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In keeping with this great tradition we started here last year- marking new time by all these years post James Brown's death two years ago on Christmas Day - we here at GHN would like to wish everyone a Happy New Year - the year of our lord - Year 2 AJB.
Can't you feel it? Give it a try.
For when this thing finally catches on you'll remember where you heard it first.
Sorry. But I just can't get enough of this shit. And I'm sure there'll be more to come. As Obama said - 'Its probably going to get worse before it gets better.'.
But I would really encourage anyone interested to watch this two part series from The Kahn Academy. (They even have an entire playlist just about "The Credit Crunch".):
Now if you have been paying attention you will know that I have already qualified myself a few times now as to the fact that I fully acknowledge - I am just beginning to learn about all of this stuff, and as such am far from an authority. But that said if you watched the last part of that last video you would have noticed the lecturer make the point that he felt that one of the reasons that the Credit Default Swap market grew to be so large was because there were many "investors" making these "swaps" because they clearly saw that so many of the original "assets" were in such obvious trouble, and in that trouble lay an incredible opportunity for them to make some serious money without ever having to own the original asset in the first place. Indeed, they did have to pay premiums, but much of the money that they ultimately used to pay these premiums was borrowed money in the first place.
A kind of informed gambling on the eve of destruction - no?
(If I'm wrong about any of this I would implore anyone who knows better to please explain to me how.)
As blogger masaccio points out in this November 14, 2008 post - Bailout Money Used to Pay Off Gamblers in Credit Defaults:
When Lehman Bros filed bankruptcy, it had $155 bn in debt, but the notional value of the CDS related to its debt was $400 bn. Obviously, not everyone who bought protection against the failure of Lehman actually held its debt. They were speculating that it would fail.
Suppose I held a CDS from AIG that would pay off if Lehman failed. I would have a real incentive to see Lehman fail. I might even engage in short-selling in an effort to cause that failure. Of course, there is no evidence that anyone did that. But there are at least two things that might make a competent regulator/investigator ask questions. First, the regulations that restricted short-selling were substantially repealed. The last of these, the up-tick rule, was repealed in 2007 by the SEC. This rule was put in place in 1938, for the express purpose of preventing a bear raid, an attack on a company, designed to weaken or destroy it. Second, in the immediate aftermath of the collapse of Lehman Bros., the SEC imposed a ban on short-selling of financial stocks.Taking all this together, it appears that by bailing out AIG, us taxpayers are making sure that a bunch of gamblers are going to get paid off on bets against the solvency of a whole lot of companies.
Could this be one of the reasons, for instance, that the U.S. Treasury is refusing to identify the recipients of almost $2 trillion dollars in emergency loans - a state of affairs that has now caused Bloomberg news service to sue the government:
The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.Fed Chairman Ben S. Bernanke and Treasury Secretary Henry M. Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.
Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.
The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.
Indeed, as this LATimes blog post from 11.10.08 notes:
The Fed, of course, can argue that it has a good reason for keeping borrowers’ identities secret: It doesn’t want to risk another banking panic by giving stock traders and depositors a list of institutions that would immediately be seen as the weakest links in the financial chain. No regulator wants to force a failure if there's a decent chance an institution could survive, with time.
Especially if it would be possible to then in turn to purchase more CDS's on these "institutions" that are the "weakest links", if this in fact is what is really going on, so as to make more profits out of their imminent demise, profits that would now be coming directly out of the U.S. Treasury, which in turn would be borrowing the money.
I should reiterate once again that I am basically coming at all this stuff from the position of wondering about all the enormous opportunity costs now fading brutally into the proverbial sunset:
Opportunity cost or economic opportunity loss is the value of the next best alternative foregone as the result of making a decision.
Remember Obama's energy plan that called for a $150 billion dollar investment over ten years which was designed to "end America's dependance on Middle Eastern oil", "create 5 million new green jobs", and even possibly the creation of an entire new "green" electricity grid?. The environmental dividends that this action alone could pay for future generations are absolutely enormous. So it sounds like a good idea to me, unfortunately it seems that the first order of business is going to require paying off Buddy's Hedge Fund. Sorry, kids. Let Daddy try and explain ...
The World Bank estimates that the cost of achieving the Millennium Development Goals is between $40-60 billion dollars a year until 2015. The idea only being to end "extreme poverty", and like, you know, basically save the world.
Unfortunately, as I pointed out in my last post on this subject the cost to the American taxpayer of this "Credit Crunch" bailout so far is presently - $7.8 trillion dollars. And all of that, borrowed money basically.
So thus my basic charge remains:
We have already seen in this time of the Administration of George W. Bush massive increases in money flowing out of the revenue column of the U.S Government for tax cuts for the most rich as well as to the full gamut of the Defense Industries (much of it to "private contractors", and much of it "classified") in all its assorted forms. And now in these twilight days we are now seeing these absolutely colossal, unprecedented cash outlays to the financial industry as well. And how much of that is going to effectively pay off somebody's bet?
And if this borrowed public money is now going to some very rich, very smart, very well connected people who basically saw all this coming for a while now and in turn devised a way to enrich themselves even further because well, because basically they could - just how fucking cynical is that?
Dear reader?
And does this not then amount to basically one of the largest transfers of wealth ever?
And at any point - does this basically amount to theft? I'm pretty sure how I feel about it morally - but is there any question of criminality?
Just thinking out loud here.
