Sunday, January 30, 2011

In a World Where Average Doesn’t Cut It Anymore

The United States’ educational system has dropped us to precisely that status: average, even a tad below. The Organisation for Economic Co-operation and Development (OECD) – a 50-year-old non-profit that fosters intergovernmental cooperation – from cross-border transparency and consistency in financial oversight and uniformly higher environmental regulations to mutual problem-solving and acceleration of healthy job and other economic growth – recently measured and ranked the quality of educational standards around the world under their Programme for International Student Assessment (PISA). According to their Website, “The survey, based on two-hour tests of a half million students in more than 70 economies, also tested mathematics and science. The results for 65 economies [were released in July of 2010].” The OECD also measured the correlation between educational standards and economic growth… in hard dollars.

The “average scores” for math were 496, science 501 and overall reading 493; the United States placed 487, 502 and 500; countries like Korea, Finland, Poland, Estonia and cities like Hong Kong, Shanghai and Singapore easily outscored us (and the usual suspects, from Japan, Switzerland, Canada, & Australia were there too among a longer list). A December 7th Google Report prepared by Karen Zeitvogel summarizes some of the relevant provisions vis-à-vis the United States: “The three-yearly OECD … PISA… report, which compares the knowledge and skills of 15-year-olds in 70 countries around the world, ranked the United States 14th out of 34 OECD countries for reading skills, 17th for science and a below-average 25th for mathematics.

“In Canada, 15-year-olds are more than one school year ahead of their US peers in math and more than half a school year ahead in reading and science, said the report released hours after President Barack Obama urged Americans not to rein in education spending, even in a tough economy… The OECD report also noted that investment in education is paid back many times over… Boosting US scores for reading, math and science by 25 points over the next 20 years would result in a gain of 41 trillion dollars for the United States economy over the lifetime of the generation born in 2010, the OECD said.” Cough! Gasp! Choke?! $41 trillion dollars?!?! And states are slashing their educational budgets to meet current shortfalls?!

Yet we are mired under tons of deficit-driven debt, particularly spending on military campaigns in Iraq and Afghanistan that seem to be passing from “risky expeditions” right into colossal failed policies and lost credibility… and billions of misdirected dollars wasted into thin air. We are trillions of dollars below the necessary and already-committed funding levels to allow many government workers to retire early with cost of living escalators while the majority of non-governmental workers aren’t even sure they will ever be able to retire. A substantially unregulated financial sector created the bubble “borrow as much as you can” mentality that crashed the global economy, a debt-driven mentality that shoves accountability for unwise spending commitments into those “let the elected officials of the future deal with that problem” zone… except the future is now, and the piper is waiting to be paid.

Where are our priorities? Are we remotely better off as a people than we were years ago? Jill Lawrence, writing for AOL’s January 23rd, observes: “The unemployment rate remains well above 9 percent, a record 6.3 percent of people are living in "deep poverty," health insurance premiums doubled from 1999 to 2009, and a record 1.2 million families are expected to lose their homes to foreclosure this year. Net worth has plummeted, particularly for minorities, driven in large part by the housing bust. The wealthiest now have assets a record 225 times greater than the median family net worth… Wages, meanwhile, have stagnated for decades. The Economic Policy Institute drives the point home with numbers: Average increase in income for households in the bottom fifth of the income scale, $200 from 1979 to 2005. Average increase over the same period for those in the top .1 percent, $6 million.”

In the end, we have stop spending money on campaigns that have no real benefit – in national security, environmental or economic terms – to real flesh-and-blood Americans. We cannot prioritize the rich over the poor, the corporate over the individual or vice versa… but we must prioritize where we spend tax dollars and incur deficits. Make the list in your own head (and link each expenditure to a tangible “quality of life” result for America as a whole, maybe even humanity as a whole)… and cut off the bottom third of your “ask.” We must make hard choices… now. Mr. President, the Union is indeed in a state…. And it really is about priorities.

I’m Peter Dekom, and I stubbornly believe we can do it, but we have to try… and accept a rocky and difficult longer-term journey.

