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Archive for the ‘volatility’ Category

It has been abundantly obvious from day one that Ben Bernanke has no understanding of “liquidity” — whatsoever.

Only 2 months (?) after Bernanke helicoptered $122 billion to AIG, AIG has come cap in hand to Uncle Sam with a down face and a confession: “The money’s all gone.” AIG supposedly wants $200 billion in new money.

AIG in talks with Fed over new bail-out

By Francesco Guerrera in New York

Published: November 8 2008 02:00 | Last updated: November 8 2008 02:00

AIG is asking the US government for a new bail-out less than two months after the Federal Reserve came to the rescue of the stricken insurer with an $85bn loan, according to people close to the situation.

AIG’s executives were last night locked in negotiations with the authorities over a plan that could involve a debt-for-equity swap and the government’s purchase of troubled mortgage-backed securities from the insurer.

People close to the talks said the discussions were on-going and might still collapse, but added that AIG was pressing for a decision before it reports third-quarter results on Monday.

AIG’s board is due to meet on Sunday to approve the results and discuss any new government plan, they added.

The moves come amid growing fears AIG might soon use up the $85bn cash infusion it received from the Fed in September, as well as an additional $37.5bn loan aimed at stemming a cash drain from the insurer’s securities lending unit.

AIG has drawn down more than $81bn of the combined $122.5bn facility. The company’s efforts to begin repaying it before the 2010 deadline have been hampered by its difficulties in selling assets amid the global financial turmoil.

AIG executives have complained to government officials that the interest rate on the initial loan – 8.5 per cent over the London Interbank Borrowing Rate – is crippling the company.

They compared the loan’s terms with the 5 per cent interest rate paid by the banks that recently sold preferred shares to the government.

One of AIG’s proposals to the Fed is to swap the loan, which gave the authorities an 80 per cent stake in the company, for preferred shares or a mixture of debt and equity.

Such a structure would reduce the interest rate to be paid by AIG and possibly the overall amount it has to repay. An extension in the term of the loan from the current two years to five years is also possible, according to people close to the situation.

The renegotiation of the loan could be accompanied by the government’s purchase of billions of dollars in mortgage-backed securities whose steep fall in value has been draining AIG cash reserves.

AIG is also proposing the government buy the bonds underlying its troubled portfolio of credit default swaps in exchange for the roughly $30bn in collateral the company holds against the assets.

Losses on the mortgage-backed assets, which were acquired by AIG with the proceeds of its securities lending programme, and the CDSs caused the company’s collapse.

Since the government rescue, they have continued to haunt AIG, which is required to put up extra capital every time the value of these assets falls. AIG and the Fed declined to comment.

Red staters get a lot of sh*t from their coastal cousins for being stupid. I will say one thing in red staters’ defense, though: it truly takes a blue coast, blue-blood stupidity to concoct such dangerous national policy as Bernanke’s.

It’s the kind of stupidity that only an Ivy League education can buy.

What is Bernanke going to do when he issues $2 trillion in Treasuries next year, and nobody buys?

All the people who thought they got a great deal when Pepsi priced its last bond at 7.5% are going to feel pretty damn stupid 12 months from now. Either that, or AAA corporates will have lower yields than Treasuries.

At the primary dealer desks, there is no net Asian sovereign demand for US sovereigns anymore.

Right now, Uncle Sam is printing the money and planning to float Treasuries “soon.” I am not exaggerating. It is the dirty secret that every FX macro desk at every major institution knows: the Treasury is printing now and issuing later.

In the ivory towers at Treasury and the Fed, “printed” money will be converted to Treasuries soon, because the Fed and Treasury (okay, just the Fed) think that there is an “irrational” “liquidity crisis”, which will abate any day now.

It won’t abate. It will get worse: all bond yields are based on Treasury yields. Treasury yields are definitely going up in the next year. All other yields (corporates … munis … ) will go up too.

That will be the real “credit crisis.” We are just mostly through the second act.

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Criminal

The most criminally ingenious short squeeze in history, engineered by those cunning Germans at Porsche.

Fortunate for them that they’re a “car company.” If a hedge fund had tried to pull that in Germany, the managers, the PMs, the traders, the analysts, the back office IT, and everybody else in the same building would have already been packed off to the gas chambers by now.

Since hedge funds are “bad,” and Hank Paulson is “out to kill the bad HFs and regulate the rest,” David Einhorn can be allowed to squirm in his final moments, instead, as he chokes on a large short position.

All the prime broker intermediaries (GS, MS, Soc Gen, etc) will be repaid the difference in money printed at Treasury, so at the end of the day, what do they care, whether they were caught on the wrong side or not?

GS told us to post 500 percent margin today to keep our VW short position.

(We posted it.)

It was a small position, luckily.

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via

May 30 (Bloomberg) — Iceland’s lawmakers passed a bill allowing the central bank to sell as much as 500 billion kronur ($6.76 billion) of foreign-currency bonds, equivalent to more than a third of the country’s gross domestic product.

The bill was passed late yesterday, Thorsteinn Thorgeirsson, chief economist at the Finance Ministry in Reykjavik, said in a telephone interview. The move would allow the central bank to more than triple foreign reserves.

The bank needs to restore confidence in an economy whose currency slumped 20 percent against the euro this year on concern commercial banks may have expanded abroad too fast. The assets of Iceland’s three biggest banks were nine times the size of the economy last year. Kaupthing Bank hf, the biggest of the three, had 87 percent of its assets denominated in foreign currencies.

“This definitely helps to boost confidence in the economy,” said Bjarke Roed-Frederiksen, an economist at Nordea Bank AB in Copenhagen, the biggest Nordic lender. “But it’ll be an expensive loan, if they decide to act on it.”

The krona gained for the first day in four, rising 0.3 percent to trade at 115.4969 against the euro as of 12:16 p.m. in Reykjavik.

“The central bank will probably take advantage of the bill,” said Ingolfur Bender, head of economic research at Glitnir Bank hf in Reykjavik. “That’s what the government wants them to do and that’s what they will do.”

An official at the central bank, or Sedlabanki, declined to comment.

Currency Slump

The krona has tumbled this year on concern the global credit crunch may force some of the island’s banks, who rely on money- market funding to run their operations, to turn to the central bank for aid. Interest rates at a record high have failed to reverse the slump in the currency, which pushed the inflation rate to an 18-year high of 12.3 percent this month.

The central bank on May 22 kept the benchmark rate unchanged at a record 15.5 percent, indicating policy makers may prefer to boost foreign reserves to support the currency rather than raise rates further.

“I know the central bank is working quite hard on it right now; they’re on a roadshow talking to possible investors in London today and yesterday,” Bender said. “I definitely expect them to announce something within the next couple of weeks.”

The bank on May 16 entered an agreement with its Norwegian, Swedish and Danish counterparts to swap kronur for as much as 1.5 billion euros, allowing it to almost double its foreign reserves.

Reserves

“It’s clear that this move, and the swap agreement, are more significant at the moment than changes in the interest rate in supporting the krona,” Roed-Frederiksen said.

Currency reserves stood at 206.8 billion kronur at the end of April, the bank said on May 8. That compares with combined assets of 11.4 trillion kronur at Kaupthing, Landsbanki Islands hf and Glitnir Bank hf at the end of last year. Including the value of the swap agreement entered earlier this month and the debt sale approved today, reserves could rise as high as 880 billion kronur at today’s exchange rates.

Moody’s Investors Service cut Iceland’s credit rating on May 20 to Aa1 from Aaa citing concern that the government may have to cover liabilities at the nation’s banks.

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The credit crisis has separated true libertarians from phony libertarians, and separated true liberals from phony liberals.

