Cuban Catholic leader approves protections for gay couples
Copyright by the Windy City Times
September 12, 2007
The Roman Catholic vicar general of Havana, Monsignor Carlos Manuel de Céspedes García-Menocal, supports “stable same-sex relationships” being “protected by civil laws.”
He staked out his position in an article published in the July/August issue of the Archdiocese of Havana’s New Word magazine.
Céspedes said, “Contemporary Western society is no longer the same as that which arrived at present clarifications concerning marriage.”
Although the church “is not going to renounce criteria established by revelation and set by tradition,” he said, “neither can it ignore contemporary personal and family reality.”
“Today we know that human reality is much more complex than we believed and that the situation of Christianity in the world is not excessively appealing, not even in the so-called ‘Christian West,’” the vicar general said.
Thursday, September 13, 2007
Chicago Sun-Times Editorial - GA first-rate mess - Chicago can't be world class with a second-rate transit system
Chicago Sun-Times Editorial - GA first-rate mess - Chicago can't be world class with a second-rate transit system
Copyright bhy The Chicago Sun-Times
September 13, 2007
A world-class city such as Chicago shouldn't have a second-rate transportation system.
Other great cities have figured that out. They know it takes a wise investment and great service to get people out of their cars and into buses and trains. Our leaders still don't get it.
Mayor Daley seems strangely uninvolved on the issue. As the CTA counted down to doomsday cuts this week, he was in Paris riding a bike. Gov. Blagojevich offered a Band-aid fix Wednesday -- $24 million that will postpone those cuts until November, as long as the RTA goes along. But he still refuses to support the most realistic plan to address chronic funding problems.
The CTA has been heading toward financial disaster for several years, plagued by mismanagement and revenues that have not kept pace with costs. That's why the agency seems to be holding out its hat begging for money every year, and partly why the rail cars, tracks and buses have been falling into such a sorry state of disrepair.
There were high hopes that this would be the year for legislative help, especially after Daley replaced CTA President Frank Kruesi. He was not well-liked by lawmakers, and his replacement, Ron Huberman, has so far lived up to his reputation for management efficiency. But those high hopes were dashed on the rocks of this year's stormy legislative session.
Concerned lawmakers crafted a plan to boost transit funding with a quarter-cent increase in the regional transit sales tax and with a small increase in the real estate transfer tax in Chicago. Those increases would provide the CTA -- as well as Metra and Pace, which are also operating in the red -- with a stable funding source. The bill also would put more teeth in the RTA's oversight of the three transit agencies. That could help address some of the issues raised in a scathing federal report on last year's train derailment, such as the poor inspection of the Blue Line tracks.
The bill has so far failed, largely because the governor has threatened to veto any sales tax increase. And he has refused to offer an alternative, other than to trot out his tired and rejected plan to close what he calls "corporate loopholes."
On Wednesday, faced with the very real prospect that he would be blamed for CTA fare hikes and service cuts, he offered the agency his $24 million Band-Aid. He also repeated his opposition to the sales tax increase. He insists "real progress is being made" on a long-term solution, but there's little evidence of it, and little optimism.
A mayor with Olympic ambitions -- and a governor and state leaders who also are Democrats -- should be able to provide a world-class transit system to a world-class city.
Copyright bhy The Chicago Sun-Times
September 13, 2007
A world-class city such as Chicago shouldn't have a second-rate transportation system.
Other great cities have figured that out. They know it takes a wise investment and great service to get people out of their cars and into buses and trains. Our leaders still don't get it.
Mayor Daley seems strangely uninvolved on the issue. As the CTA counted down to doomsday cuts this week, he was in Paris riding a bike. Gov. Blagojevich offered a Band-aid fix Wednesday -- $24 million that will postpone those cuts until November, as long as the RTA goes along. But he still refuses to support the most realistic plan to address chronic funding problems.
The CTA has been heading toward financial disaster for several years, plagued by mismanagement and revenues that have not kept pace with costs. That's why the agency seems to be holding out its hat begging for money every year, and partly why the rail cars, tracks and buses have been falling into such a sorry state of disrepair.
There were high hopes that this would be the year for legislative help, especially after Daley replaced CTA President Frank Kruesi. He was not well-liked by lawmakers, and his replacement, Ron Huberman, has so far lived up to his reputation for management efficiency. But those high hopes were dashed on the rocks of this year's stormy legislative session.
Concerned lawmakers crafted a plan to boost transit funding with a quarter-cent increase in the regional transit sales tax and with a small increase in the real estate transfer tax in Chicago. Those increases would provide the CTA -- as well as Metra and Pace, which are also operating in the red -- with a stable funding source. The bill also would put more teeth in the RTA's oversight of the three transit agencies. That could help address some of the issues raised in a scathing federal report on last year's train derailment, such as the poor inspection of the Blue Line tracks.
The bill has so far failed, largely because the governor has threatened to veto any sales tax increase. And he has refused to offer an alternative, other than to trot out his tired and rejected plan to close what he calls "corporate loopholes."
On Wednesday, faced with the very real prospect that he would be blamed for CTA fare hikes and service cuts, he offered the agency his $24 million Band-Aid. He also repeated his opposition to the sales tax increase. He insists "real progress is being made" on a long-term solution, but there's little evidence of it, and little optimism.
A mayor with Olympic ambitions -- and a governor and state leaders who also are Democrats -- should be able to provide a world-class transit system to a world-class city.
International Herald Tribune Editorial - Blocking Mexican trucks
International Herald Tribune Editorial - Blocking Mexican trucks
Copyright bhy THe International Herald Tribune
Published: September 12, 2007
One way the 1994 North American Free Trade Agreement was supposed to encourage free trade was by allowing long-haul trucks from Canada, Mexico and the United States to deliver goods throughout the three countries. Unfortunately, the Teamsters union, the Sierra Club and their allies in Congress are still working to keep Mexican trucks out.
The Teamsters and their environmental allies claim that the trucks aren't safe and are dirty. A new pilot program, however, would require that any Mexican trucks approved for entry into the U.S. be inspected for safety every three months. Environmental regulations that apply to U.S. trucks would also apply to Mexican trucks.
That's not enough to satisfy the Teamsters, which, we suspect, are just trying to stave off the competition. And it's not been enough for the Sierra Club.
That stubbornness is counterproductive. Keeping Mexican trucks out only keeps transport costs higher. It sends Mexico the message that the U.S. doesn't stand by its commitments, and it reinforces suspicions that when it comes to free trade, the U.S. only likes it one way.
Congress seems determined to block progress. On Tuesday, the Senate approved an amendment that would deny financing for the pilot program next year. The House has already approved the cutoff.
It is of utmost importance to ensure the safety of Mexican trucks - or any trucks - driving on U.S. highways. But guaranteeing highway safety does not require undermining the nation's free trade agreements or its relationship with Mexico. It is time for Congress to let Mexican trucks through.
Copyright bhy THe International Herald Tribune
Published: September 12, 2007
One way the 1994 North American Free Trade Agreement was supposed to encourage free trade was by allowing long-haul trucks from Canada, Mexico and the United States to deliver goods throughout the three countries. Unfortunately, the Teamsters union, the Sierra Club and their allies in Congress are still working to keep Mexican trucks out.
The Teamsters and their environmental allies claim that the trucks aren't safe and are dirty. A new pilot program, however, would require that any Mexican trucks approved for entry into the U.S. be inspected for safety every three months. Environmental regulations that apply to U.S. trucks would also apply to Mexican trucks.
That's not enough to satisfy the Teamsters, which, we suspect, are just trying to stave off the competition. And it's not been enough for the Sierra Club.
That stubbornness is counterproductive. Keeping Mexican trucks out only keeps transport costs higher. It sends Mexico the message that the U.S. doesn't stand by its commitments, and it reinforces suspicions that when it comes to free trade, the U.S. only likes it one way.