Saturday, January 29, 2011

The Zia Generation

In the eyes of many amateur social analysts, in societies with accelerating technological change and increasing literacy, there is a perception of children being more socially liberal than their parents, less religious, adding fiscal conservatism and increasing religious fervor only in their older years. But if you add one ingredient to this mix – hopelessness – the trends can move strongly in the opposite direction. Indeed, the winds of change themselves can create their own negative vectors, pushing people back to times – and the associated values – when the world was more generous and the socio-economic world simpler to understand.

And then there is the lesson of the impact of major policy changes in educational philosophy imposed on children in their formative years, polices that have given rise to new leaders with new mantras of explanation. When a complex world becomes cruel and inexplicable, people look for simple answers… or answers that provide the promise of stability and goodness even if these words are not really likely to change anything. As you see crowds chanting slogans promulgated by effective but manipulative leaders, as you see popular cultural folk heroes mouth the words, as charismatic religious prelates sear the power of their beliefs into growing impassioned crowds, you watch as masses of people literally outsource their opinions to one movement or the other, to one charismatic spokesperson or another: “I’m for whatever _______ is for!”

Pakistan is an over-populated, highly polarized nation with seemingly insurmountable social and economic issues. It is a hot-bed of Muslim extremists, a place where thousands of ultra-conservative Madrashas (religious schools) foment anti-Western vitriol and militant Islamist messages to very young minds… minds that never forget these violent life-lessons. A younger generation, many educated with advanced degrees and professional credentials, is now increasingly leading their country away from modernity and social consciousness and back into a deeply religious-based ethos of profound intolerance for anyone other than adherents of a most conservative and militant brand of Islam. Nothing illustrates this social phenomenon better than the treatment accorded a recent assassin – an highly-trained guard who turned on the Punjabi governor he wa s sworn to protect… with 26 lethal bullets – by both the popular and legal community.

Cheering crowds have greeted this killer – who executed his charge because the latter opposed strict anti-blasphemy laws – as a hero. A growing segment of young Pakistani lawyers has joined this worshiping chorus, to the dismay of moderates: “Their energetic campaign on behalf of the killer has caught the government flat-footed and dismayed friends and supporters of the slain politician, Salman Taseer, an outspoken proponent of liberalism who had challenged the nation’s strict blasphemy laws. It has also confused many in the broader public and observers abroad, who expected to see a firm state prosecution of the assassin… Instead, befo re his court appearances, the lawyers showered rose petals over the confessed killer, Malik Mumtaz Hussain Qadri, a member of an elite police group who had been assigned to guard the governor, but who instead turned his gun on him. They have now enthusiastically taken up his defense.” New York Times, January 10th. These aren’t reluctant court-appointed barristers arguing a case they may not truly believe in; these are legal practitioners who simply believe their assassin was correct in executing the governor. These men and women are part of what is loosely called, the Zia generation, the product of a change in educational values introduced in their formative years.

General Muhammad Zia-ul-Haq [pictured above] seized power in 1977: “After widespread civil disorder, he overthrew ruling Prime Minister Zulfikar Ali Bhutto [yes, that family!] in a bloodless coup d'état on 5 July 1977 and became the state's third ruler to impose martial law.” Wikipedia. He ruled as Pakistan’s sixth president until he died in a mysterious plane crash in 1988. Most importantly, he embraced a movement away from secularism towards marrying Islam into state politics. The children who were the products of state-imposed Islamic teachings in Pakistani schools have now come of age; today, these forces threaten the very basic pillars of the secular state.

Indeed, the Pakistan of today, and the brand of Islam much of the nation has embraced, is barely recognizable even to many educated Pakistanis older than the Zia generation. Among them is Athar Minallah, 49, a former cabinet minister and one of the leaders of the lawyers’ protest campaign against [former military dictator] Gen. Pervez Musharraf in 2007 and 2008… Mr. Minallah studied law at Islamic University in Islamabad from 1983 to 1986, and the first lesson any student learned in his day was that the preservation of life was a pillar of Islamic law, he said…

