Addicted to Real Estate

We’re just so accustomed to treating our homes as an investment that even in times when residential real estate has dropped in value by 40% over the past few years – 60% in communities like Las Vegas, NV since 2006 – there are lots of investors and homebuyers who only remember how far home prices fell in 1993 and how they skyrocketed in the years following. They still believe that such an explosion of value is just around the corner, despite the fact that there are market conditions that are materially different from that era: vastly higher unemployment (which almost everyone agrees will last years longer than any recession in recent memory) and a complete lack of sufficient credit (particularly for anything but lower and entry-level housing) to fund the necessary demand that drives home prices upward and pulls all real estate values w ith it.

In Vegas, according to the May 16^th New York Times, there are 9,517 “spanking new” houses sitting empty as well as an “additional 5,600 homes were repossessed by lenders in the first three months of this year and could soon be for sale.” So you’d think that Las Vegas would be the absolutely last place in the country that would be pushing to build new housing. You’d be wrong, although you might be right as to the fate such new housing would like face in the near term. Because building and land costs are now so low, builders in Vegas (and other hard-hit “sand” states) believe that constructing houses with new values – green requirements and new efficiency considerations – will be well-received in the marketplace. 1,100 homes are under construction in Vegas, and cheap lots for more are g oing fast. “The chance to make money on the next housing boom ‘is like it’s never been,’ Mr. [Richard] Lee, a real estate promoter, assured a crowd of agents, investors and bankers. ‘We’re going to come back like you’ve never seen us before.’”

The Times continues: “Las Vegas is trying to recover by building what it does not need. It is an unlikely pattern being repeated in many of the areas where the housing crash was most severe… ‘There’s a surprising rebound in the hardest-hit markets,’ said Brad Hunter, chief economist with the consultant Metrostudy. ‘People are buying again.’ From the recession’s lows, construction has nearly doubled in Las Vegas, Phoenix and Tucson. It is up 74 percent in inland Southern California and soaring in Florida.” Because these are often starter homes, they come with financing that could not be applied to people trying to buy foreclosed properties.

“In Phoenix, a billboard for Fulton Homes summed up the builders’ marketing approach. ‘Does your foreclosure have tenants?’ it asks, next to a picture of a mammoth cockroach… Brent Anderson, a marketing executive with another Southwest builder, Meritage Homes, said it bought 713 lots in stricken Arizona last year, and was on the verge of starting construction in a new Phoenix community called Lyon’s Gate… ‘We’re building them because we’re selling them,’ Mr. Anderson said. ‘Our customers wouldn’t care if there were 50 homes in an established neighborhood of 1980 or 1990 vintage, all foreclosed, empty and for sale at $10,000 less. They want new. And what are we going to do, let someone else build it?’” The Times.

I’ve written of entirely new communities, stripped of appliances and bulldozed because of taxes on finished homes as well as the cost of maintaining the properties. I’ve suggested that if we have new industries that need a place to locate, we set these up near these vast tracts of vacant homes to give new workers new opportunities to become homeowners at reasonable cost. It just seems odd that in communities that do not have jobs to sustain those who might buy this newly-created inventory, perhaps there needs to be a new set of realistic priorities before we begin what has failed so miserably over the last few years.

I’m Peter Dekom, and I never ceased to be amazed at what people do.

Faction B

Fact Number One: American residents – including corporations and their international subsidiaries – are subject to the application of the Foreign Corrupt Practices Act, a federal statute that imposes possible stiff fines and prison time for offenders. Basically, it makes bribing a foreign official into granting a discretionary favor or bestowing a discretionary benefit (or avoiding a detriment) on the bribing individual or company. Bribes range from the standard envelope stuffed with cash to covering travel, golf fees, lavish travel benefits, hookers, and gifts. This statute is serially enforced and while it tracks parallel laws in other Western nations, it is more strictly applied (however serially) than the “wink wink” enforcement of such laws in many other countries. And if you think hiring a “consultant” to act as an intermediary to “take care of business” – even if your contract proscribes FCPA violations but you know or should know that economic benefits are flowing to a government official – you are not exempt from the long arm of the law. You can’t hide behind a corporate barrier; individual executives go down too.

Fact Number Two: In much of the developing world, failure to bribe effectively means you cannot do business in so many nations unless you have something that the government officials want so much, they will leave you alone.

Fact Number Three: Virtually every country on earth makes bribing government officials a crime with severe sanctions.

I’m seeing the video game now, except this “game” is played out in real life every day. Americans lose out all the time as nationals from other countries secure contracts that should have gone to the better-qualified Americans because smart American managers stay on the right side of a murky line. It’s life. But I’d like to focus on one country – the Peoples Republic of China – that faces corruption issues every day, an issue that eludes even the highest ranking officials who really do want to end these economically inefficient practices.

Every year approximately 150,000 people are convicted of some form of corruption in China. But without a payoff, lots of business just doesn’t get done. The typical “joint venture” structures required in many facets of Chinese law for foreigners to do business on the Mainland creates clear opportunities for abuse, particularly when the Chinese side of the equation just sits there and accumulates benefits as a de facto passive partner. And who your “partner” is and which government officials you have relationships with very much determines the risks of doing business in China without getting hauled away to a Chinese jail charged with corruption, just as a herd of Australian/Chinese businessmen recently found out in a mining investment scandal that rocked both nations.

Picking the wrong horse to be your ally can be fatal. Take the case of Huang Guangyu, purportedly one of if not the richest individual in China. Huang, a high school dropout, began selling electronics goods and eventually owned a chain of about 1,300 “Gome” stores throughout China. Huang generated a worth of an estimated $6.3 billion. “But government prosecutors say he did it illegally, and a court in Beijing has convicted him of insider trading, leaking inside information and bribery….In addition to a 14-year prison sentence, Huang was also fined $88 million and had some of his assets seized, lawyers told Bloomberg News.

“In 2008, Huang was No. 1 on the Hurun Report's China Rich List. According to the report, 19 of the 1,330 executives on its rich list in the past decade are in jail or are awaiting sentencing on charges like bribery. Some observers have dubbed the phenomenon ‘the curse of the rich list.’… The report's publisher, Rupert Hoogewerf, told the BBC that Huang was a brilliant businessman but not a good enough politician… ‘Huang Guangyu was quite strange in so far as he didn't really cultivate his political contacts assiduously,’ Hoogewerf said. ‘You find that at the very top of the Chinese political establishment there are quite a number of different factions. He started cultivating faction A, and faction B got jealous and took him down.’” AolNews.com (May 18^th). D’oh!

I’m Peter Dekom, and business isn’t exactly an easy profession these days.

Is Immigration Reform Generating Generational Generalizations?