Congress seems determined to block progress. On Tuesday, the Senate approved an amendment that would deny financing for the pilot program next year. The House has already approved the cutoff.
It is of utmost importance to ensure the safety of Mexican trucks - or any trucks - driving on U.S. highways. But guaranteeing highway safety does not require undermining the nation's free trade agreements or its relationship with Mexico. It is time for Congress to let Mexican trucks through.
International Herald Tribune Editorial - A virus among honeybees
International Herald Tribune Editorial - A virus among honeybees
Copyright by The International Herald Tribune
Published: September 12, 2007
Last week, scientists reported having found a possible cause of the collapse of honeybee populations in the Untied States reported in the past year. What is interesting isn't just the virus, called Israeli acute paralysis virus, but the use of new methods of genetic screening to determine what pathogens the bees in collapsed colonies had been exposed to. Researchers were able to quickly screen the DNA from all the organisms present in the bees and compare them with the DNA in genomic libraries, a catalog of known organisms. Bees from collapsed hives had the virus. Healthy bees did not.
Two other factors may also have played a role in this die-off. One is drought. The other - still unproved - may be the commercial trucking of bees from crop to crop for pollination, a potential source of stress. These may have made bees more vulnerable to the effects of this virus.
In some ways, this newly reported research seems all the more important given all the speculation about what has been killing off the honeybees. These hive losses have inspired a kind of myth-making or magical thinking about their possible environmental origins. The suspected culprits include genetically modified crops and cell phones, to name only two.
Causation is a rigorous concept in science. It is vastly simpler in the popular imagination. Blaming cell phones and genetically modified crops for the death of bees is a way, mainly of saying that we are worried - not only about the death of creatures both benign and beneficial to us, but also about technology's effect on our world.
Causation, in the nonscientific sense, is just a way of organizing our worries.
Copyright by The International Herald Tribune
Published: September 12, 2007
Last week, scientists reported having found a possible cause of the collapse of honeybee populations in the Untied States reported in the past year. What is interesting isn't just the virus, called Israeli acute paralysis virus, but the use of new methods of genetic screening to determine what pathogens the bees in collapsed colonies had been exposed to. Researchers were able to quickly screen the DNA from all the organisms present in the bees and compare them with the DNA in genomic libraries, a catalog of known organisms. Bees from collapsed hives had the virus. Healthy bees did not.
Two other factors may also have played a role in this die-off. One is drought. The other - still unproved - may be the commercial trucking of bees from crop to crop for pollination, a potential source of stress. These may have made bees more vulnerable to the effects of this virus.
In some ways, this newly reported research seems all the more important given all the speculation about what has been killing off the honeybees. These hive losses have inspired a kind of myth-making or magical thinking about their possible environmental origins. The suspected culprits include genetically modified crops and cell phones, to name only two.
Causation is a rigorous concept in science. It is vastly simpler in the popular imagination. Blaming cell phones and genetically modified crops for the death of bees is a way, mainly of saying that we are worried - not only about the death of creatures both benign and beneficial to us, but also about technology's effect on our world.
Causation, in the nonscientific sense, is just a way of organizing our worries.
US wheat prices soar to record
US wheat prices soar to record
By Chris Flood
Copyright The Financial Times Limited 2007
Published: September 12 2007 22:29 | Last updated: September 12 2007 22:29
US wheat prices soared to record levels after the US Department of Agriculture said global wheat stocks would shrink to their lowest levels for 30 years.
The Chicago Board of Trade December wheat contract reached a record $9.11¼ a bushel before easing back to trade 7 cents higher at $8.97½ a bushel.
Wheat harvests of big producers have come under severe stress this year and the USDA cut its forecast for global wheat production in the year to May 2008 to 606.24m tonnes from last month’s estimate of 610.4m tonnes. Weaker production and strong overseas demand are expected to reduce global stockpiles to 112.36 tonnes by May 2008 from last month’s estimate of 114.78m tonnes.
Greg Wagner, analyst at Horizon AG Strategies, said stocks as a proportion of daily usage were expected to be the lowest for 50 years and record prices would force a dramatic reallocation of acreage devoted to wheat production.
But US farmers will enjoy a record corn harvest of 13.3bn bushels this year as heavy rainfall in August provided much-needed moisture for the crop. Corn yields are expected to be the second highest on record at 155.8 bushels an acre, from last month’s estimate of 152.8 bushels an acre, compared with the high of 160.4 bushels an acre achieved in 2004.
Corn stocks at the end of August 2008 were expected to be about 1.675bn bushels, compared with last month’s estimate of 1.516bn bushels.
Ethanol makers are expected to use 100m fewer bushels of corn than previously expected, with demand forecast at 3.3bn bushels over the next 12 months.
CBOT December corn rose 15 cents to $3.56¼ a bushel. The drive to plant more corn is having an impact on US soyabean production, which is expected to fall to 2.619bn bushels from last year’s record 3.188bn bushels.
Gavin Maguire of Iowa Grain said the rapid decline in soyabean inventories meant the stage was set for a serious battle between soyabeans and corn for acreage next year.
The amount of land that US farmers devote to soyabean production is projected to fall from 75.5m acres in 2006-07 to 64.1m acres in 2007-08. Soyabean yields are projected to slip to 41.4 bushels an acre, down from an estimated 42.7m bushels an acre in 2006-07.
“The decline in soyabean yields reflects the fact that the best ground is going to corn production,” said Mr Wagner of Horizon. “This could prove to be a chronic problem for the soyabean market going forward.”
Soyabean prices rose, with the CBOT November contract up 28 cents to $9.48½ a bushel.
By Chris Flood
Copyright The Financial Times Limited 2007
Published: September 12 2007 22:29 | Last updated: September 12 2007 22:29
US wheat prices soared to record levels after the US Department of Agriculture said global wheat stocks would shrink to their lowest levels for 30 years.
The Chicago Board of Trade December wheat contract reached a record $9.11¼ a bushel before easing back to trade 7 cents higher at $8.97½ a bushel.
Wheat harvests of big producers have come under severe stress this year and the USDA cut its forecast for global wheat production in the year to May 2008 to 606.24m tonnes from last month’s estimate of 610.4m tonnes. Weaker production and strong overseas demand are expected to reduce global stockpiles to 112.36 tonnes by May 2008 from last month’s estimate of 114.78m tonnes.
Greg Wagner, analyst at Horizon AG Strategies, said stocks as a proportion of daily usage were expected to be the lowest for 50 years and record prices would force a dramatic reallocation of acreage devoted to wheat production.
But US farmers will enjoy a record corn harvest of 13.3bn bushels this year as heavy rainfall in August provided much-needed moisture for the crop. Corn yields are expected to be the second highest on record at 155.8 bushels an acre, from last month’s estimate of 152.8 bushels an acre, compared with the high of 160.4 bushels an acre achieved in 2004.
Corn stocks at the end of August 2008 were expected to be about 1.675bn bushels, compared with last month’s estimate of 1.516bn bushels.
Ethanol makers are expected to use 100m fewer bushels of corn than previously expected, with demand forecast at 3.3bn bushels over the next 12 months.
CBOT December corn rose 15 cents to $3.56¼ a bushel. The drive to plant more corn is having an impact on US soyabean production, which is expected to fall to 2.619bn bushels from last year’s record 3.188bn bushels.
Gavin Maguire of Iowa Grain said the rapid decline in soyabean inventories meant the stage was set for a serious battle between soyabeans and corn for acreage next year.
The amount of land that US farmers devote to soyabean production is projected to fall from 75.5m acres in 2006-07 to 64.1m acres in 2007-08. Soyabean yields are projected to slip to 41.4 bushels an acre, down from an estimated 42.7m bushels an acre in 2006-07.