“But under General Zia in the 1980s, the government began supporting Islamic warriors to fight the Soviet occupation of Afghanistan and the Indian control of Kashmir, and the syllabus was changed to encourage jihad. The mind-set of students and graduates changed along with it, Mr. Minallah said. Government officials, analysts and members of the Pakistan Peoples Party, the secular-leaning party to which Mr. Taseer belonged, blame the religious parties and clerics who delivered speeches and fatwas against Mr. Taseer for inciting the attack. On Monday, Mr. Qadri, who confessed to the killing, provided a court with testimony saying he was inspired by two clerics, Qari Hanif and Ishtiaq Shah… The police say they are now seeking the clerics f or questioning, but with the growing strength of the conservative movement on the streets, religious leaders — even those who incite violence and terrorism — are nearly untouchable to the authorities and are almost never prosecuted.” NY Times.

As we press to contain the militant Taliban in neighboring Afghanistan… many of whom flea seeking safe harbor into the Pakistan’s Western Tribal District… we often use drone-launched missile strikes across that border to eliminate the enemy that once fomented the 9/11 terrorists. We expect that Pakistan will react in support of our anti-terrorist actions, particularly when those same fundamentalists now attack the Pakistani political system at its core, but we are wrong. Popular sentiments, particularly among the younger adults in Pakistan, are going the other way. To them, we are the enemy. But before we cast any stones, how sure are that such sweeping fervor suborning assassination could never happen here? How sure are we… really? And the macro-trends in the entire Muslim world are going anywhere but where American policy-makers want. Riots aimed at toppling Egypt’s Hosni Mubarak (one of our main allies in the Middle East) are escalating, a pro-American government has been toppled in Tunisia, riots plague Yemen and the civil unrest in Lebanon escalates as Hezbollah seems to have wrested political control from a once-moderate pro-U.S. prime minister.

I’m Peter Dekom, and we can learn much about own human nature by observing parallels, if extreme versions of such behavior, in societies seemingly so far away.

Friday, January 28, 2011

Big Not-So-Gay Al

Fifteen years ago, Al Jazeera (in Arabic, “the island” referencing the Arabian Peninsula) was founded as a satellite Arabic-language and regional news network. It rapidly expanded onto the Web, added an English-language version, and soon was the most uniform source of news and information to its growing Middle Eastern audience. Based on the Arabian Peninsula, in Doha, Qatar, the network has relied heavily on “loans” from Emir of Qatar, Sheikh Hamad bin Khalifa to supplement its advertising and subscriber base. Al Jazeera’s strength, and as far as its rather large audience is concerned, its credibility, comes in significant part from its independence from what is mostly local-government-controlled/censored media in most Muslim countries in the Middle East.

Al Jazeera’s reach across the Middle East is almost total, and its English-language counterpart had a reach of over 100 million households as of 2007 (Wikipedia). It has influenced policies in the region like no other political force, save Islam itself. Governments have stooped to cutting electric power (as did Algeria in 1999 to avoid a program that linked the military to a series of massacres) and are generally unhappy at a network that seems to have given dissidents a new voice. Needless to say, the United States and Israel are favorite targets of the network, and many claim that the rise in anti-American movements can be linked directly to the litany of heavily-slanted, anti-American stories, and the rather graphic and constant negative visualization of America’s military activities in the Muslim world.

Palestinian politics is clearly swayed by Al Jazeera’s coverage: “In Palestine, the station’s influence is particularly strong. Recent polling indicates that in the West Bank and Gaza, Al Jazeera is the primary news source for an astounding 53.4 percent of Palestinian viewers. The second and third most watched channels, Palestine TV and Al Arabiya, poll a distant 12.8 percent and 10 percent, respectively. The result of Al Jazeera’s market dominance is that it has itself become a mover and shaker in Palestinian politics, helping to craft public perceptions and influence the debate. This has obvious implications for the peace process: how Al Jazeera covers the deliberations and the outcome of any negotiated agreement with Israel will fundamentally shape how it is viewed—and, more importantly, whether it is accepted—by the Palestinian public.” Wikipedia. The Palestinian Authority is generally presented as a pawn of Israel and the West, and popular, grass-roots Arab support for this structure is at best minimal.