As Slovoj Zizek wrote recently in the LRB - Use Your Illusions:
The financial meltdown has made it impossible to ignore the blatant irrationality of global capitalism. In the fight against Aids, hunger, lack of water or global warming, we may recognise the urgency of the problem, but there is always time to reflect, to postpone decisions. The main conclusion of the meeting of world leaders in Bali to talk about climate change, hailed as a success, was that they would meet again in two years to continue the talks. But with the financial meltdown, the urgency was unconditional; a sum beyond imagination was immediately found. Saving endangered species, saving the planet from global warming, finding a cure for Aids, saving the starving children . . . All that can wait a bit, but ‘Save the banks!’ is an unconditional imperative which demands and gets immediate action. The panic was absolute. A transnational and non-partisan unity was immediately established, all grudges among world leaders momentarily forgotten in order to avert the catastrophe. (Incidentally, what the much-praised ‘bi-partisanship’ effectively means is that democratic procedures were de facto suspended.) The sublimely enormous sum of money was spent not for some clear ‘real’ task, but in order to ‘restore confidence’ in the markets – i.e. for reasons of belief. Do we need any more proof that Capital is the Real of our lives, the Real whose demands are more absolute than even the most pressing demands of our social and natural reality?Compare the $700 billion spent on stabilising the banking system by the US alone to the $22 billion pledged by richer nations to help poorer nations cope with the food crisis, of which only $2.2 billion has been made available. The blame for the food crisis cannot be put on the usual suspects of corruption, inefficiency or state interventionism. Even Bill Clinton has acknowledged that ‘we all blew it, including me,’ by treating food crops as commodities instead of a vital right of the world's poor. Clinton was very clear in blaming not individual states or governments, but the long-term Western policy imposed by the US and European Union and enacted by the World Bank, the IMF and other international institutions. African and Asian countries were pressured into dropping government subsidies for farmers, opening up the way for the best land to be used for more lucrative export crops. The result of such ‘structural adjustments’ was the integration of local agriculture into the global economy: crops were exported, farmers were thrown off their land and pushed into sweat-shops, and poorer countries had to rely more and more on imported food. In this way, they are kept in postcolonial dependence, vulnerable to market fluctuations – soaring grain prices (caused in part by the use of crops for biofuels) have meant starvation in countries from Haiti to Ethiopia.
And now, this morning, with the possible impending bankruptcy of General Motors, I had to ask myself the obvious question - who stands to make a lot of money shorting GM debt through Credit Defalut Swaps? I mean they have to be out there.
I Googled this question - and didn't find much but I did find the great masascio who was asking himself/herself the same question:
The Depository Trust & Clearing Corporation reports that there are over $65bn in credit default swaps naming GM as the reference credit. According to its most recent financial statements, GM has a total of $36 to 38bn in outstanding long-term debt, the kind associated with CDSs. Obviously not all of the protection buyers hold GM debt. There is a lot of money bet against GM’s survival, and the holders of that protection have a real reason to want GM to fail. I’d call that gambling, and I explain why in this diary. It’s important to note that the losses won’t affect GM. Only the protection sellers will have to pay off the bets.
So, if I am reading this right, that is probably over half of GM's "long term debt" wrapped up in Credit Default Swaps - "holders" of which have a direct financial stake in GM's failure. (Are we going to read about and see this as the narrative in the main stream media? I doubt it, as I see now that the problem apparently lies with the Unions) That's certainly more than twice the cost of what the actual bailout would have been. And as Michael Moore explained on CNN - at its present price the U.S. Government could just buy "the company" (GM) for three billion dollars, and then they would own it outright. But of course then you would also own all that "long term debt" as well, with just so much of it coming from pure speculation.
(m)asacio again:
Unfortunately, we have no idea who those gamblers are. The CDS market is private and hidden. The information provided by DTCC was the first public release of data about CDSs, which means there isn’t even any historical data from which we could figure out when all these gamblers bought their lottery tickets.It's easy to think of people who might want GM to fail. One group might be those who want to buy the pieces cheap. That might include other car companies, or private equity funds. Another group might be hostile governments, who might like to see the US lose industries that can produce weapons and war-fighting machines. In either case, betting against GM provides a bunch of money to support whatever other goals those people might have.
Any other suggestions?
Update: I wonder if any holders of protection are lobbying against a bailout?
(Above illustration by Ji Lee, from the article The End by Michael Lewis in the December issue of Portfolio.com.)
Apparently there has been some debate as to whether or not it is, I don't know, accurate to blame the present "economic crisis" on the so-called "financial elite". (See also the Columbia Journalism Review).
Well if you ask me the answer couldn't be more self evident. While, yes, our market economy will by definition have its ups and downs, our present crisis has been desperately exacerbated by the overwhelming greed, complete recklessness and a borderline sociopathic total irresponsibility from the "financial elites" in many countries of the Western world, but most notably the United States. A contagion that has now spread globally and implicated pretty much everyone.
Let me explain:
Here we are over two months (give or take a year) into what at some times is being called the "credit crisis" while other times often referred to as "the worst economic crisis" to hit the world since "The Great Depression". For myself its triggered its own private odyssey into trying to figure out not only how to respond but just what has happened here in the first place and just how this all came to be - specifically. For until two months ago I hadn't even heard of most of this financial arcana. And I had certainly never heard of Credit Default Swaps. I had heard of Derivatives, but had very little sense as to what they were.
So I begin this post with the above article The End by Michael Lewis, an article that is being widely read, linked and sent all over the internet(s). Lewis is a former investment banker himself who ended up leaving that world to write a famous book about it all - Liar's Poker - way back in the eighties. And in The End he revisits it all and tries to make sense. It has been a valuable read for me in that not only does Lewis attempt to explain all this for people like myself who might not know anything about it, but because he comes the closest I have yet read as to explaining why these Investment Banks, Banks, Hedge Funds, Money Managers, Bond Traders, Insurance companies etc. all engaged in the practice of Credit Default Swaps (for instance) in the first place, or why they were allowed to, beyond the given - because greed is great and that for a while at least they were making gobs and gobs of money.
Lewis does this in part by telling the story of Steve Eisman, a former lawyer who became a financial analyst before then becoming a hedge fund manager based in New York City. Eisman appeared to see before most the looming catastrophe that lay ahead for the U.S. subprime mortgage market and figured out a way to make money out of it. A lot of money. He did this by "selling short". By selling short Credit Default Swaps on Collateral Debt Obligations.