“The decline in soyabean yields reflects the fact that the best ground is going to corn production,” said Mr Wagner of Horizon. “This could prove to be a chronic problem for the soyabean market going forward.”
Soyabean prices rose, with the CBOT November contract up 28 cents to $9.48½ a bushel.
So what is it worth?/Decomposition is agony in a moribund market
So what is it worth?
By Paul J Davies, Jennifer Hughes and Gillian Tett
Copyright The Financial Times Limited 2007
Published: September 13 2007 03:00 | Last updated: September 13 2007 03:00
When Synapse Investment Management, a London asset manager, revealed last week that it was closing a $300m (£148m, €216m) fund, its decision sent an ominous message for bankers and accountants around the world.
That was because the death knell came not as a result of huge tangible losses on the fund's investments; instead, the main trigger was that the fund had become embroiled in a bitter, secretive fight with Barclays Capital, its prime broker, about valuation issues - how to price the debt instruments the fund held.
"The fund was closed due to the severe illiquidity in the market, which led to an inability to properly value the assets," says Mark Holman, one of Synapse's founding partners, who notes that the fund held none of the subprime assets at all that have been at the centre of recent market upheavals.
The tale highlights a much bigger battle about valuation that has already brought down other funds and still rages behind the scenes in numerous offices at banks, hedge funds and accountancy firms on Wall Street and in the City of London. One of the biggest problems spooking the markets is the sheer uncertainty about just how large the losses on many financial instruments might be - and which institutions will be hit.
This uncertainty has in turn created a crisis in trust among banks worried about the creditworthiness of their peers and therefore wary of lending to each other - which increases concerns about the possibility of a bank failure. While central banks can inject liquidity, that will only cure part of the problem: what is really needed is for banks to trust one another - and that requires transparency.
Many investors are therefore hoping that the coming weeks will produce some welcome clarity. Big US banks will start reporting their third-quarter results next week. Less publicly, a host of hedge funds are also starting to tell investors how they performed during August, the month of worst turmoil.
"The crucial question in the next few days and weeks is, how do you mark the positions? I can only hope that we do not muddle through - that we mark them to market," Josef Ackermann, chief executive officer of Deutsche Bank, said recently. Marking to market means recording the value of assets at the prevailing market price.
"That gives the reassurance and the stability back to the system. Because people will say 'OK, we have seen that people have their positions marked properly' and . . . hopefully markets will recover and some of these price levels [will] come back."
But while this call for more transparency is something investors and policymakers alike would support, in practice it will be fiendishly hard to deliver. One of the most pernicious challenges that face the financial world today is that the industry does not have any common, uncontested standard for measuring the value of many of the instruments - such as leveraged loans or securities linked to subprime mortgages - that have been at the heart of this summer's storm.
Thus, the type of valuation battle that has erupted around the Synapse fund and others could be replayed in the coming weeks, as banks and hedge funds attempt to put the best possible gloss on their numbers but investors, lenders and shareholders keep wondering where the bodies might lie (see below).
Take the case of leveraged loans, which - like subprime consumer mortgages - are made to borrowers with low credit ratings, such as companies owned by private equity groups. Traditionally, these were booked at face value, because the banks intended to hold them until they matured. But with these loans becoming more often sold in the market, banks no longer intend to hold most of them to maturity, meaning that traded prices are usually available. These are considered more relevant for the investors who use financial statements to gauge the true position of a bank.
A typical, difficult example is the £5bn ($10.2bn, €7.3bn) worth of senior loans for the planned private equity purchase of Alliance Boots, the UK pharmacies group, by Kohlberg Kravis Roberts, the US buy-out group, and Stefano Pessina, a Boots executive. Eight European and US banks arranged this finance at the start of the summer and expected to sell it quickly to capital market investors. But when the credit turmoil struck, these planned sales fell through, leaving the loans stuck on banks' books. Investors in so-called distressed debt are now offering to buy these loans at 95 per cent of face value - but most banks are reluctant to record a loss since they think the loans will recover in value soon.
The worldwide volume of such leveraged loans that banks are stuck with is estimated at between $350bn and $380bn.
While commercial banks with investment banking arms can legitimately choose at the outset between holding these loans or classing them as for sale, investment banks (known as broker-dealers in the US) have no such leeway. The broker-dealers cannot escape marking to market, because their whole business is about trading such loans and other securities.
Unsurprisingly, this accounting discrepancy infuriates some of the broker-dealers. "We think all financial instruments should be marked at fair value for consistency across the system and to simplify the accounting for hedging," says a senior accounting officer at one of the big USbroker-dealers.
Such arguments elicit some sympathy from the regulatory world. Indeed, regulators have quietly indicated that they will keep a close eye out for any sign that commercial banks are trying to flatter their accounts in the forthcoming results by failing to use "fair value" accounting approaches when this would be appropriate. Fair value for financial instruments means exit - or sale - price, which should in theory be equivalent to market value but, for some complex products or in illiquid markets, might differ drastically.
Even if all the banks use fair-value approaches, the nature of the banking pipeline creates further scope for problems. It typically takes a bank a month or more to arrange a leveraged loan and sell it on.
However, if a crisis strikes when banks are in the middle of arranging deals - as in the case of the finance to back the Boots acquisition - the banks may vary in how they book these loans on their books. "These things are not black and white," admits one senior banker.
However, the problems in using market prices become even more complex in areas such as the complex bonds backed by mortgages. At present, the leveraged loan markets are at least reasonably active - which means that bankers can find a price for an asset if they try, even if they do not like the answer. But in the more esoteric corners of the credit markets, which have been at the centre of the summerwoes, it is often much harder to determine a price, because there is no market. In some cases that is because these assets have never actually traded. But even for those where trading has taken place before, activity has often dried up in recent months.
Michel Prada, head of the AMF, France's bourse regulator, asks: "How in the world can all these [accounting] rules be of any use if one is not able to determine the price of a product?"
One way the industry seeks to address this problem is to value their products using mathematical models instead. These typically work by plugging a set of assumptions into mathematical models that deliver an estimate of what a derivative should be worth. But the results of these models can vary enormously from bank to bank, depending not only on what the "inputs" might be but also on the actual models that are used.
Accountants at the banks say their job is to ensure their traders are using sensible and verifiable inputs and check their results against a real transaction. "There is huge oversight," says an accountant at a big broker-dealer - in the sense of supervision rather than neglect.
But in the case of bonds backed by mortgages, many of the inputs are necessarily based on subjective assumptions about the future payment behaviour of mortgagees. On top of this, with the market not functioning, real transactions are hard to come by.
"The question here is to find, and constantly update, a valuation model which could reflect or approach the economic reality, as consensually defined by the market," says Mr Prada. "With products such as CDOs [collateralised debt obligations], based on many different model assumptions, the risk of such an approach is to become 'mark to myth', as Warren Buffett would call it."
Another option, which many investors now prefer, is to ask third-party data providers to offer a price for assets. These are garnered by asking brokers across the industry to supply anonymous estimates for asset values and calculating an average. But while these services have grown in popularity, they do not cover all asset classes. Some of the recently troubled mortgage-linked securities, for example, are barely covered at all.
Moreover, these third-party prices can also be contested by brokers who do not like the results. Markit Group, one such provider, is seeing increased demand for its valuation services but is facing a sharp rise in queries about the results, because differences between price quotes have grown very wide.
As a result, some observers think that in the longer term much more radical reforms are needed. In the next few weeks, regulators around the world are expected to call for more transparency in structured finance.
They may push the industry, for example, to disclose better figures on the performance of such securities and demand that banks become more open about the price at which these instruments are trading, or being quoted, even in private deals.
But even if these initiatives help to improve the credibility of the financial profession in the medium term, they will not necessarily offer investors much comfort right now. Nor will they address the fundamental difficulty that faces the accounting world today: namely that fair- value accounting based on market prices is easy to apply only when markets function properly.
