to tighten
monetary policy,” said one senior Eurosystem official. “This will depend
on whether inflationary pressures from oil and food price hikes create a
second round of increases in wages and consumer products.”

Another official put it more bluntly: “The fact is that if the
money markets can be stabilized, then rate hikes would have to be put
back on the agenda,” he said.

But such a move, if it comes at all, may still be a long way off.

The official who observed that “the bias has moved” also said,
“It’s difficult to see rates going up at the moment, with the financial
sector still weak and the U.S. maybe in recession. Higher rates here
will make it worse for financial institutions. They are still

He also noted that “there is already some tightening effect in the
markets,” given the strong euro and the rise in three- and six-month
rates, which are now well above 4.8% — more than 80 basis points north
of the ECB’s main policy rate.

The senior Eurosystem source made it clear that while perceptions
may have hardened with regard to inflation, no imminent action by the
ECB is likely because the economic picture is just too cloudy for now.

“The markets should not expect monetary policy changes during the
coming months, despite market and political pressures,” he said. “We are
in no position to make a medium-term assessment, since we are not fully
aware of the banking sector’s exposure to the financial market crisis.”

Therefore, policy is still finely balanced for now between two
conflicting pressures, he said. “The one is an interest rate increase
and the other is a rate cut. As a result, the Council has decided to
freeze any action and continue to inject the market with liquidity.”

Nonetheless, the more hawkish comments by MNI’s sources —
including that senior official — jibe with recent public remarks by
some members of the ECB Governing Council, who have resurrected the idea
of hiking rates in the face of what they see as an extremely worrisome
inflation picture.

In a newspaper interview published today, Luxembourg Central Bank
Governor Yves Mersch said the ECB staff would probably revise upward its
inflation forecasts for 2008 and 2009. Asked if this implied the ECB
would have to hike interest rates, he said the question was “entirely

Bundesbank President Axel Weber, expressing great alarm about
inflation developments, said Monday that the ECB must “decide whether
the current level of interest rates ensures the fulfillment of our
mission.” And Bank of Greece Governor Nicholas Garganas pointedly noted
on Friday that he had not ruled out a rate hike.

The only way the ECB can reconcile higher interest rates *and* pacify the hyperleveraged, debt-glutted Club Med, would be by swapping quality debt, Bernanke-style, for the banks’ asset-backed garbage, and subsidizing the Club Med/ Ireland banking sector commensurate with the size of those countries’ gargantuan trade deficits.

Italy will be the one to watch. We will soon see whether the fulcrum of Berlusconi’s coalition, Umberto Bossi’s anti-euro Lega Nord, can be bought off or not.

But at least the ECB is trying.

On another note, Bernanke is said to be heavily influenced by the work of Athanasios Orphanides, the chairman of the Bank of Cyprus, whose philosophy can be summarized as, “When there’s a recession, cut interest rates until interest-rate expectations begin to become unmoored.” By every indicator, including the laggardly consumer surveys, inflation expectations have become significantly unmoored. If there is any time for Bernanke to stun Wall St. and the commodities markets with a 25 basis-point rate hike, it would be on April 29-30. (Not that I think Bernanke will.)

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The Age (Aus.):

Justin Norrie, Tokyo

April 21, 2008

A 130% rise in the global cost of wheat in the past year, caused partly by surging demand from China and India and a huge injection of speculative funds into wheat futures, has forced the Government to hit flour millers with three rounds of stiff mark-ups. The latest — a 30% increase this month — has given rise to speculation that Japan, which relies on imports for 90% of its annual wheat consumption, is no longer on the brink of a food crisis, but has fallen off the cliff.

MARIKO Watanabe admits she could have chosen a better time to take up baking. This week, when the Tokyo housewife visited her local Ito-Yokado supermarket to buy butter to make a cake, she found the shelves bare.

“I went to another supermarket, and then another, and there was no butter at those either. Everywhere I went there were notices saying Japan has run out of butter. I couldn’t believe it — this is the first time in my life I’ve wanted to try baking cakes and I can’t get any butter,” said the frustrated cook.

Japan’s acute butter shortage, which has confounded bakeries, restaurants and now families across the country, is the latest unforeseen result of the global agricultural commodities crisis.

A sharp increase in the cost of imported cattle feed and a decline in milk imports, both of which are typically provided in large part by Australia, have prevented dairy farmers from keeping pace with demand.

While soaring food prices have triggered rioting among the starving millions of the third world, in wealthy Japan they have forced a pampered population to contemplate the shocking possibility of a long-term — perhaps permanent — reduction in the quality and quantity of its food. …

… Last week, as the prices of wheat and barley continued their relentless climb, the Japanese Government discovered it had exhausted its ¥230 billion ($A2.37 billion) budget for the grains with two months remaining. It was forced to call on an emergency ¥55 billion reserve to ensure it could continue feeding the nation.

“This was the first time the Government has had to take such drastic action since the war,” said Akio Shibata, an expert on food imports …

Biofuels companies are going to be destroyed by this. Agribusiness — especially anything having to do with genetically-modified food — will blast off. This isn’t going away in 2 quarters.