Now forgive me my ignorance dear readers (you always do) though I have already confessed to being very much a financial luddite and a stock market illiterate with regards to all of this (just ask my banker) but I had to at first look into just what "selling short" involved. So I googled it - and this is what I found:
From the Yahoo Finance Glossary - Selling short:
Selling a stock not actually owned. If an investor thinks the price of a stock is going down, the investor could borrow the stock from a broker and sell it. Eventually, the investor must buy the stock back on the open market. For instance, you borrow 1000 shares of XYZ on July 1 and sell it for $8 per share. Then, on Aug. 1, you purchase 1000 shares of XYZ at $7 per share. You've made $1000 (less commissions and other fees) by selling short.
(and here is a Google search page: define: Selling Short.)
So "Selling Short" is gambling basically. Its making a calculated, even educated guess that a stock, or in this case a bond (essentially) is going to go down and then figuring out a way to capitalize on this. Though one is not actually manufacturing or contributing anything - the talent, the glory and the reward seems to come from one's prescience, foresight and willingness to assume and manage the risk involved. For if you gamble that a stock or a bond is going to go down and you decide that you might want to "sell it short" - you then go out and "borrow it", but then suppose it happens to start going up - well then I guess you're screwed and on the hook for what could potentially be a lot of money. And this is the stock and financial market for those looking to play the short game.
So what then is a Credit Default Swap?
A Credit Default Swap is on the face of it, in theory, a kind of insurance on all of this, I guess. If one made a bond purchase one could then buy a Credit Default Swap as insurance for the chance that the value of that stock, or in this case bond, happened to go down. And one would in turn pay premiums to the 'agency' who was selling you the 'swap', as with any insurance. Except in this case they don't call it "insurance" they call it "swaps" because to call it "insurance" would legally require that the market be regulated. And the Credit Default Swap (CDS) market is (was) totally unregulated. And the people who created and engaged in it certainly wanted it to remain that way.
And just because we are trying to be all definitive here for all the financial luddites like myself I might as well post the Wikipedia definition of Bond:
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. A bond is simply a loan in the form of a security with different terminology: The issuer is equivalent to the borrower, the bond holder to the lender, and the coupon to the interest. Bonds enable the issuer to finance long-term investments with external funds. Note that certificates of deposit (CDs) or commercial paper are considered to be money market instruments and not bonds. Bonds and stocks are both securities, but the major difference between the two is that stock-holders are the owners of the company (i.e., they have an equity stake), whereas bond-holders are lenders to the issuing company. Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely. An exception is a consol bond, which is a perpetuity (i.e., bond with no maturity).
Bonds are issued by public authorities, credit institutions, companies and supranational institutions in the primary markets. The most common process of issuing bonds is through underwriting. In underwriting, one or more securities firms or banks, forming a syndicate, buy an entire issue of bonds from an issuer and re-sell them to investors. The security firm takes the risk of issue not being sold to investors. Government bonds are typically auctioned.
But the thing apparently about these Credit Default Swaps is that one can buy this insurance, one of these "swaps", without ever having to own the original bond or "asset" in the first place. So a Credit Default Swap then in this sense amounts to a kind of sidebet. It is a sidebet. All kinds of sidebets actually. An entire interconnected network of sidebets made largely with borrowed money. And as I find myself reading and researching on all this stuff this is always the question I inevitably arrive at: How this came to be and why this is allowed in the first place is a total mystery to me. And this certainly goes to the moral issue at the heart of all this, I feel. For if someone wants go and gamble all their money away in say Vegas, or even in Niagara Falls, I guess that's their perogative. But when you are a professional money manager dealing with shareholder and investor money - other people's money - and when all that money is all interconnected within the global financial system with everybody's else's money, and savings and pension funds and mortgages etc. it seems to me that it soon becomes everybody's problem. These arcane and exotic "financial instruments" were developed and designed after all, essentially - it seems to me, as a way to displace risk. To extend the risk. And that risk was absolutley massive. And it seems that the riskier it became the more arcane and complicated the entire enterprise became. And now it has certainly become the problem of the hundreds of millions of taxpayers who never engaged in any of this stuff, or who like myself, never knew anything about any of it in the first place, the instant the bankers and executives came looking for and graciously accepting their subsequent billions and even trillions of dollars of bail out money. (Yes, I'm Canadian - but our government has now gone and "purchased" $75 billion dollars worth of residential mortgages in order to "stabilize the industry". At a ratio of 10 to 1 in terms of population that would be the equivalent of the 750 billion U.S. bailout - no? What's the exposure of Canadian banks in the American subprime mess, and in the derivatives and CDS market?)
But lets try to get specific again. Many of the bonds that were at the heart of these Credit Default Swaps, for example, were bonds issued by these Mortgage Companies who were dealing largely in subprime mortages and were issuing many, many tranches of Collaterlized Debt Obligations.
(If you, like myself until recently, don't know what a Collaterlized Debt Obligation you could read my first post in this series, or you could take the time to watch the following video from the NPR show Marketplace:
Crisis explainer: Uncorking CDOs from Marketplace on Vimeo.)
Now back to the story Steve Eisman.
Steve Eisman was managing a hedge fund called Frontpoint (I assume that's the right site) and he thought that whole subprime mortage market was a house of cards and thus he was making it his business to sell the stock in some of these companies 'short'. But he was frustrated because as Lewis writes: "Smart as these trades proved to be, they weren’t entirely satisfying. These companies paid high dividends, and their shares were often expensive to borrow; selling them short was a costly proposition.". So:
Enter Greg Lippman (now affectionately known as 'Shittman' to his many detractors), a mortgage-bond trader at Deutsche Bank. He arrived at FrontPoint bearing a 66-page presentation that described a better way for the fund to put its view of both Wall Street and the U.S. housing market into action. The smart trade, Lippman argued, was to sell short not New Century’s (a mortgage company) stock but its bonds that were backed by the subprime loans it had made. Eisman hadn’t known this was even possible—because until recently, it hadn’t been. But Lippman, along with traders at other Wall Street investment banks, had created a way to short the subprime bond market with precision.Here’s where financial technology became suddenly, urgently relevant. The typical mortgage bond was still structured in much the same way it had been when I (Lewis) worked at Salomon Brothers. The loans went into a trust that was designed to pay off its investors not all at once but according to their rankings. The investors in the top tranche, rated AAA, received the first payment from the trust and, because their investment was the least risky, received the lowest interest rate on their money. The investors who held the trusts’ BBB tranche got the last payments—and bore the brunt of the first defaults. Because they were taking the most risk, they received the highest return. Eisman wanted to bet that some subprime borrowers would default, causing the trust to suffer losses. The way to express this view was to short the BBB tranche. The trouble was that the BBB tranche was only a tiny slice of the deal.