For the moment, most senior accountants insist that such problems are not enough to abandon the fair value approach - partly because most other options are also flawed.
"Fair value in a credit crunch is more difficult, for sure, but what's the alternative? We certainly don't want people to be cooking the books as they used to by creating reserves and smoothing earnings," says Tom Jones, vice-chairman of the International Accounting Standards Board. "I would make the case that in the long run, the damage of being able to hide losses is far worse, we saw this in the [1980s] savings and loans crisis in the US where accounting hid the scale of the problem.
"You need fair value to get to the truth: the facts are the facts," he adds. "The idea of people selling compound instruments, then saying they're too complex to value in a credit crunch - that's not acceptable. People [should] take the writedown now and, if markets come around again, they can mark it up again."
Decomposition is agony in a moribund market
By Jennifer Hughes
Copyright The Financial Times Limited 2007
Published: September 13 2007 03:00 | Last updated: September 13 2007 03:00
When markets are fretting about where the financial bodies are buried, a discussion about "decomposing" might seem a little alarmist. But that is what auditors call the process of unpicking complex financial instruments to verify their value.
Amid the current market uncertainty, the teams involved in this task will come under unusually intense scrutiny. The auditors are particularly busy at the largest broker-dealers, such as Goldman Sachs, Bear Stearns and Morgan Stanley, as they prepare to report third-quarter earnings. But some auditors warn privately that the most pressing problems with valuation are likely to come further down the food chain among the smaller players, because these are more likely to lack the expertise and risk management resources of the biggest houses.
"The big guys will come up with something defensible. I'd worry more about the smaller houses, the pension funds, the regional banks who were looking for yield without understanding what they're buying or how to value it now," says a financial sector auditor.
Behind the scenes, regulators, auditors and those they scrutinise are discussing the problems of valuing complex, illiquid and troubled securities and what needs to be done.
"The primary effect is clearly to take a loss if there is one to take, no matter what the basis of accounting or the structure of the instrument is," says Bill Michael, head of audit for financial services at KPMG in the UK. "The secondary impact is the lack of liquidity, which makes fair-valuing something very, very hard."
For financial instruments, "fair value" is generally considered to be the "exit price" - how much a third party would pay to buy the asset. Withmany corners of the market frozen, that value has become much harder to establish.
This is the case even for formerly liquid and relatively simple assets such as single-name credit default swaps, a form of insurance against a company defaulting on its debt. More complex assets rely on spreadsheet-based models, which involve making various assumptions that still rely in some form on market activity.
This is the crux of the model-based world: how do you model the reality of something when there is not enough reality, in the form of trading, taking place?
The system begins with the models devised and used by traders. These are first checked by the bank's financial control group, which has an independent reporting line. It verifies the assumptions and checks that the models work. Then another group tests the models for market risk - in other words, that if they are meant to produce a certain value for a certain price move, that they do this.
Periodically, auditors come in and pick over these controls, using their own quantitative analysts to "decompose" the models, review the algorithms and question the assumptions. But that task has also become problematic.
"Assumptions which previously could have been fairly straightforward will need to be treated with a high level of scepticism when the market is behaving like this," says Martyn Jones, national audit technical partner at Deloitte UK. "The fact that something last traded a month ago is not, in these markets, necessarily a pointer that you'd find a similar purchaser today. Three months ago, when markets were more liquid, you're more likely to have assumed that you would have found one at that price than you are to think that now."
Owners of assets are inevitably reluctant to mark them down to what they consider forced prices - which are sometimes the only price currently available. In some cases they may be allowed to use different valuations, but auditors are wary of this. "We'd ask clients to demonstrate that the price was a one-off fire sale and why that is so, then have them explain why their price is more valid," says Paul Sater, financial services partner at Ernst & Young.
He and others stress that the current turmoil is only the latest in a long line of illiquid market events that challenge accountants. "The 1994 bond crash, Mexico in 1995, Asia in 1997, Russia and LTCM in 1998, the internet bubble - all these were huge challenges too," says Mr Sater. "In times like this the audit of valuations requires significant application of auditors' judgment. There is no silver bullet."
By Paul J Davies, Jennifer Hughes and Gillian Tett
Copyright The Financial Times Limited 2007
Published: September 13 2007 03:00 | Last updated: September 13 2007 03:00
When Synapse Investment Management, a London asset manager, revealed last week that it was closing a $300m (£148m, €216m) fund, its decision sent an ominous message for bankers and accountants around the world.
That was because the death knell came not as a result of huge tangible losses on the fund's investments; instead, the main trigger was that the fund had become embroiled in a bitter, secretive fight with Barclays Capital, its prime broker, about valuation issues - how to price the debt instruments the fund held.
"The fund was closed due to the severe illiquidity in the market, which led to an inability to properly value the assets," says Mark Holman, one of Synapse's founding partners, who notes that the fund held none of the subprime assets at all that have been at the centre of recent market upheavals.
The tale highlights a much bigger battle about valuation that has already brought down other funds and still rages behind the scenes in numerous offices at banks, hedge funds and accountancy firms on Wall Street and in the City of London. One of the biggest problems spooking the markets is the sheer uncertainty about just how large the losses on many financial instruments might be - and which institutions will be hit.
This uncertainty has in turn created a crisis in trust among banks worried about the creditworthiness of their peers and therefore wary of lending to each other - which increases concerns about the possibility of a bank failure. While central banks can inject liquidity, that will only cure part of the problem: what is really needed is for banks to trust one another - and that requires transparency.
Many investors are therefore hoping that the coming weeks will produce some welcome clarity. Big US banks will start reporting their third-quarter results next week. Less publicly, a host of hedge funds are also starting to tell investors how they performed during August, the month of worst turmoil.
"The crucial question in the next few days and weeks is, how do you mark the positions? I can only hope that we do not muddle through - that we mark them to market," Josef Ackermann, chief executive officer of Deutsche Bank, said recently. Marking to market means recording the value of assets at the prevailing market price.
"That gives the reassurance and the stability back to the system. Because people will say 'OK, we have seen that people have their positions marked properly' and . . . hopefully markets will recover and some of these price levels [will] come back."
But while this call for more transparency is something investors and policymakers alike would support, in practice it will be fiendishly hard to deliver. One of the most pernicious challenges that face the financial world today is that the industry does not have any common, uncontested standard for measuring the value of many of the instruments - such as leveraged loans or securities linked to subprime mortgages - that have been at the heart of this summer's storm.
Thus, the type of valuation battle that has erupted around the Synapse fund and others could be replayed in the coming weeks, as banks and hedge funds attempt to put the best possible gloss on their numbers but investors, lenders and shareholders keep wondering where the bodies might lie (see below).
Take the case of leveraged loans, which - like subprime consumer mortgages - are made to borrowers with low credit ratings, such as companies owned by private equity groups. Traditionally, these were booked at face value, because the banks intended to hold them until they matured. But with these loans becoming more often sold in the market, banks no longer intend to hold most of them to maturity, meaning that traded prices are usually available. These are considered more relevant for the investors who use financial statements to gauge the true position of a bank.
A typical, difficult example is the £5bn ($10.2bn, €7.3bn) worth of senior loans for the planned private equity purchase of Alliance Boots, the UK pharmacies group, by Kohlberg Kravis Roberts, the US buy-out group, and Stefano Pessina, a Boots executive. Eight European and US banks arranged this finance at the start of the summer and expected to sell it quickly to capital market investors. But when the credit turmoil struck, these planned sales fell through, leaving the loans stuck on banks' books. Investors in so-called distressed debt are now offering to buy these loans at 95 per cent of face value - but most banks are reluctant to record a loss since they think the loans will recover in value soon.