“Meaghan Patrick, a junior at New College of Florida, a tiny liberal arts college in Sarasota, says discussing immigration with her older relatives is like ‘hitting your head against a brick wall.’”New York Times, May 17^th. A bad economy makes folks that have lived longer and have more to lose a tad more clingy to the lifestyle and “American way” they’ve grown accustomed to. Mumble stuff like “they’re taking our jobs” or “we’re getting deeper in debt to pay for their social benefits” and even purported liberals become closet conservatives when it comes to immigration. It’s fear, and when a crime wave hit Arizona – kidnappings motivated by the drug wars in Mexico that have spilled over to our side of the border – well, that was more than enough proof that if feds couldn’t control the border, state troopers could. If you look brown and a trooper finds an excuse to stop you in that sand state… better have those proper immigration documents on you… or like it or not, off you go.

Forget about the fact that the drug wars are going on down there because we have too much demand for demon drugs up here. Forget that America is a nation of immigrants that took jobs and land away from the original American citizens – Native Americans – often by violent force. Forget that God didn’t draw these borders; men did. And if you were born a few inches on the wrong side of that line, well, tough… “it’s mine.” Is it really just the luck of the draw? Harsh reality is the greatest divider of generations may not be music or technology; it just may be the difference in how younger folks perceive undocumented aliens… but then, younger folks tend to have less of a vested interest than their elders: “This emerging divide has appeared in a handful of surveys taken since the [Arizona] measure was signed into law, including a New York Times/CBS News poll this month that found that Americans 45 and older were more likely than the young to say the Arizona law was ‘about right’ (as opposed to ‘going too far’ or ‘not far enough’). Boomers were also more likely to say that ‘no newcomers’ should be allowed to enter the country while more young people favored a ‘welcome all’ approach.” The Times. Does this mean that over time, America will soften its increasingly hardening “illegal immigrant” line?

The President is sending 1,200 National Guard troops to patrol our southern border – a move that conservatives are calling too little, too late – and the U.S. Attorney General’s office is making noises like it is siding with angry police officers who feel over burdened with normal police duties and who want the Arizona law quashed. Politicians are inserting litmus tests for immigration policy and tearing at opponents who don’t agree. Yet a nation should be able to control its borders, but the demands for cheap labor – work that actually has made it easier to sustain our lifestyle – seems to have outstripped the country’s ability to control immigration. Where Americans can legally take advantage of unskilled foreigners who work for wages and under working conditions that no American would accept, well they do… They just have a different label for it: “shopping at WalMart,” where cheap Asian and Latin American manufactures dominate the durable goods sections of the store. When it comes to our food chain – from picking crops or slaughtering cattle for our hamburgers – or our construction trades or our lower-end service trades (from kitchen to domestic help)… Americans still want a better price, so undocumented workers fit that bill pretty well.

Tell every American that they’ll have to pay an extra 20-30 percent or more to keep American jobs in and undocumented aliens out, think you’ll get the same reaction? Ask for the cash up front and take a vote. Fact is that not being able to control our borders also creates a miserable trade in well-armed coyotes, ignorant workers who are exploited beyond any semblance of ethical or moral behavior and a whole new set of criminals who prey on them. And a porous border can’t good for a nation fighting terrorists looking for a way to smuggle in some WMDs to take the wind out of the American sail, although coyotes are probably smart enough to turn such folks into to our Border Patrol agents to prevent a vicious counter-attack and a super-beefed-up border. Ever worry about the Canadian border where it is a whole lot easier to cross? Ever ask how easy it is for someone to enter Canada? Pretty easy.

Truth is that there is an ugly side of this issue no matter which side you are on. Think we have an infinite capacity to absorb immigrants? Open the borders wide without limitation and perhaps there will be an ultimate balance… where they are escaping from might not look a whole lot different from this side of the border, so they’ll stop wanting to cross. It’s just not practical. Close the borders and get rid of all the undocumented, and this country stops getting a pile of basic services; life’ll be slowed to a crawl or stop. For those where those services are still performed by America’s legitimate but marginally poor, well, trust me, if there is demand for that labor elsewhere at higher pay, the lack of service at the lowest levels will impact every community in this nation.

Fact is what we need is a lot more common sense. Start with reforming our drug laws so the incentive to smuggle isn’t so damned strong. Admit that we do in fact have lower-end jobs that only undocumented workers seem to want to do (even in times of high unemployment), and then let them do it (no matter how they got here), but collect taxes from them in the process. But at least have a way to record who they are so we can collect that money, one that doesn’t prevent them from signing on because they would be issuing their own deportation orders. Clamp down on employment that takes the form of cash payments and no withholding. And stop thinking that there is a basic solution that any state can implement that will make this all go away. We need some practical, not fired-up and angry, answers.

I’m Peter Dekom, and rational brainpower usually makes better decisions than someone who get emotional whenever a particular issue is discussed.

Got Sludge?

Look at the disaster in the Gulf of Mexico; the entire ecosystem may be imperiled for decades. Think we should stop off-shore exploration and drilling? On May 27^th, even as the big Gulf leak was plugging up, the President extended the moratorium on granting deepwater oil drilling permits by six months… but this cannot last. We’re heroin addicts, but the needle flows difficult oil… deepwater oil… messy and difficult to get oil. The easy fields are running out. Take a good look at this chart that appeared in the May 17^th DailyFinance.com: & nbsp;

Look very carefully at the projections for the immediate future. Notice how the aqua area (existing and mostly easy oil) almost disappears and how the very light blue and yellow (read: “really tough to get at” oil) get a whole lot fatter? And we’ve got to squeeze the nasty stuff from what’s left of the once “easy” fields.

“The chart's most striking feature is the rapid decline in existing capacities of large, mature fields such as Cantarell in Mexico, which after yielding 11 billion barrels of oil has seen production fall from 2 million barrels per day (BPD) to 770,000 BPD… Enhanced recovery technologies such as nitrogen injection are expected to pick up the slack by retrieving more oil from older fields, and unconventional sources such as Canadian oil-sand deposits will add modestly to global production. Industry sources estimate Canadian oil sands will produce 3 million barrels per day by 2015 -- a welcome quantity but small compared to the current global output of about 85 million BPD…To put those numbers in perspective, the U.S. consumes about 18.7 million BPD and produces 5.3 million BPD domestically.” DailyFinance.com.

Think about what disasters we will face in the future. Guess we should turn to coal instead, right? Clean coal! Clean only if you shove the toxic burn-off back into the ground for future generations to figure out how to “clean it.” Clean if you believe coal ash is a nice playful substance that doesn’t cause headaches, coughing, nosebleeds and maybe an early trip to the morgue. Safe if you ignore little side effects like the nasty flood in Tennessee – toxic waste everywhere – that made the sludge from the Exxon Valdez (which ran aground and dumped a mere 10.8 million gallons of crude in Prince Williams Sound, Alaska on March 24, 1989) look like a birdbath: “[On December 22, 2008] a 60-foot-tall dam broke at a holding pond at the Tennessee Valley Authority's Kingston power plant in Roane County, Tenn., dumping more than a billion gallons of toxic coal ash onto a nearby community and into the Clinch and Emory rivers… The largest industrial waste spill in U.S. history, the ash slide covered more than half a square mile, damaging 42 residential properties, knocking one home completely off its foundation and rendering three others uninhabitable. It dumped some 2.66 million pounds of 10 toxic pollutants including arsenic, lead, and mercury into the nearby rivers -- more than all the surface-water discharges from all U.S. power plants in 2007 according to a recent analysis. "The pollutants in coal ash have been linked to health problems including cancer, liver damage, and nervous disorders." Grist.org (Dec 22,2009) What have we done to ourselves? How do we get out of this mess? When is this possible?