But the scarcity of truly crappy subprime-mortgage bonds no longer mattered. The big Wall Street firms had just made it possible to short even the tiniest and most obscure subprime-mortgage-backed bond by creating, in effect, a market of side bets. Instead of shorting the actual BBB bond, you could now enter into an agreement for a credit-default swap with Deutsche Bank or Goldman Sachs. It cost money to make this side bet, but nothing like what it cost to short the stocks, and the upside was far greater.
The arrangement bore the same relation to actual finance as fantasy football bears to the N.F.L. Eisman was perplexed in particular about why Wall Street firms would be coming to him and asking him to sell short. “What Lippman did, to his credit, was he came around several times to me and said, ‘Short this market,’ ” Eisman says. “In my entire life, I never saw a sell-side guy come in and say, ‘Short my market.’”
As a guy named Russel in this NPR Planet Money link asks:
I too cannot figure out how shorting the CDO market was, in effect, propping it up.
Its the same question I keep asking myself. Its the same question Kevin Drum asks himself - here:
I still won't pretend that I fully understand this. In fact, every time I read a story like this, it seems to get right up to the good stuff — "They were creating them out of whole cloth. One hundred times over!" — and then suddenly moves on. But I want more! I want an entire 10,000 word piece on how the combination of CDOs and CDS allowed Wall Street to magnify their underlying subprime losses so catastrophically. Instead, I just get a teaser and then the story meanders off in a more colorful direction.
I'd like to read that piece too. But nonetheless, its the same question that Steve Eisner was apparently asking himself. Until he came to a kind of eureka moment while attending a subprime mortgage conference in Las Vegas of all places. Again, from the Lewis piece:
“You have to understand this,” he (Eisman) says. “This was the engine of doom.” Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. “I cannot fucking believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says.
Later on he was having dinner with a guy who was a CDO manager whose job it was the sell these lowest of the low tranches of mortgages - what Eisman had taken to calling dogshit - and he assumed that the guy would be having a hard time but instead he told Eisman that he was selling everything out.
“Then he said something that blew my mind,” Eisman tells me (Lewis). “He says, ‘I love guys like you who short my market. Without you, I don’t have anything to buy.’ ”That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”
I still don't quite understand why this is allowed either, but I'm still trying and I suppose I'm getting closer. David Kestenbaum in the same NPR Planet Money link as above makes his own attempt:
Ok, here's my stab at it:Eisman was trying to find a way to bet that the housing market would crash. One of the ways he did this was by buying insurance on subprime mortgages, through something called a credit default swap.
Ok, selling insurance may seem like a strange way to place that bet. But imagine there is a house by the ocean and you want to bet that it's going to get hit by a hurricane. One way to do that would be to take out an insurance policy on the house, even though you don't own it. So every month you pay a small premium for the insurance, maybe $200. This goes on for a couple years. Then the house gets hit. And the insurance policy pays off, for say $1,000,000. You've lost a couple thousand, but made close to a million.
The reason the CDO expert was happy that Eisman was buying insurance, was that the expert had clients that were dying to sell that insurance. These were people who wanted to buy up mortgages, but there just weren't enough around. So they sold insurance instead. In a sense it was the same thing, owning mortgages and selling insurance. If you own someone's mortgage, then you get steady interest payments. If you sell insurance on someone's house, then you get paid steady insurance premiums. The two are similar on the downside also. In each case, if things go bad, you could lose an amount equal to the total value of the house.
There was a whole industry build up around this similarity. In a regular CDO (collateralized debt obligation) you actually own some mortgages in a pool. In a synthetic CDO you're selling insurance on a slice of mortgages in a pool. They're similar instruments, but constructed from different pieces. In one you own the mortgages. In another you're selling insurance on them.
Still confused? Me too. But I'm still doing my best. If you like, you could watch another video from Marketplace - this one specifically about Credit Default Swaps:
Untangling credit default swaps from Marketplace on Vimeo.
(Why is that the American public media is doing a much better job of following and explaining this story, it seems to me.)
Or you could read this NYT piece from last Febuary 17 ('08) that attempted to foresee what was coming:
Few Americans have heard of credit default swaps, arcane financial instruments invented by Wall Street about a decade ago. But if the economy keeps slowing, credit default swaps, like subprime mortgages, may become a household term.Credit default swaps form a large but obscure market that will be put to its first big test as a looming economic downturn strains companies’ finances. Like a homeowner’s policy that insures against a flood or fire, these instruments are intended to cover losses to banks and bondholders when companies fail to pay their debts.
The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — roughly twice the size of the entire United States stock market.
$45 trillion? That's so last year. I've been reading numbers as high as $72 trillion. To put this in perspective remember that the entire annual GDP of the United States itself, the largest economy in the world, is (according to the CIA) 13.3 trillion dollars. The GDP of the entire global economy (circa 2007) is thought to be just over 65 trillion dollars. That doesn't blow your mind? The entire Derivatives market itself - according to the NYT as of 2007: "is valued at $531 trillion, up from $106 trillion in 2002 and a relative pittance just two decades ago.".