The worldwide volume of such leveraged loans that banks are stuck with is estimated at between $350bn and $380bn.
While commercial banks with investment banking arms can legitimately choose at the outset between holding these loans or classing them as for sale, investment banks (known as broker-dealers in the US) have no such leeway. The broker-dealers cannot escape marking to market, because their whole business is about trading such loans and other securities.
Unsurprisingly, this accounting discrepancy infuriates some of the broker-dealers. "We think all financial instruments should be marked at fair value for consistency across the system and to simplify the accounting for hedging," says a senior accounting officer at one of the big USbroker-dealers.
Such arguments elicit some sympathy from the regulatory world. Indeed, regulators have quietly indicated that they will keep a close eye out for any sign that commercial banks are trying to flatter their accounts in the forthcoming results by failing to use "fair value" accounting approaches when this would be appropriate. Fair value for financial instruments means exit - or sale - price, which should in theory be equivalent to market value but, for some complex products or in illiquid markets, might differ drastically.
Even if all the banks use fair-value approaches, the nature of the banking pipeline creates further scope for problems. It typically takes a bank a month or more to arrange a leveraged loan and sell it on.
However, if a crisis strikes when banks are in the middle of arranging deals - as in the case of the finance to back the Boots acquisition - the banks may vary in how they book these loans on their books. "These things are not black and white," admits one senior banker.
However, the problems in using market prices become even more complex in areas such as the complex bonds backed by mortgages. At present, the leveraged loan markets are at least reasonably active - which means that bankers can find a price for an asset if they try, even if they do not like the answer. But in the more esoteric corners of the credit markets, which have been at the centre of the summerwoes, it is often much harder to determine a price, because there is no market. In some cases that is because these assets have never actually traded. But even for those where trading has taken place before, activity has often dried up in recent months.
Michel Prada, head of the AMF, France's bourse regulator, asks: "How in the world can all these [accounting] rules be of any use if one is not able to determine the price of a product?"
One way the industry seeks to address this problem is to value their products using mathematical models instead. These typically work by plugging a set of assumptions into mathematical models that deliver an estimate of what a derivative should be worth. But the results of these models can vary enormously from bank to bank, depending not only on what the "inputs" might be but also on the actual models that are used.
Accountants at the banks say their job is to ensure their traders are using sensible and verifiable inputs and check their results against a real transaction. "There is huge oversight," says an accountant at a big broker-dealer - in the sense of supervision rather than neglect.
But in the case of bonds backed by mortgages, many of the inputs are necessarily based on subjective assumptions about the future payment behaviour of mortgagees. On top of this, with the market not functioning, real transactions are hard to come by.
"The question here is to find, and constantly update, a valuation model which could reflect or approach the economic reality, as consensually defined by the market," says Mr Prada. "With products such as CDOs [collateralised debt obligations], based on many different model assumptions, the risk of such an approach is to become 'mark to myth', as Warren Buffett would call it."
Another option, which many investors now prefer, is to ask third-party data providers to offer a price for assets. These are garnered by asking brokers across the industry to supply anonymous estimates for asset values and calculating an average. But while these services have grown in popularity, they do not cover all asset classes. Some of the recently troubled mortgage-linked securities, for example, are barely covered at all.
Moreover, these third-party prices can also be contested by brokers who do not like the results. Markit Group, one such provider, is seeing increased demand for its valuation services but is facing a sharp rise in queries about the results, because differences between price quotes have grown very wide.
As a result, some observers think that in the longer term much more radical reforms are needed. In the next few weeks, regulators around the world are expected to call for more transparency in structured finance.
They may push the industry, for example, to disclose better figures on the performance of such securities and demand that banks become more open about the price at which these instruments are trading, or being quoted, even in private deals.
But even if these initiatives help to improve the credibility of the financial profession in the medium term, they will not necessarily offer investors much comfort right now. Nor will they address the fundamental difficulty that faces the accounting world today: namely that fair- value accounting based on market prices is easy to apply only when markets function properly.
For the moment, most senior accountants insist that such problems are not enough to abandon the fair value approach - partly because most other options are also flawed.
"Fair value in a credit crunch is more difficult, for sure, but what's the alternative? We certainly don't want people to be cooking the books as they used to by creating reserves and smoothing earnings," says Tom Jones, vice-chairman of the International Accounting Standards Board. "I would make the case that in the long run, the damage of being able to hide losses is far worse, we saw this in the [1980s] savings and loans crisis in the US where accounting hid the scale of the problem.
"You need fair value to get to the truth: the facts are the facts," he adds. "The idea of people selling compound instruments, then saying they're too complex to value in a credit crunch - that's not acceptable. People [should] take the writedown now and, if markets come around again, they can mark it up again."
Decomposition is agony in a moribund market
By Jennifer Hughes
Copyright The Financial Times Limited 2007
Published: September 13 2007 03:00 | Last updated: September 13 2007 03:00
When markets are fretting about where the financial bodies are buried, a discussion about "decomposing" might seem a little alarmist. But that is what auditors call the process of unpicking complex financial instruments to verify their value.
Amid the current market uncertainty, the teams involved in this task will come under unusually intense scrutiny. The auditors are particularly busy at the largest broker-dealers, such as Goldman Sachs, Bear Stearns and Morgan Stanley, as they prepare to report third-quarter earnings. But some auditors warn privately that the most pressing problems with valuation are likely to come further down the food chain among the smaller players, because these are more likely to lack the expertise and risk management resources of the biggest houses.
"The big guys will come up with something defensible. I'd worry more about the smaller houses, the pension funds, the regional banks who were looking for yield without understanding what they're buying or how to value it now," says a financial sector auditor.
Behind the scenes, regulators, auditors and those they scrutinise are discussing the problems of valuing complex, illiquid and troubled securities and what needs to be done.
"The primary effect is clearly to take a loss if there is one to take, no matter what the basis of accounting or the structure of the instrument is," says Bill Michael, head of audit for financial services at KPMG in the UK. "The secondary impact is the lack of liquidity, which makes fair-valuing something very, very hard."
For financial instruments, "fair value" is generally considered to be the "exit price" - how much a third party would pay to buy the asset. Withmany corners of the market frozen, that value has become much harder to establish.
This is the case even for formerly liquid and relatively simple assets such as single-name credit default swaps, a form of insurance against a company defaulting on its debt. More complex assets rely on spreadsheet-based models, which involve making various assumptions that still rely in some form on market activity.
This is the crux of the model-based world: how do you model the reality of something when there is not enough reality, in the form of trading, taking place?
The system begins with the models devised and used by traders. These are first checked by the bank's financial control group, which has an independent reporting line. It verifies the assumptions and checks that the models work. Then another group tests the models for market risk - in other words, that if they are meant to produce a certain value for a certain price move, that they do this.
Periodically, auditors come in and pick over these controls, using their own quantitative analysts to "decompose" the models, review the algorithms and question the assumptions. But that task has also become problematic.
"Assumptions which previously could have been fairly straightforward will need to be treated with a high level of scepticism when the market is behaving like this," says Martyn Jones, national audit technical partner at Deloitte UK. "The fact that something last traded a month ago is not, in these markets, necessarily a pointer that you'd find a similar purchaser today. Three months ago, when markets were more liquid, you're more likely to have assumed that you would have found one at that price than you are to think that now."
Owners of assets are inevitably reluctant to mark them down to what they consider forced prices - which are sometimes the only price currently available. In some cases they may be allowed to use different valuations, but auditors are wary of this. "We'd ask clients to demonstrate that the price was a one-off fire sale and why that is so, then have them explain why their price is more valid," says Paul Sater, financial services partner at Ernst & Young.
He and others stress that the current turmoil is only the latest in a long line of illiquid market events that challenge accountants. "The 1994 bond crash, Mexico in 1995, Asia in 1997, Russia and LTCM in 1998, the internet bubble - all these were huge challenges too," says Mr Sater. "In times like this the audit of valuations requires significant application of auditors' judgment. There is no silver bullet."