The revolt in Tunisia, the recent political success of Hezbollah in Lebanon, the explosive violence in Egypt and the rising tide of violent demonstrations in Yemen all seem to have linkage to Al Jazeera’s thematic message: “In many ways, it is Al Jazeera’s moment — not only because of the role it has played, but also because the channel has helped to shape a narrative of popular rage against oppressive American-backed Arab governments (and against Israel) ever since its founding 15 year s ago. That narrative has long been implicit in the channel’s heavy emphasis on Arab suffering and political crisis, its screaming-match talk shows, even its sensational news banners and swelling orchestral accompaniments.” New York Times, January 27th.

The network definitely takes sides, and regional un-democratic leaders generally are unhappy about negative coverage fomenting a growing tide of regional anger at incumbent regimes. But maybe Al Jazeera’s place in the Middle East was inevitable, because even when the network attempts to pull its punches to present a more balanced story, that negative story is still disseminated through mass media… in an entirely new way: “On [the afternoon of January 25th], as the street protests in Egypt were heating up, Al Jazeera was uncharacteristically slow to report them, airing a culture documentary, a sports show and more of its ‘Palestine Papers’ coverage of the leaked documents… Many Egyptians felt betrayed, and Facebook and Twitter were full of rumors about a deal between Qatar — the Persian Gulf emirate whose emir, Sheik Hamad bin Khalifa al-Thani, founded Al Jazeera in 1996 — and President Hosni Mubarak of Egypt, who visited the emir in Doha last month. Within a day, Al Jazeera was reporting from the streets in Cairo in its usual manic style.” NY Times. And Egypt pulled the plug on local Internet and cell phone service almost immediately.

After watching an inevitable power shift, the White House, through Press Secretary Robert Gibbs, commented on the Egyptian situation on January 28th: “Robert Gibbs conspicuously declined to answer directly when asked if the President stands by Mubarak, saying only: ‘We're monitoring a very fluid situation.’…Gibbs also repeatedly called on security personnel in Egypt to ‘refrain from violence,’ and insisted that the ‘legitimate grievances that have festered for quite some time in Egypt have to be addressed by the Egyptian government immediately.’ He repeated several times that the grievances are ‘legitimate.’… ‘Violence is not the response,’ Gibbs added. He also seemed to put Egypt on notice with a threat regarding aid: ‘We will be reviewing our assistance posture based on events that take place in the coming days.’” Washington Post, January 28th. Think Mubarak’s dismissing his existing government and staying in power is gonna fly with the people? How do you think Al Jazeera will spin this? We’ve been backing Mubarak for decades.

Whether we like it or not, modern technology, most of which was born in Western laboratories and initially deployed in the West, is now the powerful tool of those who wish to topple human-rights-violating incumbents (many of whom are U.S. allies), spread the word of misery and discontent and spread the word in favor of a sweeping pan-Muslim fundamentalist movement that is both profoundly anti-Western and increasingly violent. To think that rational calmness will eventually take the power away from this growing wave of Middle Eastern discontent is simply to ignore reality. Strange how the United States has rather completely failed to grasp how to use the very communications technologies it invented to reverse the negative trend (at least vis-à-vis the U.S.) created by those technologies.

I’m Peter Dekom, and failing to understand and flow with the litany of change is to drown in it.

Thursday, January 27, 2011

Hezbollah Strikes Again – Politically

Hezbollah is considered a terrorist organization with which the United States will not deal. Born of violent militancy, Hezbollah is a Shiite Islamist movement, heavily backed by Iran, and exceptionally hostile to Israel and the United States. It is also the party that has just taken power (replacing a pro-American regime) and placed a prime minister, Harvard-educated telecommunications billionaire and also former prime minister, Najib Miqati (above, who is actually a Sunni Muslim, a turncoat to the vast majority of Lebanese Sunnis), atop Lebanon’s parliament. Recently considered an American ally, Lebanon represents a continuing movement of Middle Eastern nations away from the moderating influences of the West towards a darker side of extremist Muslim organizations.