Right. Lets not forget about "derivatives". Unsure as to what a "derivative" is? Me too. Johsua Holland tries to explain in this Alternet piece :
So just what is a derivative? A derivative is a piece of paper that can be bought and sold for real money but isn't attached to a real asset. Its value is simply derived from something tangible -- hence the name. You hear a lot of talk these days about the "real" nuts-and-bolts economy, and derivatives are in essence the exact opposite: They represent an unreal economy, created by financiers in mahogany-paneled office suites in New York and London, and it's this shadow economy that teeters on the edge of collapse today, threatening to bring down much of the real economy with it.There are all sorts of derivatives. They are essentially bets -- you can bet that a market will go up, or down, or that a particular company will do well or poorly. You can bet on interest rates going up or down, or the value of a country's currency, or you can make more exotic bets about just about anything in the world -- even what the weather will be like at some point in the future.
(BUDDY: I'll bet a million dollars it snows this afternoon.
JOE SCHMOE: Oh yeah. You think you're so smart - what kind of flakes asshole? Maybe you should be in the "flakes derivative market". Because you know, the Inuit have over a hundred words for snow. Real men play the flakes. Just saying.
But then it doesn't snow, so BUDDY in a anxious panic, desperate about his financial future, incredulous as to the way things have turned out, calls his Congressman. He knows him. They went to Yale together.)
He links to this Andrew Leonard Salon piece - Panic on Wall Street - and Leonard also picks up on this useful NFL metaphor as a way of explanation:
A metaphor might be useful here. The real economy is like the Super Bowl. Real men on a real field push each other around and play with a real ball for a set period of time, and the team with the most points at the end wins. But while all this is going on, millions of outsiders who are not physically involved in the game bet on its outcome. Only they don't bet just on the outcome. They also bet on the spread -- how badly one team might beat the other. Or they can get more creative and bet on what the combined score of the teams might be, or which team's quarterback will be the first to be injured. There's absolutely no limit to the things that you can bet on, as long as you can find someone to take your bet.The betting economy is the unreal economy. All those sports bets, no matter how kooky, are financial exercises whose value and meaning are derived from what happens on the field. Theoretically speaking, the betting economy exists in a separate dimension from the actual game, but we all know that's not true. There's so much money involved in gambling that the temptation to fix the results becomes irresistible. Players and referees, for instance, can be bribed.
We can call a bribed NBA official an example of "spillover" from the betting economy into the sports economy. The very same thing happens in the real and unreal economies. So much money is riding on all the derivative bets connected to the housing sector that Wall Street speculators essentially rigged the housing sector to make their bets pay off.
And then remember to take into account that the money (and I would guess most, certainly the majority of the money) that was used to engage in all of these practices was "leveraged". That is to say that it was borrowed money. Somebody else's money, if it ever even existed at all. As Joshua Holland explains:
This brings us to a key issue in the banking mess, one that has serious ramifications for how we move forward in the future. Obscured by the finger-pointing is a simple question: How could a drop in the value of the American housing market -- even a 20 percent drop in home prices -- threaten to bring down the entire global economy?Part of the answer is "leveraging" -- using a limited amount of cash to buy a much larger position in an investment. Leveraging is a common investment tool, but there are rules in effect in regulated markets like the major stock and bond markets that limit the amount that an investor can leverage -- for example, the SEC says you have to put up at least 50 percent of the cost to buy a stock on American stock exchanges. But these fancy debt-backed investments are contracts between two gamblers and are not subject to those rules. They're traded "over the counter" -- in an opaque and largely unregulated exchange.
He links to Nouriel Roubini who explains:
Today any wealthy individual can take $1 million and go to a prime broker and leverage this amount three times; then the resulting $4 million ($1 equity and $3 debt) can be invested in a fund of funds that will in turn leverage these $4 millions three or four times and invest them in a hedge fund; then the hedge fund will take these funds and leverage them three or four times and buy some very junior tranche of a CDO that is itself levered nine or ten times. At the end of this credit chain, the initial $1 million of equity becomes a $100 million investment out of which $99 million is debt (leverage) and only $1 million is equity. So we got an overall leverage ratio of 100 to 1. Then, even a small 1% fall in the price of the final investment (CDO) wipes out the initial capital and creates a chain of margin calls that unravel this debt house of cards. This unraveling of a Minskian Ponzi credit scheme is exactly what is happening right now in financial markets.
Indeed, as this NYT article - Agency's '04 Rule Let Banks Pile Up New Debt - explains in 2004 representatives of the major investment banks had demanded and received a meeting of the Securities and Exchange Commission where they asked for a change in the laws governing just how much they were legally bound to keep in capital reserve:
On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.
The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.
And they got what they wanted:
After 55 minutes of discussion, which can now be heard on the Web sites of the agency and The Times, the chairman, William H. Donaldson, a veteran Wall Street executive, called for a vote. It was unanimous. The decision, changing what was known as the net capital rule, was completed and published in The Federal Register a few months later.With that, the five big independent investment firms were unleashed.
In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves.
Over the following months and years, each of the firms would take advantage of the looser rules. At Bear Stearns, the leverage ratio — a measurement of how much the firm was borrowing compared to its total assets — rose sharply, to 33 to 1. In other words, for every dollar in equity, it had $33 of debt. The ratios at the other firms also rose significantly.
(This article is one of many in the recent NYT series on the 'financial crisis': The Reckoning.)
Indeed, the lobbying arm of this industry, the International Swaps and Derivatives Association had always fought hard against any kind of regulation or government oversight and in 2000, in the last vote of the then lame-duck Congress they achieved what has been described "the final nail in the regulatory coffin" with the passage of the Commodity Futures Modernization Act. After the collapse of Enron, which up until all this recent crisis had been the largest corporate failure in the history of the United States, the Act was famous for what came to be known as its Enron loophole which exempted over the counter energy trades from government regulation. The Act was championed by then Senator Phil Gramm of Texas, who has subsequently became famous for the following remarks made while he was an advisor on economics with the McCain/Palin campaign:
But if all of this still isn't enough for you could still read about Credit Default Swaps in TIME from last March, or in Newsweek from last September.