The phony liberals have inadvertently mocked themselves throughout the entire credit crisis, manning the barricades to defend the greatest act of socialism for the rich in US history. Ditto for supposed “libertarians,” eg Robert Rubin, Bruce Kovner, and the vast majority of institutional Wall Street which found itself drowning in its own quagmire, and changed their tune faster than you can say “WTF.”

Anyway, here’s the link.

The editorial in question is by Robert J. Shiller, who is a professor of economics and finance and famous analyst of speculative bubbles. A specialist in behavioral economics, in the application of psychology to understanding financial markets. A co-founder of Case Shiller Weiss, that house price index we talk about a lot. His editorial, “The Scars of Losing a Home,” speaks not of lofty academic economic concepts but of human sympathy, of things that are “really important.” With references from famous academic psychologists. I haven’t taken this kind of a tiger by the tail since I went after Austan Goolsbee last year.

Yes, it was only a year ago that the distinguished Dr. Goolsbee wrote this on the same editorial page:

And do not forget that the vast majority of even subprime borrowers have been making their payments. Indeed, fewer than 15 percent of borrowers in this most risky group have even been delinquent on a payment, much less defaulted.

When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.

For be it ever so humble, there really is no place like home, even if it does come with a balloon payment mortgage.

I actually think Goolsbee’s piece was the high-water-mark of the “subprime helps the poor” talking point. You certainly don’t hear much about that these days. Less than two months after Dr. Goolsbee’s earnest op-ed, we got an interview in the very same NYT with one Bill Dallas, CEO of the famously defunct Ownit Mortgage, effusively testifying to his own burning desire to help out the unfortunate in a way that finally put paid to the respectability of that line (“‘I am passionate about the normal person owning a home,’ said Mr. Dallas, who is also chairman of the Fox Sports Grill restaurant chain and manages the business interests of the Olsen twins. ‘I think owning a home solves all their problems.'”) Plus by now we’ve got some numbers on the 2007 mortgage vintage, the one that Dr. Goolsbee was afraid wasn’t going to ever materialize if we tightened up lending standards too much. A year ago we were looking at a 13% subprime ARM delinquency rate. Per Moody’s (no link) the Q4 07 subprime ARM delinquencies were running 20.02%. And that is not, you know, “just” another 7%. By now, those delinquent borrowers in Goolsbee’s 13% have probably mostly been foreclosed upon and are off the books. The 20% or so who are now delinquent were either part of the 87% that Goolsbee thought were “successful homeowners” last year, or else they’re those lucky duckies who bought homes after the publication date of Goolsbee’s plea that we not tighten standards too much.

Of course Shiller wasn’t exactly spending his time a year ago defending the subprime mortgage industry on the grounds that it put poor and minority people into ever-so-humble homes with balloons attached. I seem to recall him mostly arguing that homebuyers were engaged in a speculative mania. In a June 2007 interview:

Well, human thinking is built around stories, and the story that has sustained the housing boom is that homes are like stocks. Buy one anywhere and it’ll go up. It’s the easiest way to get rich.

At the time, that kind of statement struck some of us, at least, as not possibly the entire story either, but in any event a useful corrective to the saccharine silliness of the “Ownership Society” and Bill Dallas solving everyone’s problems by letting them put Roots in a Community (for only five points in YSP).

So I hope I can be just a tad startled by the New Shiller:

Homeownership is thus an extension of self; if one owns a part of a country, one tends to feel at one with that country. Policy makers around the world have long known that, and hence have supported the growth of homeownership.

MAYBE that’s why President Bush’s “Ownership Society” theme had such resonance in his 2004 re-election campaign. People instinctively understand that homeownership conveys good feelings about belonging in our society, and that such feelings matter enormously, not only to our economic success but also to the pleasure we can take in it.

So it’s no longer irrational exuberance or plain old speculating; it’s now an instinctive affirmation of some eternal verity of the human psyche? The ultimate patriotism: the definition of self so tied up in ownership of a slice of the motherland that to rent becomes not only psychologically dangerous–these people without selves can’t be up to anything good–but politically dangerous as well? Is it possible that Shiller can mean what he is writing here?

If you just scanned the first few paragraphs of Shiller’s op-ed you might come away with the impression of a sincere but somewhat hackneyed plea for us all to have a bit of sympathy for the foreclosed among us, foreclosure not in anyone’s experience being a walk in the park. Fair enough. It being Sunday in America, I suspect millions of us are being treated to exhortations to take a kinder view of the unfortunate than we often do; we need those exhortations; we are often lacking in sympathy. Hands up all who disagree.

But you keep reading and you find Shiller trying to explain the “trauma” of foreclosure. And that’s where this really gets weird:

Now, let’s take the other perspective — and examine some arguments against the stern view. They have to do with the psychological effects of strict enforcement of a mortgage contract, and economists and people in business may need to be reminded of them. After all, too much attention to abstract economic statistics just might make us overlook what is really important.

First, we have to consider that we cannot squarely place the blame for the current mortgage mess on the homeowner. It seems to be shared among mortgage brokers, mortgage originators, appraisers, regulatory agencies, securities ratings agencies, the chairman of the Federal Reserve and the president of the United States (who did not issue any warnings, but instead has consistently extolled the virtues of homeownership).

Because homeowners facing foreclosure must bear the brunt of the pain, they naturally feel indignation when all of these other parties continue to lead comfortable, even affluent lives. Trying to enforce mortgage contracts may thus have a perverse effect: instead of teaching homeowners that they should respect the contracts they sign, it may incline them to take a cynical view of the whole mess.

We need to modify mortgage contracts to keep homeowners from becoming cynical? That’s somehow more respectable an idea than the one saying we should throw them out on the street to “teach them a lesson”? If Shiller is serious that all those other parties are “to blame,” then why isn’t the obvious solution to throw them out on the street? There seems to be an assumption here that nothing can be done to punish those who are “really” to blame, so we’re left managing the psyches of those who can be punished. And that’s not cynical?

This the point at which Shiller dredges up the most stunningly unfortunate quote from William effing James (1890) to define the “fundamental” psychology of homeownership:

Homeownership is fundamental part of a sense of belonging to a country. The psychologist William James wrote in 1890 that “a man’s Self is the sum total of all that he CAN call his, not only his body and his psychic powers, but his clothes and his house, his wife and children, his ancestors and friends, his reputation and works, his lands and horses, and yacht and bank account.”

Now, that’s breath-taking. Horses. Yachts. His wife and his children. Ancestors. The whole late-Victorian wealthy male WASP defining the “Self” (with a capital!) as the wealthy male WASP surveying his extensive possessions, an oddly-assorted list that ranks the family and friends somewhere after the clothes and the house. (Yes, James did that on purpose.) The kind of sentiment that was a caricature of the late-Victorian male even in 1890. And Shiller drags this out in aid of generating sympathy for homeowners? Really? You couldn’t find some psychological insight about the emotional relationship of people to their homes that doesn’t speak the language of the male ego surveying his domain, sizing himself up against all the other males to see where he ranks?

(James on the psychological effect of losing one’s property: ” . . . although it is true that a part of our depression at the loss of possessions is due to our feeling that we must now go without certain goods that we expected the possessions to bring in their train, yet in every case there remains, over and above this, a sense of the shrinkage of our personality, a partial conversion of ourselves to nothingness, which is a psychological phenomenon by itself. We are all at once assimilated to the tramps and poor devils whom we so despise, and at the same time removed farther than ever away from the happy sons of earth who lord it over land and sea and men in the full-blown lustihood that wealth and power can give, and before whom, stiffen ourselves as we will by appealing to anti-snobbish first principles, we cannot escape an emotion, open or sneaking, of respect and dread.”)