I'm Peter Dekom and energy addicts make lousy global citizens.

Ain’t Got No Mariachis in Downtown Karachi

You’re a feudalistic society that did not adapt particularly well to democracy. You still call yourself a democracy even though the political scene is dominated by old-world family dynasties who keep power by making unholy alliances with some pretty unsavory militant fundamentalists. You deny a class system that truly dominates your entire nation, and the lower-class – and very hopeless – masses really hate the rich and a modern universe that they cannot afford to live in, seeking sanctuary in a religious belief that (1) battles the incumbent and modern forces that keep them down in this world and (2) promise a next world that will make it all better. The side channel of remotely possible upward mobility – the military – is increasingly dominated by officers who defied the odds and rose from the dregs of society to power positions atop this well-armed force… but still harbor hostility to modernity (except for the beautiful weapons that modernity brought), the Western world and the old powerful families. Wouldn’t look too good in a tourism brochure, but let’s face it, tourism (versus “terrorism”) is not a serious economic factor in Pakistan.

Pakistan has enough nuclear warheads (over 60-70) effectively to destroy the entire United States if somehow these WMDs could be “delivered” to the relevant targets. The father of their nuclear program, Dr. A.Q. Khan, is no longer under house arrest for having delivered the technical specs for constructing the components (like exceptionally complex centrifuges to separate out the fissionable plutonium) of a nuclear program to nations like Iran and North Korea. And Pakistan is ripped apart by military Islamists – ranging from indigenous Taliban hell-bent on taking over the entire country including those yummy nukes (a slightly different group than the ones hell-bent on toppling the Afghani government) to factions content to carve out their government-protected niches within the existing governmental structure. Pakistan simply does not work, seemingly ripe for a political explosion that would reshape the power in this region in a way that cannot serve U.S. interests.

And since stuff doesn’t work in Pakistan, guess who’s to blame? The May 25^th New York Times: “Conspiracy theory is a national sport in Pakistan, where the main players — the United States, India and Israel — change positions depending on the ebb and flow of history. Since 2001, the United States has taken center stage, looming so large in Pakistan’s collective imagination that it sometimes seems to be responsible for everything that goes wrong here… ‘When the water stops running from the tap, people blame America,’ said Shaista Sirajuddin, an English professor in Lahore… The problem is more than a peculiar domestic phenomenon for Pakistan. It has grown into a narrative of national victimhood that is a nearly impenetrable barrier to any candid discussion of the problems here. In turn, it is one of the principal obstacles for the United States in its effort to build a stronger alliance with a country to which it gives more than a billion dollars a year in aid.” But let’s not forget about neighboring (and nuclear) India.

India has accused Pakistan of funding and staffing an insurgency in its northern (and border) state of Kashmir – a hotly contest and mostly Muslim state that Pakistan believes should be annexed to it – as well as the 60 hour assault last November in India’s port city of Mumbai that left 166 people dead. And look at the stories coming out of Pakistan even now. A Pakistani Army major is now linked to the recent failed Times Square bombing attempt. Maybe this little blurb in the New York Times (May 22^nd) about Pakistan’s equivalent of New York City – Karachi – adds a little richness to understanding the problem: “In this violent city of 18 million people, where the country’s wealthiest live just miles from thousands of extremist religious schools and their Taliban supporters, lies the urban front line of Pakistan’s struggle with Islamic militancy.” Faisal Shahzad, the Pakistani-American who is accused of planting a car bomb in Times Square, lived in Karachi in the mid-1990s. Is this where he discovered his anti-American calling?

Taliban – both of the Pakistani and Afghan variety – live in this distressing and skanky slum-infested city. Thousands of religious schools – Madrasa – teaching uncompromising Muslim militancy to impressionable children – thrive here. And for bombers, gunmen and wanted terrorists, it is a city where hiding in plain sight is a clear option. Karachi may be the world’s capital of global Muslim terrorism, even more that the dreaded Tribal Districts where official Pakistani control doesn’t really exist; Karachi, you see, offers direct transit to the rest of the earth.

The path to the Times Square bombing leads here: “The Pakistani authorities have arrested two men in Karachi who they say were linked to Mr. Shahzad and are now questioning them in Islamabad, Pakistani officials say. One was close to Jamaat-e-Islami, a radical religious party that is staunchly anti-American and whose supporters have harbored operatives of Al Qaeda, a Karachi police official said… The second man was arrested at a mosque funded by Jaish-i-Muhammad, an Islamic extremist group that has been backed by Pakistan’s intelligence agencies, and has recently joined forces with the Pakistani Taliban in the tribal areas.

“Jaish and a multitude of other hard-line Islamic groups have helped make Karachi, with its overlay of radical Islamic edicts — cinemas barely exist, alcohol is essentially banned — a welcoming rear base for the Pakistani Taliban… It is also a sanctuary for the Afghan Taliban, who the Americans are fighting in Afghanistan and who are clients of the Pakistanis. Despite the arrest of a senior commander for the Afghan Taliban, Mullah Abdul Ghani Baradar, on the outskirts of Karachi in January, some senior members still stay in the wealthy area of the Defense Housing Authority and have free passage in and out of the city, according to local politicians.” The Times. As much as we fear Iran and North Korea with their nuclear might (or near nuclear might), it is the fragile political system in Pakistan that threatens the United States like no other. It is these nukes that may one day explode in our own cities and towns.

I’m Peter Dekom, and I continue to be deeply concerned about this country.

The Pain in Spain is Mainly from the Plain

While Greeks accelerated their standard of living and social programs across the board with debt, the Spanish debacle is much more focused on the “plain” – the real estate sector. Sunny Mediterranean (a sea that seems to like to depress European economies) hugging Spain, Europe’s captive playground and vacation paradise. What’s not to speculate? Housing, commercial real estate… a developer’s dream. According to a report from the London School of Economics, Spain accounted for 2/3 of Europe’s new housing from 1999 through 2007, and loans to build these properties consumed as much as half of the nation’s GDP. This market collapsed (beginning in April of 2007) in a massive crush that applied brakes to growth and took the economy with it… the fall screeched unemployment numbers upwards to 20%. Local real estate lenders, Spain ’s equivalent of savings and loans, were threatening to go down like a small seaside village facing a giant tsunami. The world has moved its focus from Greece to Spain as the next of the PIIGS to require a massive fix.