Or you could do what I've been doing a lot lately which is to read the blog and listen to the podcasts from NPR's Planet Money. They post great posts on all of this stuff like: AIG and the trouble with Credit Default Swaps. Its where I found that great This American Life Podcast - The Giant Pool of Money for my first post in this series. And they also have a new podcast specifically about Credit Default Swap market - NPR - another Frightening Show about the Economy . I'd quote from it directly but they haven't issued the transcript.
Or you could watch the following two videos from 60 Minutes on both the Credit Default Swap and Derivatives markets:
Or just in case you wanted to read just one more football metaphor on who is responsible for all of this you could read Matt Taibbi cut to the chase in his original post on the subject - Wall Street: Less Responsible Than a Coked-Out NFL Running Back :
I plead guilty. I'm not an expert on any of this. Anyone who is, is welcome to write to me and fill me in. And obviously it wasn't just CDOs and CDS and MBS that caused this crash. Everything points to a confluence of many different bad or unsound practices. There are plenty of people out there who actually know what they're talking about who are describing these issues – the predatory lending, those crazy subprime mortgages in which the low teaser rates were like the free drinks that brought borrowers to the blackjack table (hoping they would hit 21 via continually rising real estate prices), the ramping back of one Roosevelt-era regulation after another (culminating in the repeal of the Glass-Steagall Act), the generally high level of speculative home-buying, etc.But the root cause of all of this is the same thing that has caused every speculative bubble since the tulip craze. It's a bunch of assholes who think that because they spent a few days scribbling some equation on a napkin, the laws of nature have been repealed. You can't turn a Kingston charcoal briquette into a diamond no matter how hard you squeeze and you can't conquer the problem of "risk" in investing by slicing a bunch of mortgages up into itty bitty pieces and then mixing the good ones up with the bad ones (so that it all looks kosher from a distance, if you squint).
The reason I thought it necessary to even write about this at all is that I haven't anywhere seen anyone say what absolutely needs to be said about this crash. You see finance/media people on TV just kind of moping around, with this hangdog look on their face that says, aw, man, this blows, what shitty luck. Like this downturn in housing prices was some terrible accident, like a hurricane or a flood.
Bullshit! These people on Wall Street – who are often the cream of our educational crop, the products of our most advantaged families – exist in society for exactly one reason. Yes they're supposed to create wealth (and it's great if they can figure out a way to do more with a dollar than you or I would). But the number one thing they're supposed to do is not fucking lose wealth. That is the number one justification for their enormous salaries and astonishingly privileged existences. These people are not writing Huck Finn, they're not painting Still Life With Apples, they're not inventing the Atlas rocket, they're not designing timeless buildings or making inspiring speeches.
They do exactly one thing, and that is guard our money. Their first, second, third, fourth, fifth, sixth, seventh, eighth and ninth moves of every day have to be utterly conservative. They are the people we trust with the keys to the car. That's why they get to sleep in the grownups' room. That's why they get to live in palaces and work in eighty-story obelisks. Because if you just give some dude at a bar nineteen billion dollars, he's going to spend half of it on beer and the rest betting on the Phillies. Right? That's why you have to give it to the guy with two degrees from Yale, the guy who's studied every great book on economics since The Wealth of Nations, the guy who spent eight years in the best schools in the world learning the difference between a calculated risk and a seat-of-the-pants gamble.
Well, apparently not. What we're finding out about this crisis is that you basically couldn't have found a weather-beaten crack hound on the streets of the worst ghetto in America who would have taken worse care of our nation's treasure than this community of risk-addicted craps-playing blowhards.
Sports fans out there, you know who Travis Henry is? That guy who played running back for the Bills, Titans and Broncos? Travis Henry made many millions of dollars playing football over the years, but we found out this fall that he's broke and deep in debt because a) he fathered at least ten children by ten different women b) he's got an apparently incurable drug problem and c) he tried to get out of his financial problems by dealing coke and ended up getting arrested doing it. Now those ten kids are really in trouble for about the next 18-25 years.
Well, Travis Henry would have done a better job of things than Wall Street did with the world's wealth. These guys didn't just bet the house on their investments. They bet fifty times the house! They bet a thousand times the house! They were absolute fucking madmen. All those brilliant ways they thought up to make four hundred different bets with the same dollar made them infinitely more dangerous to society than some coke-freak running back pumping his jism into two cookies on every road date. Think about that. If Travis Henry had been in charge of all that money, we'd be FINE now! Even Travis Henry couldn't even imagine the scale of desperate irresponsible greed we're talking about with these guys. They were like a bunch of rabbits on strychnine. You don't get to an almost mathematically inexpressible financial collapse through merely ordinary greed and irresponsibility of the type you might encounter in your home life, or even on the Buffalo Bills. You need an advanced education to dig this big a hole.
Things like the CDO and the CDS are just the tools these idiots used to dig that hole. There were plenty more. But the basic concept is the same across the board. They were supposed to safeguard our money and instead they gambled with it like a bunch of coke addicts. You know how a coke addict goes from having money to buy his own coke, to selling the shit in his house to buy coke, to stealing items from his mother's place to buy coke, and then finally ends up in Jayson Blair/Maureen McCormick territory, sucking cocks to get the money to buy the coke? Well, these guys in Wall Street were about fifty stages past that. They were promising to promise to suck a cock to get the money to buy the coke. This crash happened when the dealer finally decided they weren't good for it.
Just don't let anyone tell you this was all bad luck. If they'd been doing their jobs, the possibility of bad luck would have been figured into the equation.