US suffers decline in prestige/America's wishful thinking on Iraq/Lessons from the rubble of Iraq
US suffers decline in prestige
By Stephen Fidler in London
Copyright The Financial Times Limited 2007
Published: September 12 2007 20:55 | Last updated: September 12 2007 20:55
The US has suffered a significant loss of power and prestige around the world in the years since George W. Bush came to power, limiting its ability to influence international crises, an annual survey from a well regarded British security think-tank concluded on Tuesday.
The 2007 Strategic Survey of the non-partisan International Institute for Strategic Studies picked the decline of US authority as one of the most important security developments of the past year – but suggested the fading of American prestige began earlier, largely due to its failings in Iraq.
John Chipman, the institute’s director-general, said the “authority, prestige and reputation of the US is not what it might have been four or five years ago”. The deter ioration of American power had led to a “non-polar” world in which other actors, such as Russia, had been able to assert themselves.
The report says the US failure in Iraq had meant the Bush administration suffered from a much-reduced ability to hold sway in both domestic and international affairs. This was evident, it says, from the president’s failure to push through a new immigration bill, to the scant regard paid to US efforts to influence Israeli-Palestinian developments and Mr Bush’s sudden acceptance of the need for action on climate change.
But a more fundamental loss of clout occurred at a strategic level. “It was evident that exercise of military power – in which, on paper, America dominated the world – had not secured its goal,” the survey says. The failings in Iraq created a sense around the world of American power “diminished and demystified”, with adversaries believing they will prevail if they manage to draw the US into a prolonged engagement.
In the Middle East, the survey says, the loss of US influence encouraged some countries – notably Iran – to flex their muscles in the region; it provided ammunition for radical groups seeking to discredit the leaders of countries maintaining solid links with the US; and it encouraged other countries to hedge their diplomatic relations with the US by strengthening their links with other regional powers.
Washington’s ability to act as an honest broker in the world had declined; and Iraq had meant the US had failed to pay as much attention as it should have to other parts of the world.
The report concludes that the “the restoration of American strategic authority seemed bound to take much longer than the mere installation of a new president”.
America's wishful thinking on Iraq
By Clive Crook
Copyright The Financial Times Limited 2007
Published: September 13 2007 03:00 | Last updated: September 13 2007 03:00
When you reflect on the war in Iraq - on the false assumptions, on all the errors of execution, on the price already paid - it is hard to believe that wishful thinking could still be the prevailing mode of analysis. Yet it is, and on both sides. George W. Bush thinks that the US is winning, and will prevail if the country "stays the course". The president's critics are not much less deluded. Their solution is rapid withdrawal of American forces. Just quit, and the US can start to put the whole mess behind it.
If only that were true. Awful as it is to contemplate, things can get much worse in Iraq and in no plausible scenario are they likely any time soon to get better. Success, meaning victory or clean disengagement, is not an option. The question is how to control the damage. The US needs consensus around a strategy not to "win" and not to "bring America home" - the first is impossible, the second very risky - but to dig in for a protracted, limited and hence (with luck) feasible effort to contain the harm. Perhaps by default that is where policy will end up, under either this president or the next. Meanwhile, though, an honest discussion of the issue in those gloomy but realistic terms has barely even begun.
This week's report and congressional testimony of General David Petraeus, the US commander in Iraq, proved to be beside the point. Taking the administration at its word - not to be recommended, on the whole - the "surge" has failed. It is true the evidence suggests that sectarian killing is down somewhat and that the policy of using extra soldiers to hold areas wrested from insurgent control rather than handing them back makes sense. This is hardly a surprise and underlines the fatal error of committing too few forces at the start.
Yet the surge has failed, nonetheless, because a temporary curbing of the violence was not its aim. The president accepted political and security benchmarks to measure the surge and stressed the larger purpose of fostering a political breakthrough. Most of those targets have been missed, civil war still rages and Iraqis are no closer to coming to terms. Judged by the administration's own tests, the game is over.
Gen Petraeus's proposal to unwind the surge next year is a simple matter of military necessity. The US lacks the resources to sustain its deployment in Iraq at present levels. The vastly bigger commitment that would be needed for a surge-like initiative across the whole country is entirely out of the question. And, it goes without saying, this would be politically impossible in any case.
Rapid disengagement, the preferred alternative of many Democrats, looks much more sensible, until you consider the possible consequences: a failed state (Afghanistan pre-9/11, on a much larger scale), a haven for global jihadists, outright ethnic cleansing and a widening regional conflict in a strategically crucial part of the world. All this, if it came to the worst, could fairly be blamed on the Bush administration. But what consolation is that, even to a Democrat? A Democratic president, after all,will most likely have to deal with it.
America needs to plan for a substantial and open-ended military commitment in Iraq, not to achieve victory but to guard against the worst possible outcomes, difficult as even this will be. For military and political reasons, far fewer soldiers will be available: planning has to start acknowledging that constraint, rather than continuing to deny it. The focus must shift towards containing the conflict within Iraq's borders, securing havens for internal refugees, striking jihadist targets and other containment strategies. Hard as it will be for this administration, and maybe impossible, the US should seek allies and renewed international legitimacy in this more limited mission. For their part, the administration's critics need to recognise that America - in good conscience and its own interests - cannot wash its hands of the problem.
Can Democratic and Republican centrists come together around such a strategy - one that limits America's purpose in Iraq, but resolves to stay engaged? This deeply unappealing prospect may be the least of the available evils. For it to happen, though, both parties will need to divide. That is unlikely, but not impossible. Amid the clamour this week there were intimations of a possible new consensus.
Republican support for the administration shows new signs of cracking, notably among senators seeking re-election. A withdrawal of forces that merely unwinds the surge by next summer, as now proposed, is less than they had hoped for and less than their voters are demanding.
On the other side, centrist Democrats got a push from the reliably bone-headed leftists of MoveOn.org, which ran a controversial advertisement this week trashing the integrity of "General Betray Us". Aside from firing up the administration's apologists with synthetic outrage, and giving them talking-points they would otherwise have lacked, it drew some centrist Democrats into distancing themselves from the anti-war left, and towards a more accommodating posture.
But these are no more than hints of a bipartisan centre. The administration is unlikely to help and the longer it persists with "we can win", the greater the chances of an abrupt, total and possibly calamitous withdrawal. Whatever happens, Iraq is not going away.
Lessons from the rubble of Iraq
By Philip Stephens
Copyright The Financial Times Limited 2007
Published: September 13 2007 17:51 | Last updated: September 13 2007 17:51
The lesson of September 11 2001 was that to be invincible is not to be invulnerable; the moral to be drawn from the quagmire of Iraq is that the ability to conquer does not confer the capacity to control. If post-Bush America is to reclaim global leadership, it must better understand the limits of its power.
The US remains the world’s sole superpower, the one nation with the capacity to intervene almost anywhere, at almost any time. It is stronger in every dimension – military, economic, political, cultural – than any potential adversary. Separate out the animus towards the persona and policies of George W. Bush and the US is also still quite liked. Odd though it seems, most Iranians declare themselves pro-American.
But in the exercise of US power, the present administration has eroded it. For much of the past six years, Washington has preferred to define itself against its handful of enemies instead of with its multitude of friends. The Bush White House has never really understood the need to map the boundaries, as well as test the reach, of US primacy.
The administration presented the invasion of Iraq as vital to the defeat of al-Qaeda. It was a fraudulent prospectus. “Shock and awe” was intended as a demonstration of raw power. As that well-known Francophile Donald Rumsfeld might have put it, Saddam Hussein was removed pour encourager les autres. Instead, the war in Iraq has energised violent Islamism and distracted US attention from the pursuit of al-Qaeda.