And the crisis in Spain is so terrible with an obvious central cause that the unheard of occurred: the prime minister and the leading opposition leader met face-to-face to discuss what to do next. That would be like Republican Mitch McConnell sidling up to President Obama to plot strategy. I’ve already blogged how regional politics generally trumps national policies in this sun-drenched but troubled democracy, but at some level the solutions still reside at the national level. What did these two boychicks decide was necessary for the country? “They didn't fashion emergency spending cuts to counter negative impressions of bloated budget dyspepsia or make an impassioned plea for European monetary security. Instead, they pushed for quick mergers of Spain's troubled savings and loans so these banks, known as cajas de ahorros, can better hand le bad real estate loans that threaten to bury them.” TheDeal.com, May 14^th.

To compound the problem, Spain’s legal system has been struggling with a series of reforms aimed at upgrading its bankruptcy and insolvency laws. Insolvency is also a huge cultural stigma and clearly not viewed as a business tool in impaired times. Unfortunately, Spain’s antiquated legal system does have such obvious tools that – for example – reorganization under Chapter 11 of U.S. bankruptcy statutes would permit. Effectively, American laws allow bankrupt companies with some viability going forward to restructure and continue operations. Instead, 95% of all bankruptcies in Spain wind up in complete liquidation.

TheDeal.com explains: “ ‘No specific measures have yet been developed which truly work when it comes to restructuring companies under distress, before they file for bankruptcy protection,’ write Angel Martin, head of restructuring at KPMG Europe LLP in Spain, and Mikel Ortega, KPMG Spain's senior manager of restructuring, in a joint e-mail. ‘Once these proceedings begin, the company's image deteriorates, key management leaves, no refinancing is available, and a high percentage of cases are eventually wound up.’… Among other limitations, there are no provisions for prepackaged bankruptcy, debtor-in-possession financing or superpriority new money. Even if there is no fraudulent intent, anything done by the debtor up to two years before filing that somehow jeopardized asset structures can be unwound. Tough employment retention provisions supersede insolvency laws. It's a time-consuming, cumbersome process. The default response is to avoid insolvency at all costs, or at least until finances have deteriorated so badly that there's no other choice.”

The government is applying austerity measures within its own budget as well; Prime Minister José Luis Rodríguez Zapatero has cut civil service pay, reduced public sector investments and has indicated that Spain’s foreign aid packages will be contracted. The economy has at least stopped falling of late, although a .1% rate of growth can hardly be deemed significantly positive. But because development and real estate are such a huge part of the entire Spanish economy, failing to fix this sector means that Spain will remain “broken” for some time. Property developers, construction and financial lending – and the jobs that go with each of these elements – are, to put it mildly, moribund. Banks are playing games – gee, we don’t have that in this country, do we? – and they have simply been unwilling to write down their real estat e loan assets by much more than a meager 15%, while actual values would mandate a 20%-50% reduction. Think the same banks would lend money to potential homebuyers at these inflated values? Precisely!

The assumption underlying this folly is that sometime in the foreseeable future, the sunny Spanish marketplace will rebound, and all those underperforming housing values will turn out to be gold. Unfortunately, there isn’t a shred of tangible evidence that such a recovery is anywhere in that “foreseeable future” and it would seem that some realistic bank consolidation, improved bankruptcy laws and some money from the European Central Bank are needed… er… now. Also, perhaps, some major brain transplants in a number of senior bankers.

I’m Peter Dekom, and if you’ve got some cash, there’s this lovely house I’d like you to see in a Madrid suburb.

Fiduciary Duty

A federally licensed “investment advisor” is both tested (to be certified) and required to apply a higher standard of care (which among other things requires the advisor to put the interest of the client ahead of that of the advisor) – called a fiduciary duty. A federally licensed stock broker (trader) is tested but is not a fiduciary acting on behalf of a client. See a problem? As long as a licensed trader is following trading rules – like not acting on inside information or engaging in stock manipulation – he/she can sell his/her clients whatever they like, recommending along the way, without fear that perhaps someone in that broker’s company is making opposite recommendations and selling instruments that actually are betting the original broker’s recommendations to his/her client are wrong.

While touting that the firm has millions of satisfied customers, Goldman Sachs is beginning to generate an aura of mistrust among a growing cadre of existing and potential clients. It is interesting to note that while the firm has traditionally been built under the leadership of corporate financial advisors (mergers and acquisitions specialists with an eye for raising capital of all forms) – investment bankers – today that leadership (and the direction of the company) has moved dramatically towards trading (CEO Lloyd Blankfein comes from that world, not investment banking), particularly trading on the firm’s own accounts. With access to exceptionally cheap money, since Goldman has established a commercial banking operation (they prefer to access Fed funds for their own benefit rather than deploy that capital into the traditional lending markets to their customers), the emphasis on the company’s own portfolio appears to trump any other operation or any other value.

In a lengthy article on the subject, the May 19^th New York Times speaks to this shift of values: “When new hires begin working at Goldman, they are told to follow 14 principles that outline the firm’s best practices. ‘Our clients’ interests always come first’ is principle No. 1. The 14th principle is: ‘Integrity and honesty are at the heart of our business.’… But some former insiders, who requested anonymity because of concerns about retribution from the firm, say Goldman has a 15th, unwritten principle that employees openly discuss… It urges Goldman workers to embrace conflicts and argues that they are evidence of a healthy tension between the firm and its customers. If you are not embracing conflicts, the argument holds, you are not being aggressive enough in generating business.

“But a former Goldman partner, who spoke on condition of anonymity, said that the company’s view of customers had changed in recent years. Under Lloyd C. Blankfein, Goldman’s chief executive, and a cadre of top lieutenants who have ramped up the firm’s trading operation, conflict avoidance had shifted to conflict management, this person said. Along the way, he said, the firm’s executives have come to see customers more as competitors they trade against than as clients… In fact, Mr. Blankfein and Goldman are quick to remind critics that Wall Street deals with sophisticated investors, who they say can protect themselves. At the bank’s shareholder meeting earlier this month, Mr. Blankfein said, ‘We deal with the most demanding and, in some cases, cynical clients.’… Even Goldman’s mortgage department compliance training manual from 2007 acknowledges the challenges posed by the firm’s clients-come-first rule. Loyalty to customers ‘is not always straightforward’ given the multiple financial hats Goldman wears in the market, the manual notes.”

Markets change; that’s the real world. And sometimes the big trading firms have inventory and deals based on past assumptions even as the winds blow in another direction. In 2007, the subprime housing market was showing clear signs of deteriorating with related derivatives – bundles of such loans – evidencing higher-than-projected overall default rates. Unfortunately, even as Goldman analysts were projecting this erosion of subprime bundle values and as traders created new derivatives that actually bet on further erosion (appreciating in value as the subprime default rate climbed), other Goldman traders were still selling the failing subprime derivatives.