Or as George Packer wrote:
The moral code of these Wall Street executives corresponds to stage one of Lawrence Kohlberg’s famous stages of morality: “The concern is with what authorities permit and punish.” Morally, they are very young children. The Swiss bankers are closer to stage four, most common among late teens, where a concern for maintaining the good functioning of society takes hold. Stage six, an elaboration of universal moral principles based on an idea of the good society, is a distant dream for the titans of global finance.In private life, extreme indebtedness, bankruptcy, the ruin of those close to you, and dependence on the government dole are generally thought to be causes for anguish, self-denial, and a degree of shame. But if you’re a financial executive with an exalted title, a big enough salary, a deep enough debt, and a vast enough handout, these same disasters entitle you to go on living and feeling about yourself much as you did before. You even have a right to think that the taxpayers owe it to you—that it’s for their own good, not yours. You don’t have to explain yourself; you certainly don’t have to apologize.
I would like to see these malefactors of great wealth apologize to the country. I would like to see them organize their own press conference in a lineup on Wall Street and, in the manner of disgraced Japanese officials, bow low to the pavement, express contrition, and beg their countrymen’s forgiveness. Such a scene would go some way toward cleansing the smell of the financial crisis.
Of course, nothing like this is going to happen. So instead, like the parents of two-year-olds, the next Congress should summon them to Washington and publicly punish these executives who, in Kohlberg’s terms, “see morality as something external to themselves, as that which the big people say they must do.”
But we will give Steve Eisman the last word:
"It was like feeding the monster," Eisman says of the market for subprime bonds. "We fed the monster until it blew up."
So there it is. I rest my case.
The monster blew up. So bring on The Monster.
But as I've already come this far - let me see if I've actually got this straight:
At the risk of portraying this as some how exclusively a Republican problem (which it decidedly is not) let's take this time in these final days to recall that after pretty much stealing the Presidential election in 2000 the Administration of George W. Bush assumed office with projected ten year budget surpluses of 5.6 trillion dollars - he immediately enacted and then enacted again tax cuts that amounted to about a one trillion dollar return - primarily to wealthiest one percent in the United States (over a ten year period up and until the time that the spending on old age benefits for retiring baby boomers begins to kick in). He also started at least two wars including the war in Iraq where he deliberately mislead his people as to the reason why it needed to be fought with no plan for the subsequent occupation. Its a war that continues to cost about twelve billion dollars a month officially, and alongside the War in Afghanistan is presently projected to ultimately cost more than three trillion dollars and growing. (Not to mention the fact by some estimates over one million Iraqi civilians have now been killed, alongside over 4200 American soldiers, with maybe 100 000 wounded) And there is presently no end in sight for either war. The overall Defense Budget under George W. Bush has also now officially risen to 612 billion dollars, but as Chalmers Johnson explains:
Our annual spending on "national security" -- meaning the defense budget plus all military expenditures hidden in the budgets for the departments of Energy, State, Treasury, Veterans Affairs, the CIA, and numerous other places in the executive branch -- already exceeds a trillion dollars, an amount larger than that of all other national defense budgets combined.
And the U.S. budget deficit itself might soon reach a trillion dollars, with the debt now on its way to $11 trillion dollars.
But meanwhile, back on Wall Street,
while all this other stuff has been going on apparently the "financial elites" (forgive me, I can't come up with a better term) of the United States have been engaging in the financial practices of "exotic" and "arcane" instruments like Credit Default Swaps and Derivatives - trading in what has been termed a "shadow economy", completely unregulated (and maintained as such through deliberate political pressure and design), extremely opaque to the general tax paying public at best, totally and completely unknown at worst. Practices that essentially gamed
the real economy - creating an unreal economy to a market value of hundreds of trillions of dollars. An unreal economy that began in the late eighties but really, really took off after the year 2000.
And now that unreal economy is imploding with catastrophic effects spilling out all over into both the real and unreal worlds alike, resulting in things like - one in five American homeowners now owing more on their mortgages than the worth of their actual houses (underwater, as they call it), an economy that has shed 1.2 million jobs in three months, the bankruptcy and collapse of one of the country's oldest investment banks, and the bailout of the largest insurance company in the world - leading ultimately to this massive combined bailout from the federal government, now - here, in these final days of the Bush Administration. A cash outlay from the U.S. Treasury that presently amounts to more than $4.6 trillion dollars - $4.6165 trillion as of November 25. If that is indeed the correct number - if this article is to be believed, for instance. And if it is than that would mean that this bailout has now cost more than the:
"• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
• Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion
TOTAL: $3.92 trillion"
combined.
And (as the author goes on to state) - this is more than the entire cash outlay for the entire American commitment to World War II:
The $4.6165 trillion dollars committed so far is about a trillion dollars ($979 billion dollars) greater than the entire cost of World War II borne by the United States: $3.6 trillion, adjusted for inflation (original cost was $288 billion).Go figure: WWII was a relative bargain.
But this is the low estimate.
According this Edmund L. Andrews article in the NYT the real cost is more in the order of $7.8 trillion:
In the last year, the government has assumed about $7.8 trillion in direct and indirect financial obligations. That is equal to about half the size of the nation’s entire economy and far eclipses the $700 billion that Congress authorized for the Treasury’s financial rescue plan.Those obligations include about $1.4 trillion that has already been committed to loans, capital infusions to banks and the rescues of firms like Bear Stearns and the American International Group, the troubled insurance conglomerate. But they also include additional trillions in government guarantees on mortgages, bank deposits, commercial loans and money market funds.
So there you have it.
And for some reason, dear reader (if you've made it this far) I just can't think of all of this stuff without remembering the fact that, you know, people in Haiti are eating mud in order to force off imminent starvation.
Over three billion people live on less than $2.50 a day. Over 80% live on less than ten dollars a day.
And yet trillions of dollars are presently flowing out of government coffers (most of it borrowed - from whom and for how long?) in order to help prop up the financial industry, and some of the richest people on the planet, and ultimately save the entire global economic system, as they say.
Because if we don't, and they didn't get that money ...
FURTHERMORE:
John Paulson and Josh Birnaum - two other guys who also made a lot of money on this financial meltdown.