I’m actually, you know, in favor of some sympathy for homeowners, but one thing that does get in the way of that for a lot of us is, well, the rather disgusting shallowness that a lot of them displayed on the way up. There is this whole part of our culture that has sprung into being since 1890 that takes a rather severe view of conspicuous consumption, unbridled materialism, and totally self-defeating use of debt to buy McMansions, if not yachts. We were treated to a fair amount of that kind of thing in the last few years. In fact, we had Dr. Shiller explaining to us last year that a lot of folks just wanted to get rich, quick, in real estate.

It is undeniably true, I assert, that not everyone was a speculatin’ spend-thrift maxing out the HELOCs to buy more toys, and that part of our problem today with public opinion is that we extend our (quite proper) disgust for these latter-day Yuppies to the entire class “homeowner.” But it is surely an odd way to engage our sympathies for the non-speculator class to speak of it in Jamesian terms as the man whose self is defined by his Stuff, and whose psychological pain is felt most acutely when he recognizes that he is now just like the riff-raff.

It’s worse than odd–it’s downright reactionary–to then go on to that evocation of homeownership as good citizenship and good citizenship as “feel[ing] at one with [the] country.” This puts a rather sinister light on Shiller’s earlier insistence that we need to make sure people don’t get too “cynical.”

I see that Yves at naked capitalism was just as disgusted by Shiller as I am:

Now admittedly, this is not a validated instrument, but a widely used stress scoring test puts loss of spouse as 100 and divorce at 73. Foreclosure is 30, below sex difficulties (39), pregnancy (40), or personal injury (53). Change in residence is 20.

Note that if we as a society were worried about psychological damage, being fired (47) is far worse than foreclosure (30), and if it leads to a change in financial status (38) and/or change to a different line of work (36) those are separate, additive stress factors. Yet policy-makers have no qualms about advocating more open trade even though it produces industry restructurings that produce unemployment that does more psychological damage than foreclosures. As a society, we’ll pursue efficiency that first cost blue collar jobs, and now that we’ve gotten inured to that, white collar ones as well (although Alan Blinder draws the line there).

But efficiency arguments don’t apply to housing since we are sentimental about it. And it’s that sentimentality that bears examination, since it engendered policies that helped produce this mess.

I would only add that we are about five years too far into a war that has not made a majority of us “feel at one with that country.” I think of another really important policy change we could be pursuing right now to shore up everyone’s psychological estrangement from their patriotic self-satisfaction. But “efficiency arguments” don’t apply to wars, either.

My fellow bleeding heart liberals like Goolsbee found themselves defending the subprime industry in the name of increasing minority homeownership. Now we’re treated to the spectacle of Shiller arguing for homeowner bailout legislation in the same terms that Bush used to defend the “Ownership Society.” Housing policy, I gather, makes strange bedfellows. It certainly makes strange editorials.

Shiller’s unwitting self-parody embodies the principle at the heart of the TAF and every other tentacle of the Wall Street bailout. Far more than “economist statistics which can cause us to lose sight of what’s really important,” what’s REALLY important is protection of those Selves which include “lands and horses, and yacht and bank account.”

You can *not* make this stuff up.

Pardon my French, but our economy is being run by f*cking idiots.

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I’m not sure Felix Salmon is as dumb as he thinks.

May 6 2008 6:49PM EDT

Fannie Mae’s Weird Rally

I’ve seen a lot of financial institutions see their stock soar on the day they release atrocious quarterly results, and in fact I had them in mind this morning when I kicked off a blog entry with the words “Fannie Mae’s stock is certain to tank today”.

Ahem. FNM closed up 8.9% at $30.81 per share, for no obvious reason. Which is not to say that journalists didn’t try to find one: both Reuters and Fortune seem to have decided that it was the conference call which did it.

Really? This conference call? I skimmed the whole thing, and couldn’t see anything particularly upbeat in there, even after realizing that when the Seeking Alpha transcribers had CEO Daniel Mudd saying that “we will feed stock this book business that we are putting on for many years to come,” in fact he was saying “feast on this book of business”.

Of course, the reason that Fannie Mae is doing such great business is that at the moment it’s pretty much the only game in town. As house prices continue to fall, Fannie Mae continues to lose money – and if house prices ever recover, then it will have competitors again. Yes, the mortgages it’s buying now might well be profitable long into the future, but I don’t see any of Fannie Mae’s management making the case that the profits from its present business will ultimately exceed the losses being suffered in the markets.

Even Mudd himself seemed pretty downbeat at times. “The summary is, we still believe that ’08 and ’09 will be tough years as home prices return to the trend line,” he said. “No news there, but an updated forecast there.”

And on any call where an executive starts talking about “creating a significant long-term shareholder value as we ramp everything up to serve our mission,” you have to wonder if there’s really any substantive good news. There’s certainly bad news:

Florida is very over built. It will take a long time to correct. Values continue to fall and delinquencies continue to increase hitting 232 basis points in March up from about hardly 60 basis points in December and up from 49 basis point a year ago.

Still, all that said, I was very wrong: I said the stock was going down, and it went up. Yet more reason, if any is needed, never to listen to me on the subject of stock prices.

Any theories on this, other than the default conspiracy theory (that the Fed is propping it up)?

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The Times of London is known to be the sieve of choice for neoconservative news leaks. Given all the concentration of firepower in the Persian Gulf recently, as well as the crackdowns on al-Sadr, and the fact that Bush wants to scare Iran off to some extent before he leaves office, some kind of surgical airstrike on Iran would make sense.

From
May 4, 2008

United States is drawing up plans to strike on Iranian insurgency camp

President George W Bush is known to be determined that he should not hand over what he sees as “the Iran problem” to his successor. A limited attack on a training camp may give an impression of tough action, while at the same time being something that both Gates and the US commander in Iraq, General David Petraeus, could accept.

The US military is drawing up plans for a “surgical strike” against an insurgent training camp inside Iran if Republican Guards continue with attempts to destabilise Iraq, western intelligence sources said last week. One source said the Americans were growing increasingly angry at the involvement of the Guards’ special-operations Quds force inside Iraq, training Shi’ite militias and smuggling weapons into the country.

Despite a belligerent stance by Vice-President Dick Cheney, the administration has put plans for an attack on Iran’s nuclear facilities on the back burner since Robert Gates replaced Donald Rumsfeld as defence secretary in 2006, the sources said.

However, US commanders are increasingly concerned by Iranian interference in Iraq and are determined that recent successes by joint Iraqi and US forces in the southern port city of Basra should not be reversed by the Quds Force.

“If the situation in Basra goes back to what it was like before, America is likely to blame Iran and carry out a surgical strike on a militant training camp across the border in Khuzestan,” said one source, referring to a frontier province.

They acknowledged Iran was unlikely to cease involvement in Iraq and that, however limited a US attack might be, the fighting could escalate.

Although American defence chiefs are firmly opposed to any attack on Iranian nuclear facilities, they believe a raid on one of the camps training Shi’ite militiamen would deliver a powerful message to Tehran.

British officials believe the US military tends to overestimate the effect of the Iranian involvement in Iraq.

But they say there is little doubt that the Revolutionary Guard exercises significant influence over splinter groups of the radical cleric Moqtada al-Sadr’s Mahdi Army, who were the main targets of recent operations in Basra.

The CBS television network reported last week that plans were being drawn up for an attack on Iran, citing an officer who blamed the “increasingly hostile role” Iran was playing in Iraq.

The American news reports were unclear about the precise target of such an action and referred to Iran’s nuclear facilities as the likely objective.

According to the intelligence sources there will not be an attack on Iran’s nuclear capacity. “The Pentagon is not keen on that at all. If an attack happens it will be on a training camp to send a clear message to Iran not to interfere.”

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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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via

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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via

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

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Libor

… via Bloomberg:

Banks That Misquote Money-Market Rates to Be Banned (Update1)

By Ben Livesey

April 16 (Bloomberg) — The British Bankers’ Association said it will ban any member deliberately misquoting lending rates at daily money-market operations amid concern that some contributors are providing misleading quotes.