You could sense that this week. Tuesday was the sixth anniversary of the destruction of the World Trade Center in New York. Last year, Mr Bush marked the anniversary at Ground Zero. This year, the president felt the need to stay in Washington to hear General David Petraeus plead his case for staying in Iraq.
After the hyperbole of the advance billing, it was probably inevitable that America’s cerebral soldier would disappoint. The commander of the surge could scarcely have told Congress he had failed. Armed with charts and statistics, he made the best of the tactical military successes. Even from such a media-attentive general, it was not enough.
The more interesting testimony came from Ryan Crocker, the US ambassador in Baghdad. Mr Crocker’s job was to report on progress towards political reconciliation among Iraq’s Shia and Sunni communities. He applied whatever gloss he could find to the long-stalled efforts to bridge the sectarian divides. But the surge has failed in its principal purpose of providing the security in which national politics would take root.
For Mr Bush, though, the testimony had another purpose. At the White House, success is now measured not just by events on the ground, but by whether a final reckoning can be delayed beyond the president’s departure from office. From this perspective, Mr Bush can claim a small victory.
The number of US troops in Iraq will probably fall next summer to 130,000. This drawdown to pre-surge levels is more military imperative than political choice. The administration has half-promised another cut – perhaps to 100,000 – as the presidential campaign intensifies in the autumn of 2008. The timetable, though, would still leave Mr Bush’s successor with the responsibility for dispatching the helicopters to the roof of the Baghdad embassy.
A cynic might say that Mr Bush wants Iraq to inflict as much damage on his successor – most likely a Democrat – as it has on his own presidency. There must be a fair chance he will get his wish. As long as they are on the campaign trail, the candidates for 2008 can avoid discussion of the consequences of withdrawal. The voters, after all, want the troops home. The reality of disengagement is likely to be very different. The choice facing the new president may be between disaster and catastrophe.
She or he will not be entirely powerless. If there is little prospect of changing the outcome in Iraq itself, Mr Bush’s successor can set the context in which the US acknowledges failure. Will the America that eventually leaves Iraq be a sore, sullen superpower resolved to lash out at enemies from behind the walls of its fortress? Or will it be a US intent on understanding the difference between leadership and hegemony?
There is no simple route map for this latter course, but there are some markers. The first is an appreciation of the importance in global affairs of motives – perceived as well as real. Brent Scowcroft, the former national security adviser to the first President Bush, puts it well. For most of the postwar period, Mr Scowcroft observes, America’s many friends gave it the benefit of the doubt. Even when Washington got things wrong, people thought it had meant well. Now the opposite is true. Even when the present administration gets things right – and it occasionally does – it is suspected of hiding a darker agenda.
Linked umbilically to this issue of trust is the one of legitimacy.
There is no need for the next administration to embrace multilateralism with all its warts and weaknesses. But the lesson shared between Iraq and the fight against terrorism is that the absence of legitimacy is as a stone to a knife in its capacity to blunt American power.
Mr Bush’s successor will find the United Nations at a crossroads. American indifference alongside Russian obstructionism could well return it to the freezer of the cold war. Or, albeit with some effort, it could become an ally in America’s effort to rebuild something from the rubble of its reputation.
A third marker – and one with specific relevance to Iraq – calls for the US to talk to its enemies as well as its friends: to understand, as it did during the stand-off with the Soviet Union, that such engagement can be a source of strength rather than a sign of weakness.
Talking clarifies motives. US efforts to halt Iran’s nuclear programme would win wider support if the rest of the world were not suspicious of US intent. A dialogue with Tehran would shine a powerful light on Iran’s intentions and reassure doubters about American motives. Curiously, Mr Bush seems to have grasped this point in talking to North Korea.
There are lots of people in Washington, on the Democratic as well as the Republican side of politics, who think multilateralism is for wimps, that international rules are for the weak. The irony, of course, is that the global system thus scorned was made in America – and at a moment when the US had never been stronger. Roosevelt and Truman understood the transmission mechanism between power and leadership.
philip.stephens@ft.com
By Stephen Fidler in London
Copyright The Financial Times Limited 2007
Published: September 12 2007 20:55 | Last updated: September 12 2007 20:55
The US has suffered a significant loss of power and prestige around the world in the years since George W. Bush came to power, limiting its ability to influence international crises, an annual survey from a well regarded British security think-tank concluded on Tuesday.
The 2007 Strategic Survey of the non-partisan International Institute for Strategic Studies picked the decline of US authority as one of the most important security developments of the past year – but suggested the fading of American prestige began earlier, largely due to its failings in Iraq.
John Chipman, the institute’s director-general, said the “authority, prestige and reputation of the US is not what it might have been four or five years ago”. The deter ioration of American power had led to a “non-polar” world in which other actors, such as Russia, had been able to assert themselves.
The report says the US failure in Iraq had meant the Bush administration suffered from a much-reduced ability to hold sway in both domestic and international affairs. This was evident, it says, from the president’s failure to push through a new immigration bill, to the scant regard paid to US efforts to influence Israeli-Palestinian developments and Mr Bush’s sudden acceptance of the need for action on climate change.
But a more fundamental loss of clout occurred at a strategic level. “It was evident that exercise of military power – in which, on paper, America dominated the world – had not secured its goal,” the survey says. The failings in Iraq created a sense around the world of American power “diminished and demystified”, with adversaries believing they will prevail if they manage to draw the US into a prolonged engagement.
In the Middle East, the survey says, the loss of US influence encouraged some countries – notably Iran – to flex their muscles in the region; it provided ammunition for radical groups seeking to discredit the leaders of countries maintaining solid links with the US; and it encouraged other countries to hedge their diplomatic relations with the US by strengthening their links with other regional powers.
Washington’s ability to act as an honest broker in the world had declined; and Iraq had meant the US had failed to pay as much attention as it should have to other parts of the world.
The report concludes that the “the restoration of American strategic authority seemed bound to take much longer than the mere installation of a new president”.
America's wishful thinking on Iraq
By Clive Crook
Copyright The Financial Times Limited 2007
Published: September 13 2007 03:00 | Last updated: September 13 2007 03:00
When you reflect on the war in Iraq - on the false assumptions, on all the errors of execution, on the price already paid - it is hard to believe that wishful thinking could still be the prevailing mode of analysis. Yet it is, and on both sides. George W. Bush thinks that the US is winning, and will prevail if the country "stays the course". The president's critics are not much less deluded. Their solution is rapid withdrawal of American forces. Just quit, and the US can start to put the whole mess behind it.
If only that were true. Awful as it is to contemplate, things can get much worse in Iraq and in no plausible scenario are they likely any time soon to get better. Success, meaning victory or clean disengagement, is not an option. The question is how to control the damage. The US needs consensus around a strategy not to "win" and not to "bring America home" - the first is impossible, the second very risky - but to dig in for a protracted, limited and hence (with luck) feasible effort to contain the harm. Perhaps by default that is where policy will end up, under either this president or the next. Meanwhile, though, an honest discussion of the issue in those gloomy but realistic terms has barely even begun.
This week's report and congressional testimony of General David Petraeus, the US commander in Iraq, proved to be beside the point. Taking the administration at its word - not to be recommended, on the whole - the "surge" has failed. It is true the evidence suggests that sectarian killing is down somewhat and that the policy of using extra soldiers to hold areas wrested from insurgent control rather than handing them back makes sense. This is hardly a surprise and underlines the fatal error of committing too few forces at the start.
Yet the surge has failed, nonetheless, because a temporary curbing of the violence was not its aim. The president accepted political and security benchmarks to measure the surge and stressed the larger purpose of fostering a political breakthrough. Most of those targets have been missed, civil war still rages and Iraqis are no closer to coming to terms. Judged by the administration's own tests, the game is over.