Thailand, one of the world’s biggest rice exporters, is only the latest country to be mauled by a massive drought.

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I guess the “Level 3 asset” chicanery got too embarrassing.

Outsize losses reported last week by Citigroup Inc. and Merrill Lynch & Co. could have been a lot worse except for a quirk in the way companies account for different types of securities.

Citigroup took $15 billion in write-downs and credit charges, leading the big bank to report a first-quarter loss of $5.1 billion. But $2.3 billion in other write-downs didn’t hit the company’s income statement.

The same was true at Merrill. The broker had $6.6 billion in write-downs, leading to a loss of $1.9 billion. But Merrill took at least $3.1 billion in other write-downs that didn’t count toward its loss.

So, where did those other charges go? Into a special bucket in shareholders’ equity called “other comprehensive income.” The beauty of this bucket is the charges land on the balance sheet, but don’t dent the companies’ bottom line.

It all gets down to how a company classifies a security. A company can say it plans to hold a security until it matures, that it is available for sale or that it is being actively traded. Securities being held to maturity are held at their original cost and their value is written down only if they are deemed to be impaired. Securities that are traded are always marked to market, and gains or losses immediately hit profit.

The available-for-sale category is a middle ground in which the value of the securities is written down or up depending on market prices, but the loss or gain ends up in the “other comprehensive income” bucket. It stays there until the change in value is considered more permanent. At that point, a company finally takes the losses out of the bucket, and they hit the bottom line.

To be clear, Citigroup, Merrill or the many other companies that book losses in this way aren’t doing anything wrong. This is all permitted by accounting rules.

Still, many investors are starting to question why different companies can book losses from similar securities in different ways, and whether they should be delaying losses at all. Merrill and Citigroup both declined to comment.

Analysts also are sounding the alarm that these losses may eventually come back to bite investors, even if they are presently tucked away in a little-noticed corner of the balance sheet. In a recent report, Credit Suisse analyst David Zion estimated that companies in the Standard & Poor’s 500-stock index were sitting on about $80 billion of these unrealized losses as of the end of last year.

After Merrill reported its results, Punk Ziegel & Co. analyst Richard X. Bove threw up his hands in frustration over the way corporate results were being masked by accounting practices, including the ability to book some losses in shareholders’ equity rather than profit.

“It would be disingenuous of me to indicate that I understood what has happened at Merrill Lynch in the first quarter or that I had any rational way to estimate what the company’s earnings are likely to be going forward,” Mr. Bove wrote in a note to clients.

Investors need to keep a wary eye out for booking of increases in losses in the other-comprehensive-income bucket for another reason: They can obscure the picture of a bank’s financial strength. That is because losses in other comprehensive income aren’t included in calculations of a bank’s Tier 1 capital, an important regulatory measure of a bank’s financial strength, even though they will take a chunk out of a firm’s net worth.

An added danger: There isn’t a hard-and-fast rule defining when companies have to deem the losses in other comprehensive income to be more permanent and so take a hit to profit. That gives management leeway in potentially timing when losses will hit the income statement.

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I have always thought that there’s something uniquely soporifying about DC that makes most who live there especially complacent and/or ignorant, kind of like the lead plumbing of many “established” Roman cities poisoned most urban dwellers into senility by age 55.

George Will, though, gets it. He has just enough of a flicker of cynicism for him to ask, “Hey, wait a second … what the hell is everybody doing, trusting the Federal Reserve?

What the Fed’s Job Isn’t

By George Will

Some say the world will end in fire,
Some say in ice. …

— Robert Frost

WASHINGTON — And some say it will end because of subprime mortgages. But for those who cultivate fears of catastrophes as excuses for expanding government supervision of other people’s lives, the bad news is that the world is not going to end — not from global warming or economic cooling or anything else. Today’s untethered Federal Reserve will, however, make the muddle-through interesting.

The late Sen. William Proxmire, a populist Democrat who represented Wisconsin for 32 years, wanted all members of Congress to write on their bathroom mirrors, so it is the first thing they read each day, this: “The Fed is a creature of Congress.” Congress created the Federal Reserve pursuant to its constitutional power “to coin money” and “regulate the value thereof.” Fortunately, Congress has left the Fed free to go about its business.

But suddenly the Fed is undergoing radical “mission creep.” The description of the Fed as the “lender of last resort” is accurate without being informative. Lender to whom? For what purposes? Last resort before what? Did the bank “lend” $29 billion to Bear Stearns, or did it, in effect, buy some of the most problematic securities owned by Bear? If so, was this faux “loan” actually to J.P. Morgan Chase? The purpose of the money was to give Morgan an incentive to buy Bear — at a price so low that an incentive should have been superfluous.

In 1979, when the government undertook to rescue Chrysler, conservatives worried not that the bailout would fail but that it would work, thereby inflaming government’s interventionist proclivities and lowering public resistance to future flights of Wall Street socialism. It “worked”: Chrysler has survived to endure its current crisis. The fallacious argument in 1979 was that Chrysler was then “too big to be allowed to fail.”