The global credit squeeze has raised concern lenders have been manipulating the so-called fixing process to prevent their borrowing costs from escalating, the Bank for International Settlements said in March. Participants have complained to the BBA, the Wall Street Journal said today, citing a person familiar with the matter. The BBA holds its annual board meeting today.

“It’s very important to us that we preserve the integrity of the figures,” said Lesley McLeod, a BBA spokeswoman in London. “It’s something we have been looking at. If we find that people have been putting in figures which don’t reflect accurately their financial figures, the ultimate sanction is to throw them out of the pond.”

The BBA asks 16 member banks every morning to say how much it would cost them to borrow from each other for 15 different periods in currencies including dollars, euros and pounds. It then calculates averages, known as the London interbank offered rates, or Libor, which are used as benchmarks for companies, lenders and investment banks around the world.

The BBA represents lenders such as HSBC Holdings Plc, Europe’s largest bank by market value, Royal Bank of Scotland Group Plc and Barclays Plc.

`Credibility Weakened’

“Libor will survive, although its credibility is severely weakened,” Paul Calello, Credit Suisse Group’s head of investment banking, said in a speech at the International Swaps and Derivatives Association annual conference in Vienna today. “Continuing to base an enormous amount of derivative contracts on an index with credibility problems is a serious issue we must address.”

Money-market rates began surging last year as the fallout from the U.S. housing slump left banks wary of lending to all but the safest borrowers. The three-month dollar rate was at 2.73 percent today, the highest since April 3, according to BBA data. That’s 48 basis points more than the Federal Reserve’s target rate for overnight lending between banks, compared with an average of 11 basis points in the first half of last year.

Liquidity concerns, the cost of wholesale market borrowing and Libor rates will be discussed at today’s annual board meeting, McLeod said. The BBA holds a review of its daily money market operations every year, concluding in June.

`Calls Coming Down’

Eurodollar futures contracts, which are based on traders’ expectations for three-month dollar Libor, rose today amid concern that rates may increase at tomorrow’s fixings as banks exercise more care when giving quotes, said Ian Lyngen, an interest-rate strategist at RBS Greenwich Capital in Greenwich, Connecticut. The implied yield on the contract expiring in June climbed 13 basis points to 2.69 percent.

“The risk is that there are calls coming down from the highest level of the 16 different banks associated with the Libor process saying this better not be us and if it is, it better not be us tomorrow,” said Lyngen. “Some people have estimated that there is up to 30 basis points of inaccuracy in Libor rates. We might find out tomorrow what it really was.”

Money markets would benefit from increased transparency and “trimming,” or the discarding of extreme rates quoted by participating banks, the Basel, Switzerland-based BIS said in a study released in March with its quarterly report. The system still worked as it was meant to do when rates started rising last year, it said.

“The design worked as intended to moderate the influence of strategic behavior and changing perceptions of credit quality,” researchers Jacob Gyntelberg and Philip Wooldridge wrote. The divergence of rates quoted for different currencies “reflected dislocation in the underlying interbank markets more than shortcomings in the design of the fixing mechanisms.”

This will be fixed soon one way or another. Any bank that gets kicked out of the BBA for fudging its Libor rates will very quickly become the next Bear Stearns.

And the USD will be further besmirched.

Note that gold has rallied >2% in the last two days. We’re headed for $1150.

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Today marks the first mass explosion in an Iranian metropolitan area in over a year:

At least eight people have been killed and more than 50 wounded in an explosion in the southern Iranian city of Shiraz, Iranian media reports say.

The blast occurred in a mosque in the city either during or after evening prayers, the reports said.

Iran’s Fars news agency was quoted as saying that the explosion was caused by a bomb. It said at least three of the wounded were seriously hurt.

There was no immediate claim of responsibility for the blast

Fars said the death toll was expected to climb.

Where have we seen this before?

(AP) Police and insurgents clashed after a bombing in southeastern Iran late Friday near the site where an explosion killed 11 members of the elite Revolutionary Guards this week, Iranian news agencies reported. “Minutes ago, the sound of a bomb explosion was heard in one of Zahedan’s streets,” the state-run news agency IRNA said, without giving more details. The semiofficial Fars news agency said clashes broke out between Iranian police and armed insurgents after the explosion.

Fars quoted the governor of Zahedan, Hasan Ali Nouri, as saying the blast was a “sound bomb explosion”_ a device that creates a loud boom but that usually does not cause casualties.

Nouri said there was gunfire heard but that it was late at night and that police had cordoned off the area.

On Wednesday, a car bomb blew up a bus carrying Revolutionary Guards, killing 11, in Zahedan, capital of Sistan-Baluchestan province, which sits on the border with Pakistan.

A Sunni Muslim militant group called Jundallah, or God’s Brigade, which has been blamed for past attacks on Iranian troops, has claimed responsibility for the Wednesday bombing.

Iran has accused the United States of backing militants to destabilize the country. Tensions between Tehran and Washington are growing over allegations of Iranian involvement in attacks on U.S. troops in Iraq, and over Iran’s nuclear activities.

Fars said the Friday explosion was at a school in Zahedan.

“The insurgents began shooting at people after the explosion. Clashes are continuing between police and the armed insurgents. Police have cordoned off the area,” the Fars agency said.

IRNA quoted an unnamed “responsible official” late Friday as saying that one of those arrested on charges of involvement in Wednesday’s bombing, identified as Nasrollah Shanbe Zehi, has confessed that the attacks were part of alleged U.S. plans to provoke ethnic and religious violence in Iran.

The confessions by Zehi helped police detain an unspecified number of Jundallah members and confiscate weapons and documents from the group in a raid Thursday in Zahedan, IRNA also said.

A majority of Iran’s population are Shiite Muslims but minority Sunnis live in southeastern Iran.

Friday’s blast came just hours after the funeral of the 11 Revolutionary Guardsmen in the capital.

Iran’s state-run television showed footage of Zahedan residents marching in the streets with the coffins of the killed Guardsmen. The crowd chanted, “death to hypocrites,” in a reference to the insurgents.

The blasts are a sharp flare-up of violence, but the remote southeast corner of Iran, near Pakistan and Afghanistan, has long been plagued by lawlessness. The area is a key crossing point for opium from Afghanistan and often sees clashes between police and drug gangs.

Jundallah, which is believed by some to have links to al-Qaida, has waged a low-level insurgency in the area and is led by Abdulmalak Rigi, a member of Iran’s ethnic Baluchi minority, a community that is Sunni Muslim and also can be found in Pakistan and Afghanistan. Rigi has said his group is fighting for the rights of impoverished Sunnis under Iran’s Shiite government.

Fars said that Rigi appeared on a station run by an opposition group known as the People’s Mujahedeen, which is based in Iraq, minutes before Friday’s explosion. The People’s Mujahedeen has long sought to overthrow the Iranian government by force.

Iranian officials have often raised concerns that Washington could incite members of Iran’s many ethnic and religious minorities against the Shiite-led government in Tehran.

Iran has faced several ethnic and religious insurgencies that have carried out occasionally deadly attacks in recent years _ though none have amounted to a serious threat to the government.

In December, Jundallah claimed responsibility for kidnapping seven Iranian soldiers in the Zahedan region, threatening to kll them unless group members were freed from Iranian prisons. The seven were released a month later, apparently after negotiations through tribal mediators.

In March 2006, gunmen dressed as security forces killed 21 people on a highway outside Zahedan in an attack authorities blamed on “rebels,” though Jundallah was never specifically named.

=====================

US funds terror groups to sow chaos in Iran

By William Lowther in Washington DC and Colin Freeman, Sunday Telegraph

Last Updated: 12:30am GMT 25/02/2007

America is secretly funding militant ethnic separatist groups in Iran in an attempt to pile pressure on the Islamic regime to give up its nuclear programme.