One such example, according to the Times: “As the housing crisis mounted in early 2007, Goldman Sachs was busy selling risky, mortgage-related securities issued by its longtime client, Washington Mutual, a major bank based in Seattle… Although Goldman had decided months earlier that the mortgage market was headed for a fall, it continued to sell the WaMu securities to investors. While Goldman put its i mprimatur on that offering, traders in the same Goldman unit were not so sanguine about WaMu’s prospects: they were betting that the value of WaMu’s stock and other securities would decline… Goldman’s wager against its customer’s stock — a position known as a ‘short’ — was large enough that it would have generated at least $10 million in profits if WaMu collapsed, according to documents recently released by Congress. And by mid-May, Goldman’s bet against other WaMu securities had made Goldman $2.5 million, the documents show.” The original WaMu did collapse; it was taken over by federal regulators in the fall of 2008 and is now a part of the Chase banking group.

As we look for obvious rule changes, it would seem clear that, just based on the above, two additional regulations need to be added to control such failures: 1. Fed funds should not be available for the relevant commercial bank (or its affiliates) for use directly or indirectly for trading on their own accounts (it makes self-trading too easy) and 2. A clear fiduciary duty should be imposed both on the individual brokers and the company that employs them (including all affiliates). Or you could simply allow rogue conflicts of interest to continue to infect our economy. Pick one or do nothing.

I’m Peter Dekom, and sometimes we really need to take the stick out of the hand of the guy who keeps poking us in the eye with it.

That Sinking Feeling

On March 26^th, an explosion rocked and then sank a South Korean Navy warship – the Cheonan (pictured above) – near the North/South Korean border. 46 sailors went to their death – the worst military disaster between the two nations since the Korean War ended in a truce in 1953; the war itself was never officially terminated (a state of war technically still exists). The North disavowed any involvement in this sinking, but an international civilian-military investigating team found strong evidence that the source of the destruction was a torpedo with North Korean markings (evidence released on May 20^th). The North has already issued a statement that the evidence was fabricated and that any attempt to retaliate would result in “all out war.”

The North is a clearly a nuclear power with a long history of saber-rattling and making outlandish threats. North Korea would, however, be no match for the 28,500 American forces stationed in the South combined with the South Korean military if it really came down to an actual conflict. If the North were to pull the nuclear trigger, it is unlikely that it could survive any retaliatory strike, but the resulting chaos, death and destruction would be monumental, mostly heaped on the suffering population of the north.

The official reactions were obvious: “South Korea ‘will take resolute countermeasures against North Korea and make it admit its wrongdoings through strong international cooperation,’ [also pledging to take ‘stern action,’ South Korean President Lee Myung-bak] said during a call with Australian Prime Minister Kevin Rudd … The White House called the sinking an unacceptable ‘act of aggression’ that violates international law and the 1953 truce. Japanese Prime Minister Yukio Hatoyama declared his support for South Korea, calling North Korea's actions ‘inexcusable.’… China, North Korea's traditional ally, called the sinking of the naval ship ‘unfortunate’ but stopped short of backing Seoul.” Ao lNews.com (May 20^th). Secretary of State Hillary Clinton went one step further: “‘Let me be clear,’ Clinton said in her first public comments on the March 26 attack. ‘This will not be and cannot be business as usual. There must be an international -- not just a regional -- response… ‘I think it is important to send a clear message to North Korea that provocative actions have consequences,’ Clinton added. ‘We cannot allow this attack on South Korea to go unanswered by the international community.’” Washington Post (May 21^st).

What’s really going on here? What kind of idiot would intentionally sink a South Korean naval vessel and expect no consequences, especially a leader in a super-impoverished nation that is reeling from economic sanctions and global condemnation from its recent nuclear tests? The kind of idiot who needs support from his military – mostly hardliners itching for the world to shudder at their might – to effect his goal to place his virtually unknown son as the next leader of one of the darkest and most nefarious nations on earth. Dear Leader or Great Leader or Fearless Leader Kim Jong-il is dying. He inherited his mantle from his father Kim Il-sung and now wishes to pass the baton to his son, Kim Jong-un, who is still in his twenties. The North Korean military isn’t a powerless faction within the North Korea n hierarchy; without their blessing, the Kim-to-Kim transfer cannot take place. His hardline actions reflect the hardliners he is trying to placate.

Dear Leader’s ace-in-the-hole? China. While China is uncomfortable with the concept of “succession by inheritance” in a communist world and further irritated at North Korea’s rogue approach to the rest of the world, the PRC is equally uncomfortable about the U.S. troop presence so close to its southern border and the fact that U.S. foreign policy continues to try and exert influence in China’s backyard (North Korea is under its protective wing). Kim is walking a delicate line, counting on China to hold back a politically and economically weakened United States (where China literally holds the U.S. economy at bay with the purchase of U.S. deficit debt in the trillions of dollars). Note how mild the Chinese response was to the clear North Korean attack, and given its dependence on the Peoples Republic, the U.S. really can’t make a decisive move that China would abhor. Russia too is uncomfortable with the U.S. presence near its border as well.

Maybe the U.S. and South Korean should hold joint military exercises in a show of force. So what? They’re unlikely to attack the North, particularly if China and Russia make it clear that they would support the North. Maybe there will new sanctions – imposed through the U.N. or otherwise. So what? What’s left that can be done to squeeze the North? And anyway, both Russia and China are permanent members of the U.N. Security Council… and each has a veto right.

One note that you may have missed however: Japanese Prime Minister Yukio reversed his campaign promise to move a U.S. base out of Okinawa. After a few skirmishes with Chinese forces in and the over the waterways separating China and Japan and notably after clear blame for the sinking of the South Korean vessel was established, Japan reluctantly accepted the need for a continued U.S. military presence on its soil: “‘There is pretty substantial understanding among the Japanese people about the nature of some of the challenges they face on the Korean Peninsula and [with a] rising China in their backyard,’ said a senior U.S. official speaking on condition of anonymity. ‘I think recent developments, if anything, h ave provided a substantial reminder of what was needed to the new leadership about what we are facing collectively in Asia.’” Washington Post (May 23^rd). Hmmmm.

I’m Peter Dekom, and this transition of power tilting toward China is both fascinating and disturbing.

Low-Hanging Fruit

California faces the possibility of highest budget deficit of any state, north of $19 billion. Its cities and towns are running out of cash at a parallel rate. It has massive under-funded pension obligations (I blogged about this issue vis-à-vis Los Angeles, but the same issues apply statewide as well), as a border state disproportionately bears the brunt of the social cost of undocumented aliens, faces wildfires and earthquakes that mimic the devastation of weapons of mass destruction, has one of fastest deteriorating local primary and secondary school systems in the entire country, has failed and failing basic infrastructure, has one of the highest unemployment rates and greatest falls in home values in the nation and still sports some of the highest income and sales tax rates in the U.S. It also has a voting mechanism where emotional issues can circumvent the legislative process through its ballot initiative process, with one such initiative force a nigh-impossible 2/3 majority to pass a state budget. Oh, but it does have amazing ocean views (for part of the state) and terrific weather.