I'm no Monarchist, far from it, but the imminent meeting between Harper and Her Excellency the Right Honourable Michaelle Jean Governor General of Canada in a few hours at least gives me the excuse to post on Her Majesty's (or whatever) ultra-post-modern, totally twenty-first century Personal Coat of Arms which I have always found completely fascinating. From her own website:
In the centre of the coat of arms is a sand dollar, which is a special talisman for Michaëlle Jean. Sand dollars are marine creatures found on both the Atlantic and Pacific coasts of Canada and Northern United States. The Royal Crown symbolizes the vice-regal function and service to all Canadians. Above the shield, the sea shell and broken chain allude to the famous sculpture Marron inconnu by Albert Mangonès, displayed in Port-au-Prince, Haiti, depicting an escaped slave blowing a sea shell to gather and call to arms his fellow sufferers around the whole island. For Michaëlle Jean this image evokes the victory of her ancestors over barbarism and, more broadly, the call to liberty. Beside the shield are two Simbis, water spirits from Haitian culture who comfort souls, purify troubled waters and intervene with wisdom and foresight. Moreover, the Simbis' words are enlightening and soothing. These two feminine figures symbolize the vital role played by women in advancing social justice. They are shown in front of a rock set with a palm tree, a symbol of peace in Haitian history, and a pine tree representing the natural riches of Canada. The motto Briser les solitudes, which means "Breaking down solitudes", is at the heart of the objectives Michaëlle Jean intends to follow.
From the classic Divine Horsemen:The Living Gods of Haiti by Maya Deren:
"(Simbi) is definitely a cross-roads loa, and his symbol, or vever, is a snake in a field of crosses ... In Simbi's case, the cross-roads principle is extended to the concept of straddling the Rada/Petro division in one direction (it is said that, while Simbi is primarily Rada, a "hungry" Simbi would be invoked through Petro) while in the other direction, he is known as Simbi/en/deux/eux and straddles the waters above and the waters below, which are understood either as the heavenly and the abysmal waters, or as the sweet and salt waters. .... Certainly it is a role for which his pivotal position in the cosmos and in the pantheon equips him admirably, for he radiates in every direction from his central location ... Yet, for all his activity, his personality is more obscure that that of many other loa. Songs refer repeatedly to his reluctance to enter the hounfor gate, his loitering outside, like a sociable neighbour newly come to the district, who is still a little shy for all his knowledge and power."
(Moshe Holtsberg, the two year old orphan of Rabbi Gavriel Holtzberg and his wife Rivka slain at the seige on the Mumbai Jewish Centre, cries during their memorial service in Mumbai on Monday)
On hearing that Ajmal Amir Qasab, the one surviving suspect from last week's jihadi terrorist attacks in Mumbai last week, has supposedly admitted to being a member of Lashkar-e-Taiba I immediately remembered this NYT article - Militants escape control of Pakistan, Officials say - by Carlotta Gall and David Rhode (which I linked to) from last January.
A huge story then, getting bigger all the time:
ISLAMABAD, Pakistan — Pakistan’s premier military intelligence agency has lost control of some of the networks of Pakistani militants it has nurtured since the 1980s, and is now suffering the violent blowback of that policy, two former senior intelligence officials and other officials close to the agency say.
NYT: Fresh Blood from an Old Wound - Pankaj Mishra:
MIDWAY through last week’s murderous rampage in Mumbai, one of the suspected gunmen at the besieged Jewish center called a popular Indian TV channel. Speaking in Urdu (the primary language of Pakistan and many Indian Muslims), he ranted against the recent visit of an Israeli general to the Indian-ruled section of the Kashmir Valley. Referring to the Pakistan-backed insurgency in the valley, and the Indian military response to it, he asked, “Are you aware how many people have been killed in Kashmir?”In a separate phone call, another gunman invoked the oppression of Muslims by Hindu nationalists and the destruction of the Babri Mosque in Ayodhya in 1992. Such calls were the only occasions on which the militants, whom initial reports have tied to the Pakistani jihadist group Lashkar-e-Taiba, offered a likely motive for their indiscriminate slaughter. Their rhetoric seems all too familiar. Nevertheless, it shows how older political conflicts in South Asia have been rendered more noxious by the fallout from the “war on terror” and the rise of international jihadism.
American pressure after 9/11 forced Pakistan’s president, Pervez Musharraf, to ban Lashkar-e-Taiba, which had developed links with the Taliban and Al Qaeda. With General Musharraf’s departure from office in September, it would be no surprise if this turned out to be the Muslim group’s first major atrocity since 2001.Pakistan’s new civilian government is too weak to control either the extremist groups within the country or the various rogue elements within its military and intelligence. The American military was reported to have started bombing supposed terrorist hideouts inside Pakistan’s borders even as General Musharraf stumbled to the exit. As its increasingly desperate pleas to the Bush administration to stop the attacks go unheeded, Pakistan’s government appears pathetically helpless to its own citizens.
The sense of humiliation and impotence that this loss of sovereignty creates in Pakistan, a country with a strong tradition of populist nationalism, cannot be underestimated.
Meanwhile, India’s influence in Afghanistan has grown as it pours reconstruction money into the country, as have its military ties with Israel. Add to this the Bush administration’s decision to reward India with an extraordinarily generous nuclear deal and to more or less ignore Kashmir, where in August Indian security forces brutally suppressed the biggest nonviolent demonstrations in the valley’s history, and recent attacks against the Indian Embassy in Kabul, the Marriott Hotel in Islamabad, and now in Mumbai begin to appear to be connected by more than chronology.
Meanwhile, Indian intelligence experts and others suspect that jihadists and disaffected members of Pakistan’s armed forces and intelligence agencies have forged closer links and, as the string of recent bomb attacks on Indian cities reveals, are rapidly making new allies among the 13 percent of Indians who are Muslim.
FURTHERMORE:
Alternet: Mumbai Attacks: Piecing Together the Story
India: Please don't go down the Bush/Cheney Road - Juan Cole