In a move that reflects Washington’s growing concern with the failure of diplomatic initiatives, CIA officials are understood to be helping opposition militias among the numerous ethnic minority groups clustered in Iran’s border regions.

The operations are controversial because they involve dealing with movements that resort to terrorist methods in pursuit of their grievances against the Iranian regime.

In the past year there has been a wave of unrest in ethnic minority border areas of Iran, with bombing and assassination campaigns against soldiers and government officials.

Such incidents have been carried out by the Kurds in the west, the Azeris in the north-west, the Ahwazi Arabs in the south-west, and the Baluchis in the south-east. Non-Persians make up nearly 40 per cent of Iran’s 69 million population, with around 16 million Azeris, seven million Kurds, five million Ahwazis and one million Baluchis. Most Baluchis live over the border in Pakistan. …

What else was going on in Iraq/Iran in February of 2007?

Iran rejects claims of equipping Iraqi Shiite extremists

Updated 2/12/2007 10:54 AM ET

BAGHDAD — Iranian officials today rejected claims they were arming Shiite extremists in Iraq with armor-piercing roadside bombs, a day after the U.S. military said those bombs have killed 170 American and coalition troops in Iraq.

LATEST: Dozens killed in Baghdad blasts on anniversary of Shiite mosque attack

U.S. military officials, who declined requests to be identified, said Sunday that shipments of weapons and ammunition to Iraq’s Shiite militias were being directed at the highest levels of the Iranian government.

Iran on Monday rejected the accusations. “Such accusations cannot be relied upon or be presented as evidence. The United States has a long history in fabricating evidence. Such charges are unacceptable,” Foreign Ministry spokesman Mohammad Ali Hosseini told reporters.

In a briefing, U.S. officials showed reporters part of a device they described as a sophisticated roadside bomb, along with mortar shells and rocket-propelled grenades they said were made in Iran. Later, one of the officials, an intelligence analyst, said it would be impossible to find a “smoking gun” conclusively proving Iranian government involvement.

FROM THE U.S. MILITARY: Pictures, descriptions of Iranian support to insurgents (PDF)

Sunday’s briefing by the three military officials was the most detailed attempt to show that Iran supports militants in Iraq. It followed similar remarks Friday by U.S. Defense Secretary Robert Gates.

Gates said serial numbers and markings found on explosives provide “pretty good” evidence that Iran is supplying either weapons or expertise to extremists in Iraq.

U.S. and coalition forces have not captured any Iranian agents in possession of the armor-piercing roadside bombs. The U.S. officials at the briefing said Iraqis are usually used to transport the explosives from Iran.

The Mahdi Army militia is among the Shiite extremist groups that have obtained the powerful bombs. The Mahdi Army is aligned with anti-American cleric Muqtada al-Sadr, whose political organization is part of Prime Minister Nouri al-Maliki’s government. …

February 2007 also marked the beginning of a secular shift upwards in oil prices, from a 2004-06 average of about $58/barrel, to a peak of $86 per barrel (using December 2007 dollars) by November of 2007, when the publication of the National Intelligence Estimate blunted what the oil market perceived was an inexorable march to US-Iranian war.

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Didn’t see this gem anywhere in US business media. What an Orwellian “surprise” that is.

The Greenspan Fed: a tragedy of errors

Mr Greenspan’s apologia pro vita sua in the Financial Times of Monday, April 7 2008 fails to convince.

  1. The Greenspan Fed (August 1987 – January 2006) did indeed contribute, through excessively lax monetary policy, to the US housing boom that has now turned to bust.
  2. The Greenspan-Bernanke put is real. It is an example of an inappropriate monetary policy response to a stock market decline.
  3. The Greenspan Fed focused erroneously on core inflation, rather than using all available brain cells to predict underlying headline inflation in the medium term.
  4. The Greenspan Fed failed to appreciate the downside of the rapid securitisation during the first half of this decade and acted exclusively as a cheerleader for its undoubted virtues.
  5. The Greenspan Fed displayed a naive faith in the self-regulating and self-policing properties of financial markets and private financial institutions.
  6. The Greenspan Fed, by enabling the rescue of Long Term Capital Management in 1998, acted as a moral hazard incubator.
  7. The failure of the Greenspan Fed to press, before or after LTCM, for a special insolvency resolution regime with prompt corrective action features for all highly leveraged private financial institutions that were likely to be deemed too big and too systemically important to fail, demonstrates either bad judgement or regulatory capture.
  8. During his years as Chairman of the Federal Reserve Board, Mr. Greenspan’s statements reflected a partial (in every sense of the world) understanding of how free competitive markets based on private ownership work. This partial understanding guided his actions as monetary policy maker and financial regulator. Mr Greenspan’s theories have been comprehensively refuted by the financial crises of 1997/98 and 2007/08.

Below, I shall elaborate on these eight bullet points, although some of them will be amalgamated and some will come up more than once.

1. The Greenspan Fed’s excessively accommodating monetary policy during 2003 – 2006

Mr Greenspan is correct that a major global decline in risk-free real interest rates was an important factor in the housing booms that occurred in a couple of dozen countries between, say, 2002 and the end of 2006. The Fed, indeed central banks in general, had little to do with this. The extremely high saving propensities of the rapidly growing economies in the Far East and of the Gulf states were a key contributor, as was the extreme conservatism, until recently, of the portfolio allocation policies of the current account surplus countries of the Far East and the Middle East.

But the fact that on top of these very low risk-free long-term real rates, credit spreads became extraordinary low, had something to do with the liquidity glut created by the Fed, the Bank of Japan and, to a slightly lesser extent, the ECB. The Fed kept the Federal Funds rate target too low for too long after 2003. Because of the unique role played by the US dollar in the global financial system, the US dollar liquidity shower not only soaked the US economy, but also many others. First those who kept a formal or informal peg vis-a-vis the US dollar. Then those whose monetary authorities, without pursuing a dollar peg, kept a wary eye on the exchange rate with dollar, and ultimately most central banks in the globally integrated financial system.

2. The Greenspan-Bernanke put: an example of cognitive state capture by vested interests

[…]

Nevertheless, looking at the available data as a historian, and constructing plausible counterfactuals as a laboratory economist, it seems pretty self-evident to me that the Fed under both Greenspan and Bernanke has responded more vigorously with rate cuts to sharp falls in stock prices than can be rationalised with the causal effects of stock prices on household spending and private investment or with the predictive content of unexpected changes in stock prices.

To me, the LTCM and January 2008 episodes suggest that the Fed has been co-opted by Wall Street – that the Fed has effectively internalised the objectives, concerns, world view and fears of the financial community. This socialisation into a partial and often highly distorted perception reality is unhealthy and dangerous.

It can be called cognitive state capture, because it is not achieved by special interests buying, blackmailing or bribing their way towards control of the legislature, the executive, the legislature or some important regulator, but through those in charge of the relevant state entity internalising, as if by osmosis, the objectives, interests and perception of reality of the vested interest.

3. The Greenspan’s Fed unfortunate focus on core inflation

… core inflation in the US has persistently under-predicted headline inflation and headline inflation has been above the Fed’s comfort zone for most of the past six years (see Buiter1, Buiter2 and Buiter3).

This is just technical incompetence compounded by institutional inertia and unwillingness to correct a mistaken intellectual framework, even when it obviously no longer makes sense to stick with it. Even now, the Fed has not been completely rid of this bug.