How does the state plan to deal with this morass? Here’s what the Governator is proposing, although it unlikely he will generate the bi-partisan support necessary to ram this through a highly polarized legislature: “Proposing a budget that would eliminate the state’s welfare-to-work program and most child care for the poor, Gov. Arnold Schwarzenegger on [May 14^th] outlined a stark vision of a California that would sharply limit aid to some of its poorest and neediest citizens…. His $83.4-billion plan would also freeze funding for local schools, further cut state workers' pay and take away 60% of state money for local mental health programs. State parks and higher education are among the few areas the governor's proposal would spare… The proposal, which would not raise taxes, also relies on $3.4 billion in help from Washington — roughly half of what the governor sought earlier this year — to help close a budget gap now estimated at $19.1 billion. Billions more would be saved through accounting moves and fund shifts.”

“‘California no longer has low-hanging fruits,’ said Schwarzenegger at an afternoon news conference in Sacramento. ‘I now have no choice but to … call for elimination of some very important programs.’… Elimination of CalWorks, the state's main welfare program, would affect 1.3 million people, including about 1 million children. The program, which requires recipients to eventually have jobs, gives families an average $500 a month. Ending those payments would save the state $1.6 billion, the administration said. It would also make California the only state not to offer a welfare-to-work program for low-income families with children.” Los Angeles Times (May 14^th).

The problems of many states – those with high unemployment, under-performing consumer sales and falling housing prices – is obvious: there’s no tax base to support programs that were created in vastly better times. It is particularly hard to cut back on programs where the right to payment has vested – bond issues, loan repayments, pension requirements, union benefits – or where the federal government (either through matching fund incentives or simple statutory requirements) effectively has taken state discretion away. California and several cities within the state have taken to selling off real estate assets during the period of the lowest real estate values in years. With no clear mechanism to bankrupt at the state level (federal bankruptcy – Chapter 9 – only recognizes “municipal” bankruptcies), the solution to long-term commitments that such state may never again have the ability to pay is elusive. States can’t print money, and their ability to borrow depends heavily on the ratings that credit rating agencies apply to them. Borrowing also doesn’t fix the problem; it merely delays the inevitable, and “waiting out the economic downturn” – now couched as a number of years – isn’t a realistic option for states that are sliding into oblivion now.

As we watch Europe’s PIIGS nations deteriorate and the Euro falling in value, as we watch commercial real estate failures multiply and take down local banks and as credit seems to be drying up like a desert after a very short rainfall… the question is which shoe will drop next and exactly when. We need new industry, innovation and better education to lead us out of this dark and unexplored cave.

I’m Peter Dekom, and I have a whole lot more faith in the younger generation than I do in my own.

Addicted to Real Estate

We’re just so accustomed to treating our homes as an investment that even in times when residential real estate has dropped in value by 40% over the past few years – 60% in communities like Las Vegas, NV since 2006 – there are lots of investors and homebuyers who only remember how far home prices fell in 1993 and how they skyrocketed in the years following. They still believe that such an explosion of value is just around the corner, despite the fact that there are market conditions that are materially different from that era: vastly higher unemployment (which almost everyone agrees will last years longer than any recession in recent memory) and a complete lack of sufficient credit (particularly for anything but lower and entry-level housing) to fund the necessary demand that drives home prices upward and pulls all real estate values w ith it.

In Vegas, according to the May 16^th New York Times, there are 9,517 “spanking new” houses sitting empty as well as an “additional 5,600 homes were repossessed by lenders in the first three months of this year and could soon be for sale.” So you’d think that Las Vegas would be the absolutely last place in the country that would be pushing to build new housing. You’d be wrong, although you might be right as to the fate such new housing would like face in the near term. Because building and land costs are now so low, builders in Vegas (and other hard-hit “sand” states) believe that constructing houses with new values – green requirements and new efficiency considerations – will be well-received in the marketplace. 1,100 homes are under construction in Vegas, and cheap lots for more are going fast. “The chance to make money on the next housing boom ‘is like it’s never been,’ Mr. [Richard] Lee, a real estate promoter, assured a crowd of agents, investors and bankers. ‘We’re going to come back like you’ve never seen us before.’”

The Times continues: “Las Vegas is trying to recover by building what it does not need. It is an unlikely pattern being repeated in many of the areas where the housing crash was most severe… ‘There’s a surprising rebound in the hardest-hit markets,’ said Brad Hunter, chief economist with the consultant Metrostudy. ‘People are buying again.’ From the recession’s lows, construction has nearly doubled in Las Vegas, Phoenix and Tucson. It is up 74 percent in inland Southern California and soaring in Florida.” Because these are often starter homes, they come with financing that could not be applied to people trying to buy foreclosed properties.

“In Phoenix, a billboard for Fulton Homes summed up the builders’ marketing approach. ‘Does your foreclosure have tenants?’ it asks, next to a picture of a mammoth cockroach… Brent Anderson, a marketing executive with another Southwest builder, Meritage Homes, said it bought 713 lots in stricken Arizona last year, and was on the verge of starting construction in a new Phoenix community called Lyon’s Gate… ‘We’re building them because we’re selling them,’ Mr. Anderson said. ‘Our customers wouldn’t care if there were 50 homes in an established neighborhood of 1980 or 1990 vintage, all foreclosed, empty and for sale at $10,000 less. They want new. And what are we going to do, let someone else build it?’” The Times.

I’ve written of entirely new communities, stripped of appliances and bulldozed because of taxes on finished homes as well as the cost of maintaining the properties. I’ve suggested that if we have new industries that need a place to locate, we set these up near these vast tracts of vacant homes to give new workers new opportunities to become homeowners at reasonable cost. It just seems odd that in communities that do not have jobs to sustain those who might buy this newly-created inventory, perhaps there needs to be a new set of realistic priorities before we begin what has failed so miserably over the last few years.

I’m Peter Dekom, and I never ceased to be amazed at what people do.

Driving a Hard Bargain

American carmakers have had a rough time, mostly out of arrogance and losing touch with a market that was sending the clearest message imaginable in a world of rising gas prices. It was too easy for management to say yes to union benefit packages that simply made American cars uncompetitive with foreign imports. Tariffs to penalize cheap overseas manufacturers were no longer viable in a universe of World Trade Organization rules and bitterly-fought retaliatory tariffs on American goods any time America threatened to impose these economic barriers against imports. The collapse of the economy only accelerated the inevitable.

As a massive oil slick decimates our Gulf coastal states, killing wildlife, destroying fishing grounds and threatening recreational coastline with long-term if not permanent damage, the ugliest side of our reliance on petroleum-powered energy comes home with an explosive bang… and maybe a desperate firestorm. The hard fact is that cars and energy demands have defined the American lifestyle for decades now. We complain of crumbling infrastructure, but almost all of that “stuff” relates to energy-generating dams and power plants, fixing or building mass transportation and car/truck-carrying roads, highways and bridges. Our work world, for those with work, for the most part involves a century-plus of separation of workplace from residence; with the exception of a few stay-at-home freelancers, getting to work usually involves “travel” (even looking for work requires transportation).