Today’s argument is that Bear Stearns was so connected to the financial system in opaque ways that no one could guess the radiating consequences of its failure — the financial consequences or, which sometimes is much the same thing, psychological.

But what is now the principle by which other distressed firms will elicit Fed interventions in future uncertainties? By what criteria does Washington henceforth determine whether a large entity is “too connected to fail”?

The Fed has no mandate to be the dealmaker for Wall Street socialism. The Fed’s mission is to preserve the currency as a store of value by preventing inflation. Its duty is not to avoid a recession at all costs; the way to get a big recession is to engage in frenzied improvisations because a small recession, aka a correction, is deemed intolerable. The Fed should not try to produce this or that rate of economic growth or unemployment.

After the tech bubble burst in 2000, the Fed opened the money spigot to lower interest rates and keep the economy humming. And since the bursting of the housing bubble, which was partly caused by that opened spigot, the Fed has again lowered interest rates, which for now are negative — lower than the inflation rate, which the open spigot will aggravate.

A surge of inflation might mean the end of the world as we have known it. Twenty-six percent of the $9.4 trillion of U.S. debt is held by foreigners. Suppose they construe Fed policy as serving an unspoken (and unspeakable) U.S. interest in increasing inflation, which would amount to the slow devaluation — partial repudiation — of the nation’s debts. If foreign holders of U.S. Treasury notes start to sell them, interest rates will have to spike to attract the foreign money that enables Americans to consume more than they produce.

Having maxed out many of their 1.4 billion credit cards, between 2001 and 2006 Americans tapped $1.2 trillion of their housing equity. Business Week reports that the middle-class debt-to-income ratio is now 141 percent, double that of 1983. Because anxiety is epidemic, bipartisanship has reared its supposedly pretty head.

Republicans and Democrats promise cooperation, compromise and general niceness using other people’s money. If Congress cannot suppress its itch to “do something” while markets are correcting the prices of housing and money, Congress could pass a law saying: No company benefiting from a substantial federal subvention (which would now include Morgan) may pay any executive more than the highest pay of a federal civil servant ($124,010). That would dampen Wall Street’s enthusiasm for measures that socialize losses while keeping profits private.

Too little too late.
I thought the figure was higher than twenty-six percent. The People’s Bank of China alone holds over $1.7 trillion, although a large and growing fraction of that is actually euros (I’d guess that about 80 percent of China’s stash — $$1.35trn or so — is in dollars.) Dubai’s aggregate holdings are also enormous, over $900bn. Japan holds over $900 billion. Russia holds over $500bn, although again a lot of that is euro-denominated. Vietnam holds $50bn. Taiwan holds, I think, $450bn. South Korea’s is about $250bn, going from a spotty memory. India, Germany and Brazil are surging.
There are other exporters like Singapore and HK batting above a quarter trillion in forex reserves, but their assets are significantly more diversified.
All in all, 26 percent of $9.4trn (about $2.3trn) sounds way too low.

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Looks like . . .

Debkafile was right, this time.

A week ago:

Iran’s position as the greatest threat to Iraq was highlighted by Iraq commander Gen. David Petraeus and Ambassador Ryan Crocker in their testimony to Congress last week – to the point that al Qaeda scarcely rated a mention.

President George W. Bush commented on April 11 that if Iran continues to help militias in Iraq “then we’ll deal with them.” But he also reaffirmed his disinclination for war and preference for diplomatic solutions. “You can’t solve these problems unilaterally. You’re going to need a multilateral forum,” he said.

This testimony and the president’s remarks did not set to rest the Washington cliffhanger over whether the president will opt for military action against Iran after all, before he leaves the White House, or stick to quiet diplomacy and relegate the Iran nuclear headache to his successor.

Bush’s immediate reaction confirmed the latter view: Without prior notice, he sent Petraeus and Crocker to Riyadh. Last week, there was talk of a limited US military action against the Iranian command centers directing, training and army Iraq’s militias. Now, the commander-in-chief was instructing the top Americans in Iraq to persuade the Saudis to blaze the way for Arab rulers to throw their support behind the Maliki government in Baghdad. The object of this exercise was to offset rather than challenge Iranian influence in Baghdad.

A diplomatic, multilateral course appeared to have been set in motion for dealing with Iranian troublemaking in Iraq – if not its nuclear defiance. …

Today, from the BBC:

… Ms Rice, in the Middle East for conferences with Gulf states, has been calling on Iraq’s neighbours to show more diplomatic support for the government of Prime Minister Nouri Maliki.

During her journey to Baghdad, Ms Rice praised Mr Maliki’s security efforts.

“The neighbours could do more to live up to their obligations because I do believe the Iraqis are beginning to live up to theirs,” she told reporters travelling with her.

She said she saw a “coalescing of a centre in Iraqi politics” and Sunnis, Shias and Kurds had been working together better than ever before. …

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How many times do I have to say ‘Game over’?




Clinton friend Reich backs Obama...

Boren, Nunn Endorse...

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