4. The Greenspan Fed’s failure to appreciate the downside of securitisation

[omitted for sake of brevity]

5. The Greenspan Fed as moral hazard incubator
In 1998, the Federal Reserve System played an important role in orchestrating the private sector bail-out of Long Term Capital Management (LTCM), a hedge fund brought down by hubris, incompetence and bad luck. Although no Fed money, and indeed no public money of any kind, was committed in the rescue, the Federal Reserve System, through the Federal Reserve Bank of New York and its President, William J. McDonough, played a key role in brokering the deal, by offering its good offices and using its not inconsiderable powers of persuasion to achieve agreement among its 14 major creditor banks (ironically, Bear Stearns refused to participate in the rescue). The reputation of the Fed therefore was put at risk.

The reason given by the Fed for its orchestration of this bailout was the fear that, in a final desperate attempt to forestall insolvency, a fire-sale by LTCM of its assets would cause a chain reaction. This rushed liquidation of LTCM’s securities to cover its maturing debt obligations would lead to a precipitous drop in the prices of similar securities, which would expose other companies, unable to meet margin calls, to liquidate their own assets. Such positive feedback could create a vicious cycle and a systemic crisis.

This is the same vicious cycle leading to systemic risk story that was trotted out by Timothy F. Geithner, the current President of the New York Fed, to rationalise the bail out of Bear Stearns.

Notable features of the LTCM bailout were (1) that the existing shareholders retained a 10 percent holding, valued at about $400million, and (2) that the existing management of LTCM would retain their jobs for the time being, and with it the opportunity to earn management fees. A rival (rejected) offer by a group consisting of Berkshire Hathaway, Goldman Sachs and American International Group, would have had the shareholders lose everything except for a $250 mln takeover payment and would have had the existing management fired.

One reason given for allowing the existing shareholders to retain a significant share and for keeping the existing managers on board was that only these existing shareholders-managers could comprehend, work out and unwind the immensely complex structures on LTCM’s balance sheet. These were the same people, including two academic finance wizards, Myron Scholes and Robert C. Merton, joint winners in 1997 of the Nobel Memorial Prize in Economics, whose ignorance and hubris got LTCM into trouble in the first place.

Any handful of ABD graduate students from a top business school or financial economics programme could have unravelled the mysteries of the LTCM balance sheet in a couple of afternoons. The bail-out of LTCM smacks of crony capitalism of the worst kind. The involvement of the Fed smacks of regulatory capture.

The nature of the bail-out of LTCM meant that there was never any serious effort subsequently to address the potential conflicts of interest arising from simultaneously financing hedge funds, investing in them, and making money executing trades for them, as many investment banks did with Long-Term Capital. Things were even worse because, apart from the inherent potential conflict of interest that is present whenever a party is both a shareholder in and a creditor to a business, the bailout created a serious corporate governance problem because executives of one of the financial institutions that funded the bailout had themselves invested $22 mln in LTCM on their personal accounts. Using shareholder resources for a bail-out of a company to which you have personal exposure is unethical, even where it is legal.

For the Fed to have been involved in this shoddy bailout was a major mistake that soiled its reputation. If the Fed becomes involved (as an ‘enabler’ and/or by putting its financial resources at risk) in the rescue of a highly leveraged private financial institution, be it a hedge fund, an investment bank or a commercial bank, that private institution should immediately be subject to a special resolution regime, including the appointment of a special public administrator. That is, what is needed is an arrangement for all highly leveraged private financial institutions ddeemed too big and too systemically important to fail, akin to the treatment of (insured) commercial bank insolvencies under the Federal Deposit Insurance Act.

Under the rules established by the FDIC Improvement Act of 1991, a legally closed bank’s charter is revoked and the bank is turned over to the FDIC which serves as receiver or conservator. Typically, the old top management are fired and shareholder control rights are terminated. The shareholders do, however, keep a claim on any residual value that remains after all creditors and depositors have been paid off. [2]

From a longer-run perspective, the LTCM bail-out can be seen as a key enabler of the 2008 bailout of the investment bank Bear Stearns, another type of highly leveraged financial institution deemed too big to fail by the Fed. In the case of Bear Stearns too, shareholders were left with something ‘up front’ (two dollars per share initially, subsequently revised to ten dollars per share) and the old management is still in situ. In addition, in the Bear Stearns case, Fed money is directly at risk – the Fed is funding the senior $29 bn of a $30 bn off-balance sheet facility created to warehouse Bear Stearns’ most toxic assets.

If the” too big and too systemically important to fail” argument for bailing out large deposit-taking commercial banks is now also applied to other highly leveraged private financial institutions, including but not limited to, investment banks and hedge funds, then a similar special resolution regime, including prompt corrective action provisions must be in place if rampant moral hazard is not to be encouraged. The Greenspan Fed failed to make the case for or press for such reforms, even after the LTCM debacle. They bear a heavy responsibility for the moral hazard created in 1998 and in 2008, and for the future financial crises that will be encouraged and exacerbated by these failures.

Conclusion

During his years as Chairman of the Federal Reserve Board, Alan Greenspan’s statements reflected a partial (in every sense of the world) understanding of how free competitive markets based on private ownership work. This partial understanding also guided his actions as monetary policy maker and financial regulator.

Mr Greenspan consistently saw but half the picture when it came to what makes competitive market capitalism work. He recognised the central roles of greed, self-interest and competition. He failed to appreciate the complementary roles of non-strategic/non-opportunistic forms of altruism, solidarity and cooperation. Both competition and cooperation must be monitored and regulated, lest they become predation and collusion respectively.

Chairman Greenspan emphasized self-regulation, spontaneous order and the disciplining effect of reputation. He failed to appreciate the essential role external or third-party (i.e. state) enforcement of laws, rules and regulations. He did not understand the weakness of reputational concerns as an enforcement or self-discipline mechanism ensuring good behaviour, when credible commitment is limited at best in a world with short horizons and easy exits.

He failed to appreciate the essential role external/third-party (i.e. state) enforcement of laws, rules and regulations, and the indispensability of collective action when faced with the threat of the breakdown of trust and confidence.

Alan Greenspan’s period as Chairman of the Board of Governors of the Federal Reserve System represents to me the nadir of central banking in advanced economic-financial systems during modern times. While monetary policy was only mildly incompetent, the regulatory failures were horrendous. The US and the world economy will pay the price for Mr Greenspan’s misjudgements and errors for years, perhaps decades, to come.

By overselling, at home and all over the world, the virtues of American-style transactions-based financial capitalism and light-touch regulation, Mr. Greenspan has done more to harm the cause of decentralised, competitive market-based financial systems based on private ownership, than even Charles Ponzi.

The spectacular failures, first in 1997/98 and then in 2007/08, of the global tests of Mr Greenspan’s theory that global financial markets do not require global regulators and that even national regulators should use only the lightest of touches, did more to discredit financial globalisation and competitive market systems based on private ownership generally than any event since the 1930s.

I am not as enthusiastic about Buiter as I used to be. While Buiter has brought his stature to bear against Greenspan-Bernanke “monetarism” very effectively, his “market maker of last resort” drumbeat does not seem any different from what Bernanke is actually doing. The market in question (structured finance) crashed because a very large percentage of it was discovered to be worthless. No new market should have been made by the Fed.

However, this column, besides making valuable points with extra venom, brings at least one new idea to bear: the idea of “cognitive regulatory capture” in the United States. This goes to the heart of why the dollar has suffered so badly relative to other currencies. The American regulatory apparatus is perceived to be in thrall to Wall Street, not because of any concrete or provable corruption or favors, but rather because the regulators allow themselves to be intellectually browbeaten into inflationistic action during every crisis.

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The case for war

Sample these recent headlines from the Times of London, a leading neoconservative conduit, and a couple of other sources:

Does that sound like an imminent peace outbreak, or making the case for war?

Amusingly, amid the blizzard of hawk-reinforcing headlines, Condoleeza Rice’s State Department continued its asymmetric-warfare campaign against Administration policy. After Ahmadinejad boasted of 6,000 new uranium centrifuges, Rice said:

WASHINGTON, April 11 (RIA Novosti) – The U.S. cannot verify reports about recent advances in Iran’s nuclear program, U.S. State Secretary Condoleezza Rice said on Friday.