Think of the cost of transportation: direct costs like fuel, insurance, maintenance, taxes, ticket costs or buying a vehicle, and indirect costs like air and water pollution, accident victims, and the like. The old paradigm of the three necessities – food, clothing and shelter – adds transportation into a modern world. What would be willing to give up first… transportation or Internet access? Or there a link? Internet access providing work access? Where is the balance?

And exactly whom is the government trying to help? Car companies? Consumers? Workers in the automotive industry? Car dealers? Lenders who make car loans? Indeed, government clearly does interfere at every level. Look at the simplest fact of all… Try and buy a new car today online, skipping the dealer and saving a precious extra $1,500-$2,000 average mark-up. Go ahead, try going online to order a new car directly from the manufacturer… I’ll wait while you search… la, la, la, la…. Give up yet? No? Okay, take some more time… la, la, la, la… No luck? Guess I should have saved you the effort; you can’t.

Autos.Aol.com (April 30^th) tells you why: “Auto manufacturers did try their hand at selling cars via the Internet [and a number of start-ups joined the fray offering direct-to-consumer pricing], but before they got very far, they ran head-on into the massive legal barricades that state legislatures had erected over the last 50 years to protect dealers from automakers. These were ‘iron-clad franchising laws,’ said Jack Gillis, director of public affairs at the Consumer Federation of America in Washington, D.C. ‘For the most part the laws have been interpreted to not allow manufacturers to directly sell vehicles.’” Only authorized franchisees have that right.

See the pattern? Technology is introduced into our lives. When it becomes pervasive and changes our lives, money accumulates to the purveyors of the technology to allow them to “buy” protective legislation to secure their advantage not only through the technology, but through artificial barriers to keep others from changing… until uncompetitive barriers, whatever they may be, lose their economic edge in a sea of change.

There’s a metaphor here; we live very complex lives – linked to millions of variables that we do not control – but in the end, we live those lives in accordance with the patterns and requirements of the special interests which prefer to spend money more on protective legislation than in innovating and accelerating change. Since that protective legislation favors rich incumbents at the expense of consumers, two inevitables seem to be the result: (i) when special interests fall after being artificially supported by legal machinations (like the automotive industry or Wall Street), the damage they cause is akin to flooding after a massive dam break and (ii) the little guy bears the brunt. Legal machinations like supporting an unlevel playing field to favor big financial institutions or laws that simply stop competition. Think of that the n ext time you put your key in the ignition to go somewhere or buy a token to get onto public transportation. Simple acts – multiplied by millions every day – define our very existence.

I’m Peter Dekom, and what would you give up first – transportation or Internet?

Don’t Mess with the Chaebols

“Zaibatsu (財閥), literally plutocrats or financial clique) is a Japanese term referring to industrial and financial business conglomerates in the Empire of Japan, whose influence and size allowed for control over significant parts of the Japanese economy from the Meiji period until the end of World War II.” Wikipedia. In Korea, the equivalent word is “chaebol.” These mega-corporate structures are almost a second government, sacred cows and not to be trifled with. They wield massive power and their relationship with government is always a bit scary.

While Japan seems to have moderated this zaibatsu-government relationship, as South Korean mega-conglomerates, from Hyundai to Samsung, have spread their wings into many varied sectors of the global economy (shipping, automotive, consumer electronics, etc.), their power also seems to have grown; they almost seem to have certain legal exemptions not available to anyone else. Reports in Korea, for example, write that President President Lee Myung-bak “would soon pardon Samsung Chairman Lee Kun-hee on a 2008 conviction for tax evasion. Chairman Lee, 68, had already received a federal pardon in the 1990s on a conviction for bribing two former presidents while he was with the firm.” Los Angeles Times, May 10^th.

Chaebols provide essential economic opportunities, massive employment and a favorable trade balance for Korea; they are the very foundation of that nation’s entire economic fortune. And as such, they are treated with almost the same reverence in Korea as the Emperor in Japan receives from his constituency. The top chaebol managers are Korea’s royalty. “‘In South Korea, it's considered taboo to criticize the chaebols,’ said Kim Ky-won, professor of economics at Korea National Open University. ‘They hold very close to absolute power.’… Most critical stories run in smaller media less dependent on ads from big companies. Major media reports are mostly limited to breaking news of prosecutions of chaebol leaders but seldom probe deeper, critics say. ‘Samsung has financial power over the press. They're their own sanctuary where no one can intervene or criticize them,’ said Kim Keon-ho, an official at the Citizens’ Coalition for Economic Justice.” LA Times.

So when the Korea Times allowed the publication of a satirical spoof (“What the People Got for Christmas”) that targeted Samsung and a few others in an English-language column on Christmas of last year – specifically addressing the arrogance of some chaebol leaders and the past bribery scandals with Samsung – Samsung was not amused. On the day that Samsung’s Chairman Lee was pardoned (December 29^th), Samsung filed a suit against the Korea Times, its senior editor and the author of the spoof (Michael Breen), claiming damages from lost profits and a negative impact on their reputation.

“In its suit, Samsung said the column used a ‘mocking tone’ to add ‘baseless, malicious and offensive false information to criticize’ the firm.” The LA Times. Samsung initially dropped its case against the Korea Times and its editor after the paper issued two “clarifications” but continued pursuing all avenues against Breen. Eventually, on May 12^th, feeling the pressure from its Western customers (some say Breen cracked), Samsung relented and dropped its suit against Breen as well. The LA Times (May 12^th) added tidbit from Samsung’s corporate spokesman: “‘We didn't want to have a legal war with Michael Breen,’ said Hwang Eun-ju, a member of Samsung Electronics’ corporate communications team. ‘That was not our intention…. Breen accepted that he went beyond parody, and we accept ed that somehow the column could be considered black humor. We reached a common consensus.’”… Samsung spokesman James Chung said the company decided to drop the lawsuit after Breen sent a May 7 letter of apology.” Unfortunately for Breen, criminal charges might still be hovering.

Libel in Korea carries not only civil penalties but also can be prosecuted as a crime. “Additionally, both South Korean civil and criminal codes regarding defamation are stricter than in many other countries, including the U.S., said Brendon Carr, an American attorney who practices in Seoul. ‘In South Korea, injury to one's reputation is the key element, not the truth,’ he said. ‘The fact that a statement is true is not an absolute defense. Satire is not a defense. That's different from the American definition. America is a free speech society, whereas Korea is not. It has historically been a 'sit down and shut up' society.’” The LA Times.

This special exemption from the rules accorded to the biggest of the big in Korea seems to echo parallel practices in the United States. On April 28, 2004, for example, the SEC exempted the five biggest financial institutions in the land from limitation on the level of debt that they could incur… everyone else had to live with the limits. Two of those companies – Bear Stearns and Lehman Bros. – are no longer with us. The richest and most powerful American financial institutions rail at the thought that the government might want to regulate their derivative markets, prevent their obvious conflicts of interest with their clients and try and protect consumers from dangerous economic practices; they are special, they need freedom to pursue profits even if that pursuit can bring down the global economy. Is the only difference between these American practices and those in Korea the application of the First Amendment? Think about it.