Gen Petraeus's proposal to unwind the surge next year is a simple matter of military necessity. The US lacks the resources to sustain its deployment in Iraq at present levels. The vastly bigger commitment that would be needed for a surge-like initiative across the whole country is entirely out of the question. And, it goes without saying, this would be politically impossible in any case.
Rapid disengagement, the preferred alternative of many Democrats, looks much more sensible, until you consider the possible consequences: a failed state (Afghanistan pre-9/11, on a much larger scale), a haven for global jihadists, outright ethnic cleansing and a widening regional conflict in a strategically crucial part of the world. All this, if it came to the worst, could fairly be blamed on the Bush administration. But what consolation is that, even to a Democrat? A Democratic president, after all,will most likely have to deal with it.
America needs to plan for a substantial and open-ended military commitment in Iraq, not to achieve victory but to guard against the worst possible outcomes, difficult as even this will be. For military and political reasons, far fewer soldiers will be available: planning has to start acknowledging that constraint, rather than continuing to deny it. The focus must shift towards containing the conflict within Iraq's borders, securing havens for internal refugees, striking jihadist targets and other containment strategies. Hard as it will be for this administration, and maybe impossible, the US should seek allies and renewed international legitimacy in this more limited mission. For their part, the administration's critics need to recognise that America - in good conscience and its own interests - cannot wash its hands of the problem.
Can Democratic and Republican centrists come together around such a strategy - one that limits America's purpose in Iraq, but resolves to stay engaged? This deeply unappealing prospect may be the least of the available evils. For it to happen, though, both parties will need to divide. That is unlikely, but not impossible. Amid the clamour this week there were intimations of a possible new consensus.
Republican support for the administration shows new signs of cracking, notably among senators seeking re-election. A withdrawal of forces that merely unwinds the surge by next summer, as now proposed, is less than they had hoped for and less than their voters are demanding.
On the other side, centrist Democrats got a push from the reliably bone-headed leftists of MoveOn.org, which ran a controversial advertisement this week trashing the integrity of "General Betray Us". Aside from firing up the administration's apologists with synthetic outrage, and giving them talking-points they would otherwise have lacked, it drew some centrist Democrats into distancing themselves from the anti-war left, and towards a more accommodating posture.
But these are no more than hints of a bipartisan centre. The administration is unlikely to help and the longer it persists with "we can win", the greater the chances of an abrupt, total and possibly calamitous withdrawal. Whatever happens, Iraq is not going away.
Lessons from the rubble of Iraq
By Philip Stephens
Copyright The Financial Times Limited 2007
Published: September 13 2007 17:51 | Last updated: September 13 2007 17:51
The lesson of September 11 2001 was that to be invincible is not to be invulnerable; the moral to be drawn from the quagmire of Iraq is that the ability to conquer does not confer the capacity to control. If post-Bush America is to reclaim global leadership, it must better understand the limits of its power.
The US remains the world’s sole superpower, the one nation with the capacity to intervene almost anywhere, at almost any time. It is stronger in every dimension – military, economic, political, cultural – than any potential adversary. Separate out the animus towards the persona and policies of George W. Bush and the US is also still quite liked. Odd though it seems, most Iranians declare themselves pro-American.
But in the exercise of US power, the present administration has eroded it. For much of the past six years, Washington has preferred to define itself against its handful of enemies instead of with its multitude of friends. The Bush White House has never really understood the need to map the boundaries, as well as test the reach, of US primacy.
The administration presented the invasion of Iraq as vital to the defeat of al-Qaeda. It was a fraudulent prospectus. “Shock and awe” was intended as a demonstration of raw power. As that well-known Francophile Donald Rumsfeld might have put it, Saddam Hussein was removed pour encourager les autres. Instead, the war in Iraq has energised violent Islamism and distracted US attention from the pursuit of al-Qaeda.
You could sense that this week. Tuesday was the sixth anniversary of the destruction of the World Trade Center in New York. Last year, Mr Bush marked the anniversary at Ground Zero. This year, the president felt the need to stay in Washington to hear General David Petraeus plead his case for staying in Iraq.
After the hyperbole of the advance billing, it was probably inevitable that America’s cerebral soldier would disappoint. The commander of the surge could scarcely have told Congress he had failed. Armed with charts and statistics, he made the best of the tactical military successes. Even from such a media-attentive general, it was not enough.
The more interesting testimony came from Ryan Crocker, the US ambassador in Baghdad. Mr Crocker’s job was to report on progress towards political reconciliation among Iraq’s Shia and Sunni communities. He applied whatever gloss he could find to the long-stalled efforts to bridge the sectarian divides. But the surge has failed in its principal purpose of providing the security in which national politics would take root.
For Mr Bush, though, the testimony had another purpose. At the White House, success is now measured not just by events on the ground, but by whether a final reckoning can be delayed beyond the president’s departure from office. From this perspective, Mr Bush can claim a small victory.
The number of US troops in Iraq will probably fall next summer to 130,000. This drawdown to pre-surge levels is more military imperative than political choice. The administration has half-promised another cut – perhaps to 100,000 – as the presidential campaign intensifies in the autumn of 2008. The timetable, though, would still leave Mr Bush’s successor with the responsibility for dispatching the helicopters to the roof of the Baghdad embassy.
A cynic might say that Mr Bush wants Iraq to inflict as much damage on his successor – most likely a Democrat – as it has on his own presidency. There must be a fair chance he will get his wish. As long as they are on the campaign trail, the candidates for 2008 can avoid discussion of the consequences of withdrawal. The voters, after all, want the troops home. The reality of disengagement is likely to be very different. The choice facing the new president may be between disaster and catastrophe.
She or he will not be entirely powerless. If there is little prospect of changing the outcome in Iraq itself, Mr Bush’s successor can set the context in which the US acknowledges failure. Will the America that eventually leaves Iraq be a sore, sullen superpower resolved to lash out at enemies from behind the walls of its fortress? Or will it be a US intent on understanding the difference between leadership and hegemony?
There is no simple route map for this latter course, but there are some markers. The first is an appreciation of the importance in global affairs of motives – perceived as well as real. Brent Scowcroft, the former national security adviser to the first President Bush, puts it well. For most of the postwar period, Mr Scowcroft observes, America’s many friends gave it the benefit of the doubt. Even when Washington got things wrong, people thought it had meant well. Now the opposite is true. Even when the present administration gets things right – and it occasionally does – it is suspected of hiding a darker agenda.
Linked umbilically to this issue of trust is the one of legitimacy.
There is no need for the next administration to embrace multilateralism with all its warts and weaknesses. But the lesson shared between Iraq and the fight against terrorism is that the absence of legitimacy is as a stone to a knife in its capacity to blunt American power.
Mr Bush’s successor will find the United Nations at a crossroads. American indifference alongside Russian obstructionism could well return it to the freezer of the cold war. Or, albeit with some effort, it could become an ally in America’s effort to rebuild something from the rubble of its reputation.
A third marker – and one with specific relevance to Iraq – calls for the US to talk to its enemies as well as its friends: to understand, as it did during the stand-off with the Soviet Union, that such engagement can be a source of strength rather than a sign of weakness.
Talking clarifies motives. US efforts to halt Iran’s nuclear programme would win wider support if the rest of the world were not suspicious of US intent. A dialogue with Tehran would shine a powerful light on Iran’s intentions and reassure doubters about American motives. Curiously, Mr Bush seems to have grasped this point in talking to North Korea.
There are lots of people in Washington, on the Democratic as well as the Republican side of politics, who think multilateralism is for wimps, that international rules are for the weak. The irony, of course, is that the global system thus scorned was made in America – and at a moment when the US had never been stronger. Roosevelt and Truman understood the transmission mechanism between power and leadership.
philip.stephens@ft.com
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