At a news conference with Germany’s Foreign Minister Frank-Walter Steinmeier Rice said she could not verify “one way or another” the statement by Iranian President Mahmoud Ahmadinejad that his country had started to install 6,000 ‘ordinary’ uranium enrichment centrifuges at its underground facility in Natanz.

She added that the U.S. made its conclusions on Iran relying on the information provided by the UN nuclear watchdog, the IAEA. According to the international organization, Iran currently uses around 3,000 ‘P-1’ centrifuges, which are prone to breakdown when working at high speed for long periods.

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Israel, PNA: Olmert Vows To Strike Hamas After Israelis Killed Near Gaza Strip
April 10, 2008 1934 GMT
Israeli Prime Minister Ehud Olmert said Israel would strike Hamas after two Israeli civilians at an oil terminal that pumps fuel into the Gaza Strip were killed, Reuters reported April 10. “I promise you that the response to Hamas will be one such that it will not be able to continue to operate as it does today,” Olmert said.

Review: Israel must show that it can defeat the Arab brand of “incremental violence” against the Jewish state, exemplified by Hezbollah’s mastery of both conventional and asymmetric warfare. Israeli lives are too precious for Israel to play that game for long; so they must raise the price.

To do that, they must cripple Hezbollah, which defeated Israel in 2006.

Israel would vastly prefer to rematch with Hezbollah in a way that does not destroy Israel’s standing among neutral, international third parties. Therefore, it must provoke Hezbollah into making the first major, discrete offensive move.

Israel’s quasi-war against Iranian Hezbollah aligns with the interests of the United States, which is fighting a parallel incremental war against Iran (with Shiite Iraqi cities as the battlefield), and with the Saudis, who are defending their regional throne by minimizing Iran’s ascent in any and every way possible.

Thus, Saudi Arabia has backed, to the hilt, Sunni and Christian factions in Lebanon, against Iran and Syria; and the Saudis apparently also sponsored the assassination of Imad Mughniyah, Iran’s main broker within Hezbollah and arguably the single most capable asymmetrical-warfare operative in the world.

Meanwhile, the United States is throttling Iran’s proxies in Iraq (recently branded as “criminal gangs,” but in fact the Mehdi Army).

The Pentagon does not want to see 2008 reprise 2006, when Iran did its best to game the US election, and to some extent succeeded. (It did not help that an American late-October strike on a madrassa in Chingai, Pakistan, killed 52 students, but apparently failed to kill Ayman al-Zawahiri, the target of the strike — although it apparently killed some high-ranking al Qaeda operatives, and drove the organizational leadership very deep underground).

The Pentagon figures that Ahmadinejad — whose US Embassy hostage derring-do cost Carter a second term — will ratchet up violence in Iraq, deliver the presidency to Barack Obama, and drive a savage bargain afterwards. The Pentagon would prefer to move first.

The Israelis would hate to see a US-Iranian accommodation. Furthermore, they agree with the Pentagon’s sentiment, and are doing their part in pressuring Ahmadinejad’s Iranian proxies — Hamas in Palestine, Hezbollah in Lebanon, Bashar and Maher al Assad in Damascus. Saudi Arabia and Egypt are eagerly assisting Israel’s efforts against Hezbollah, as evidenced by the Mughniyah hit.

Which brings us to the latest Israeli move. We had figured that Iran’s best play was to ride out the next several months of allied pressure, before changes in the timeline of elections would shift the initiative back to Teheran. Combined with evident dissonance between Teheran and her militias, and the previously probable (now obvious) fact that Israel was not the proximate killer of Mughniyah, and Hezbollah’s need to retaliate against Israel vanishes.

Therefore, Israel must damage Hezbollah’s image in some other way — hence our conclusion a week and a half ago that Israel would smash Hamas:

… Israel’s low-risk/ moderate-reward play is to smash Hamas in Gaza. There is no messy Lebanese quagmire, Iran would lose a lot of face, Olmert would get a PR boost, and perhaps Hezbollah would be provoked into doing something really stupid, in which case Olmert’s PR/ economic cost of smashing Hezbollah would be significantly lower. It’s a win-win for him.

Now the question becomes: what will Ahmadinejad do?

Stratfor has, predictably, woven Bush’s latest, bellicose speech into its “inevitable US/Iran accommodation” paradigm of Iraq. But to reach an accommodation you need trust commensurate with the scope of your objective. There is no such level of trust between Ahmadinejad and the United States.

Now the onus is on Hezbollah to respond to Saudi Arabia, not Israel, for Mughniyah’s death.

Assuming that Hezbollah can’t, with reasonable probability of success, strike at one of the senior members of the Saudi royal family, the likely target of any Hezbollah reprisal shifts to those Saudi assets closest to Saudi Arabia’s Shiite minority (15% of the country) — which, coincidentally, are clustered around Saudi Arabia’s oil fields near Kuwait, including the Ghawar field.

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Greg Ip wrote a momentous column today.

Fed Weighs Its Options in Easing Crunch

By GREG IP
April 9, 2008; Page A3

WASHINGTON — The Federal Reserve is considering contingency plans for expanding its lending power in the event its recent steps to unfreeze credit markets fail.

Among the options: Having the Treasury borrow more money than it needs to fund the government and leave the proceeds on deposit at the Fed; issuing debt under the Fed’s name rather than the Treasury’s; and asking Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011.

No moves are imminent because the Fed still has plenty of balance sheet room for additional lending now. The internal discussions are part of a continuing effort at the Fed, similar to what is under way at foreign central banks, to determine its options if the credit crunch becomes even more severe. Fed officials believe the availability of such options largely eliminates the risk of exhausting its stockpile of Treasury bonds and thus losing its ability to backstop the financial system, as some on Wall Street fear.

British and Swiss central banks also are contemplating contingency plans. For now, the European Central Bank is reluctant to consider options that require substantial modifications of its standard tools.

The Fed, like any central bank, could print unlimited amounts of money, but that would push short-term interest rates lower than it believes would be wise. [LOL–ed] The contingency planning seeks ways to relieve strains in credit markets and restore liquidity without pushing down rates.

The Fed is reluctant to heed calls from some Wall Street participants and foreign officials for the Fed to directly purchase mortgage-backed securities to help a market that still is not functioning normally.

Before the credit crunch began in August, the Fed had $790 billion in Treasury securities on its balance sheet, about 87% of its total assets. Since then, it has sold or lent about $300 billion. In their place, the Fed has made loans to banks and securities firms to assist them in financing holdings of mortgage-backed and other securities. Some on Wall Street say the potential for further declines in Fed treasury holdings could leave it out of ammunition.

The Fed holds assets to manage the nation’s money supply and influence the federal-funds rate, which banks charge each other on overnight loans. When the Fed buys Treasurys or makes loans directly to banks, it supplies financial institutions with cash; in effect, it prints money. The cash ends up as currency in circulation or in banks’ reserve accounts at the Fed.

Since reserves earn no interest, banks lend cash that exceeds their required minimum. That puts downward pressure on the federal funds rate, currently targeted by the Fed at 2.25%. The Fed could purchase securities and make loans almost without limit, expanding its balance sheet. That would cause excess reserves to skyrocket and the federal funds rate to fall to zero. The Fed would contemplate such “quantitative easing” only in dire circumstances. The Bank of Japan took this step this decade after years of economic stagnation.

Weighing the Possibilities

So the Fed is seeking ways to expand its balance sheet without causing the federal funds rate to drop. The likeliest option, one the Fed and Treasury have discussed, is for the Treasury to issue more debt than it needs to fund government operations. The extra cash would be left on deposit at the Fed, where it would be separate from bank reserves on deposit and thus would have no impact on interest rates. The Fed would use the cash to purchase an offsetting amount of Treasurys in the open market; for legal reasons, it generally cannot buy them directly from Treasury.