I’m Peter Dekom, and I am grateful for the Constitution of the United States every day of my life.

Thai Game

Thailand, a constitutional monarchy since 1932, is generally seen as a peaceful country that has never been conquered. A tourist haven, rich with royal palaces, Buddhist temples, spectacular canals, lush tropic forests, a warm climate, amazing beaches, world-class cuisine, mountain getaways, reasonable prices and exceptionally friendly people. Oh did I mention that a major part of the capital city, Bangkok, has become a “live firing zone” (the Thai military description) as part of a period of ever-escalating civil unrest as poor and disenfranchised citizens (“red-shirts,” mostly from the countryside) challenge the legitimacy of the incumbent government: “Thai troops on [May 14^th] fired tear gas and bullets at protesters, who responded with stones, slingshots and homemade rockets, turning parts of downtown Bangkok into a battlefield as the military tried to tighten its cordon around a broad area where the protesters have camped for weeks… Sixteen people [29 as of May 16^th and rising ] were killed and 141 wounded [221 and rising as well], according to the government-run Erawan medical center, in some of the worst violence in two months of unrest. The standoff has paralyzed the Thai government and further fractured a socie ty struggling to cope with the growing demands of its poor… The fighting followed an assassination attempt [the day before] on a renegade general who had declared himself a protector of the protesters before he was critically wounded by a sniper’s bullet.”

On an historical plain, poverty is a relatively recent phenomenon – primarily a creature of the late 20^th century and into the present day. With a countryside rich in food literally growing off the trees, fish in streams, lakes and ocean waters and relatively sparse population for most of recorded time, hunger and housing were never real issues for most of the region’s history. But as economic success and technological upgrades became the mantra for most of emerging Asia, the brutal regimes of Burma (Myanmar) and Cambodia (Kampuchea) fell back into the dark ages, North Korea never left, and Thailand struggled with an ever-polarizing society and a language barrier (very few non-Thais can read or write Thai, a tonal language, and not enough Thais are fluent in any other tongue to matter), stagnating as regional powers like China, Singapore, Vietnam and India accelerated into the modern world. Political instability, corruption and serial coups d'état became the norm in this tiny country.

Today’s political unrest – a tangible expression of Thailand’s falling behind – really came home to root in 1997, when a new constitution was implemented to create modern checks and balances, a stronger and more independent judiciary and a more orderly parliamentary process. The 2001 election was described as the cleanest and most corruption-free election in the nation’s history. It also began the ascendency of Thaksin Shinawatra, a billionaire businessman (who once owned the famous UK Manchester United soccer franch ise), who oddly became a populist prime minister, implementing such programs as healthcare reform. The poor and disenfranchised loved him. The 2001 election produced the first Thai government ever to serve out their full elected four-year term. The 2005 election, which reelected Thaksin, did not produce the same result. In 2006, claiming election fraud and corruption, a military junta deposed the elected government, took power and declared martial law.

In 2007, the junta forced through what they called the new “permanent constitution,” supported by a referendum that gave marginal validity to the new government structure. The political electoral process that followed – in 2008 – was a joke. Wikipedia: “The People's Power Party (Thailand), led by Samak Sundaravej formed a government with five smaller parties. Following several court rulings against him in a variety of scandals, and surviving a vote of no confidence, and protesters blockading government buildings and airports, in September 2008, Sundaravej was found guilty of conflict of interest by the Constitutional Court of Thailand (due to being a host in cooking TV program), and thus, ended his term in office. He was replaced by PPP member Somchai Wongsawat. As of October 2008, Wongsawat was unable to gain access to his offices, which were occupied by protesters from the People's Alliance for Democracy. On December 2, 2008, Thailand's Constitutional Court found the ruling Peoples Power Party guilty of electoral fraud, which led to the dissolution of the party according to the law.

“After defections from smaller parties the opposition Democrats Party was able to form a government, a first for the party since 2001. The leader of the Democrat party, and former leader of the opposition, Abhisit Vejjajiva was appointed and sworn-in as the 27th Prime Minister, together with the new cabinet on 17 December 2008.” That change hardly satisfied a growing mass of frustrated and impoverished Thais who maintained that none of the post-coup governments were legitimate. Civil unrest simmered in the background, surfacing every now and again, but signaling a building level of frustration that augured badly for the incumbent government. Deposed and exiled prime minister, Thaksin Shinawatra, is said to have provided financial backing to his red-shirt constituency which, according to some, resulted in the explosive set of protests, noted above, that began in earnest on April 10^th.

Is this once peaceful country on the verge of being torn apart at the seams in a rising possibility of a full-on civil war? The Times: “If it is not contained, the violence could widen into the kind of broader conflict that the government has been trying for weeks to avoid. Just several days ago, it appeared the long sit-in might end peacefully when the government offered to move up elections, a proposal that won tentative support from protest leaders… But that support began faltering even before the general was shot, as the opposition movement bickered over whether the government was doing enough to meet its demands, including the dissolution of Parliament an d the holding of a new election… In response, the government withdrew its offer of an early election and said it would no longer negotiate with the red shirts.”

Bitterness has increasingly polarized the haves from the have-nots. The deaths and injuries have only served to harden each side’s position, and these profoundly deep and hostile feelings are unlikely to dissipate anytime soon. Time will tell if this vacation playground returns to normal or transitions into a combat zone. I am saddened by this violence, the barriers to reconciliation and the potential destruction of one my favorite countries on earth. Bangkok has about 7 million people (almost 12 million if you look at the greater metropolitan area) out of a total of 62 million for the entire country, and this capital city is paralyzed. Unrest is spreading fast; the Thai state has now imposed “emergency rules” in 17 of the country’s 76 provinces.

One ray of hope: On May 16^th, Red Shirt protesters suggested that if the Thai military would end their violent crackdown, they would entertain U.N. mediation; the Thai military accepted the possibility of U.N. intervention… but not with any preconditions. The May 16^th Washington Post adds this reality-check: “Talks between the government and the protesters have a history of collapsing. A deal to end the violence was so close a week ago that some protest leaders had begun packing their bags to go home… Red Shirt demonstrators, it seemed, had forced the Thai government to call an early election. But that deal foundered on last-minute demands from leaders of the Red Shirts… Differences between protest leaders and the government now seem all but irreconcilable, according to some diplomats and academics in Bangkok.” The NY Times (May 16^th) quickly quashed any hope of any short-term cease fire: “Heavy fighting and explosions were reported in several areas of Bangkok on [May 16^th] night in the deadliest and most prolonged conflict in Thailand in decades.”

I’m Peter Dekom, and I’ve often traveled to Thailand (since I was 16), loving the people and the country every time.