Treasury’s principal constraint is the statutory limit debt. Treasury debt was $453 billion below the limit Monday. In the past, Congress always has responded to administration requests to raise the limit, sometimes only after political theatrics.

Fed officials also are investigating the feasibility of the Fed issuing its own debt and using the proceeds to purchase other assets or make loans. It has never done so; the legality is unclear. Some foreign central banks, such as the Bank of Japan, do so.

Another possibility is seeking congressional approval to pay interest on banks’ reserves immediately instead of waiting until a 2006 law permits that in 2011. If the Fed paid, say, 2% interest on reserves, banks would have no incentive to lend out excess reserves once the federal funds rate fell to that level.

Congress put off the effective date because paying interest on reserves reduces the Fed profits that are turned over to the Treasury each year, widening the budget deficit. Although preliminary explorations suggest Congress would be open to accelerating the date, the Fed is leery of depending on action by Congress.

The Fed is inclined to use any additional maneuvering room to lend through its existing and recently expanded avenues. Officials are reluctant to buy mortgage-backed securities directly. They worry that such purchases would hurt the market for MBS that the Fed is not permitted to buy: those backed by jumbo and subprime and alt-A mortgages, which are under the greatest strain.

Moreover, the Fed is not operationally equipped to hold MBS and would probably have to outsource their management. Such holdings wouldn’t help avert foreclosures much, since the Fed would have little control over the mortgages that comprise MBS.

Scratch everything I’ve said about the euro having run its course …

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A bit of bragging is in order …

April 9, 2008 2000 GMT
Israel is preparing to invade the Gaza Strip, Israeli sources told Stratfor April 9. No details were given on the exact time frame for the invasion.
Of course, it might not happen and my crowing could prove premature. But as usual you know where you read it first …

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April 8, 2008 1356 GMT
Israel jammed Lebanon’s telephone network after a nationwide defense drill that Israel launched April 6, Naharnet reported April 8, citing a report in the daily As Safir. As Safir quoted security sources as saying that the jamming operation targeted both land lines and cell phone lines and began the afternoon of April 7. The As Safir report gave no further details.
=======================
Stratfor has confirmed that at least some fixed phone lines in Lebanon are working April 8. Israel jammed Lebanon’s telephone network starting the afternoon of April 7, according to an April 8 report in Naharnet citing the daily As Safir. The jamming was said to have targeted both cell phones and regular phone lines.
And Hamas does what little it can to poke Israel on its southern border:
April 8, 2008 1620 GMT
People in Gaza will storm into Egypt and into Israel if an embargo of the territory is not lifted, The Jerusalem Post reported April 8, quoting Khalil al-Haya, a leading official with Hamas, the Palestinian militant group and political party. Palestinians in Gaza can no longer bear being confined to the strip of land and subjected to shortages of food, power and substandard health care, he said. In January, Palestinians breached the southern border and poured into Egypt; they will do it again, and might breach other borders, Al-Haya said, a clear reference to Gaza’s borders with Israel.

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via neo-conduit WorldNetDaily:

FROM WND’S JERUSALEM BUREAU
Syria: U.S. can
buy our loyalty

For Saudis’ place as chief ally, trade partner,
willing to discuss peace with Israel, Iran ties


Posted: April 06, 2008
11:08 pm Eastern

By Aaron Klein
© 2008 WorldNetDaily

JERUSALEM – If the U.S. helps facilitate billions of dollars in business for Syria and builds up Damascus as the primary American ally in the Arab world in place of Saudi Arabia, the Syrians would be willing to discuss scaling back alliances with Iran and making peace with Israel, according to a senior Syrian official speaking to WND.

The official said Syria recently conveyed this message to numerous visiting foreign dignitaries, including U.S. congressmen and Turkish mediators.

He said Syria also demanded as a key condition for considering altering its alliances that the U.S. cease opposing Syrian influence in Lebanon.

“Syria is the key to the Arab world. We have influence with Hezbollah and Lebanon and hold many cards in the Palestinian and Iraqi arenas. The U.S. needs to rethink the value of the investment it places in Saudi Arabia,” said the official, who spoke by phone from Damascus on condition his name be withheld.

The official said Syria is asking the U.S. firstly to end its opposition to a trade and association agreement between Damascus and the European Union drafted in 2004 that is said to be worth about $7 billion per year for the Syrian economy. The agreement was not signed or implemented largely due to American pressure, said the Syrian official.

(Story continues below)

Syria is also asking the U.S. not to object to Syrian “influence” in Lebanon, which was occupied for nearly 30 years by Syrian forces until protests prompted by the 2005 assassination of Lebanon’s former prime minister for which Syria was widely blamed. Pro-democracy Lebanese leaders accuse Syria of meddling it Lebanon’s affairs by directing the Hezbollah terrorist group, which holds key parliamentary seats, to interfere in the election of a new Lebanese president.

The main Syrian request is that America uphold Damascus as its main “partner” in the Arab world instead of Saudi Arabia, said the Syrian official.

He said in exchange Damascus would discuss severing “many ties” with Iran, but he would not specify which ties and whether Syria is willing to cut off all coordination with the Iranians.

“We are ready to significantly and deeply reduce relations with our Iranian brothers if conditions are met,” the official said. …

This is an interesting offer.

If this has any meaning, it is not meant to be taken at face value. Suggesting that Syria supersede Saudi Arabia in the hierarchy of American allies is silly for every reason imaginable.

Assuming the signal is not completely meaningless (the rule of international politics is that no national signal is meaningless) :

Syria and Hezbollah are both divided into pro- and anti-Iran camps. e.g., Syrian Asif Shawkat (head of intelligence in Syria and brother in law of Bashar Assad — his wife Bushra al Assad has allegedly fled the country) and Hassan Nasrallah, Hezbollah’s emasculated CEO, who was sidelined by Iran after he started the 2006 war with Israel without Iran’s go-ahead, and elevated his own value at Iran’s substantial expense. The two aforementioned actors are anti-Iranian.

Pro-Iranians incldue Bashar Assad, his brother Maher Assad, as well as the late Imad Mughniyeh, whom the Mossad carbombed.

Bashar Assad’s crowd is very tightly intertwined with Teheran, so the offer would have zero credibility coming from one of them, even after generously “reading between the lines.”

So the Syrians are basically offering to stop being Iran’s proxy, and to sell out “Iranian Hezbollah” without severing all commercial links to Iran, in return for a reasonable few tens of billions — including Syria’s maintaining its Lebanese fief, which Shawkat/ Nasrallah is very heavily invested in, too.

Assuming the offer was meant to be credible at all, it had to have come from a Shawkat representative, and the only circumstance in which it would have credibility would be after a coup in Damascus, in which Shawkat’s faction had seized power from the al Assad faction. They are basically offering to cut off Hezbollah insofar as it acts as an Iranian proxy, sever some but hardly all links with Iran, and ease into the US Mideastern alliance.

Syria is definitely under the most stress of any of the Mideast players, and it is probably the only regime, besides Siniora’s in Lebanon, which is existentially threatened in the near term.

In terms of how that might possibly be relevant to a trader … well … the likelihood of a pro-US/ coup in Damascus could be gauged as higher … as could the likelihood of a war involving Lebanon, Israel and Syria. So: a fatter-tailed distribution of geopolitical outcomes, and of oil prices, in the near term.

Even George “every state utterance is part of Bush’s or Ahmadinejad’s master plan” Friedman now seems to be conceding that, despite all the suppositions of “high-level meetings” between Ahmadinejad and the Americans (of which there is no evidence whatsoever), Israel and Syria are hurtling towards war in Lebanon.

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