While Miqati will form a coalition government that will dilute Shiite extremist influence, Lebanon is very much Syria’s and Iran’s playground – and they play vigorously; the United States and its regional allies – notably Saudi Arabia and Egypt – have decreasing power. Miqati struck a conciliatory tone upon his election: “My hand is extended to all Lebanese, Muslims and Christians, in order to build and not to destroy.” He has suggested that he will not be an anti-American as most believe he has to be: “We cannot afford to have an enemy,” he noted. But the tea leaves suggest a dangerous shift. With Lebanon sitting on Israel’s northern flank, what happens in this little Mediterranean nation can have significant repercussions in the fading prospects for regional peace and security. A quote from a local leader in the January 24th New York Times summarizes this situation well: “‘The country is moving from one stage to another, from one approach to another,’ declared Michel Aoun, a Christian leader and key ally of Hezbollah.” Expect local politicians to continue separating themselves from anything that smacks of American influence or policy.

Already, Sunni groups – who remain hostile to the Shiite interpretation of their faith and the political movements that back them – have begun protests, some of which have turned quite violent: “By nightfall [on the January 23rd] , angry opponents of Hezbollah took to the streets in parts of Beirut, Tripoli and other cities, burning tires, shouting slogans and offering at least an image of what many feared Hezbollah’s victory might unleash: strife among communities in a country almost evenly divided over questions of foreign patrons; posture toward Israel; and the relative power of Lebanon’s Shiite Muslims, represented by Hezbollah, and its Sunni foes… Acrid smoke billowed into a nighttime sky, as barricades temporarily blocked some roads into Beirut before security forces dispersed the demonstrators… ‘Down with Hezbollah! Down with Miqati!’ young men shouted in Beirut.” NY Times.

By the 25th, Sunni Muslims backing the losing candidate, caretaker Prime Minister Saad Hariri (who is backed by the U.S.), took to the streets in a second “day of popular anger” – roadblocks and burning tires marked the rage that threaten to bring down a government before it is even installed. Lebanon’s system of government is called “confessionalism” (where designated elective governmental posts must be filled by a person of a specified faith – the prime minister, for example, must be Sunni). But this Sunni – Maqati – was a Sunni only in an exceptionally technical sense to the protesters; he represents a powerful militant Shiite political party that is an anathema to the majority of “true” Sunnis.

Lebanon – a nation where I spent over four years as the teenage son of a U.S. diplomat – once featured a Christian majority, a currency backed 85% with gold, a polyglot culture where almost half the people spoke fluent French, an open and tolerant society where an occasional synagogue invited Jewish faithful in neighborhoods with mosques and churches nearby and a prosperous community where poverty was seldom an issue. The influx of Palestinian refugees, a civil war that raged out of control – on and off for decades starting in the 1970s – Syrian interference both militarily and politically (Syria is charged with orchestrating the 2005 assassination of a prime minister who refused to play ball with Damascus) left Lebanon in shambles, with many wealthy business people and professionals leaving the country, and taking both their money and their skills with them. Militant extremists streamed in. Israel and Hezbollah battled each other briefly in the region in 2006, and Israel didn’t live up to its former military glory in that struggle. U.N. forces couldn’t bring stability, and while there are periods of tranquility, most here realize that they are unsustainable; the hostility and the negative feelings of one faction against another just run too deep.

After the above assassination, “On 13 December 2005, the Government of the Republic of Lebanon requested the United Nations to establish a tribunal of an international character to try all those who are alleged responsible for the attack of 14 February 2005 in Beirut that killed the former Lebanese Prime Minister Rafiq Hariri [Saad’s father] and 22 others. Pursuant to Security Council resolution 1664 (2006), the United Nations and the Lebanese Republic negotiated an agreement on the establishment of the Special Tribunal for Lebanon… The mandate of the Special Tribunal for Lebanon is to prosecute persons responsible for the attack of 14 February 2005 resulting in the death of former Prime Minister Rafiq Hariri and in the death or injury of other persons. The Tribunal’s jurisdiction could be extended beyond the 14 February 2005 bombing if the Tribunal finds that other attacks that occurred in Lebanon between 1 October 2004 and 12 December 2005 are connected in accordance with the principles of criminal justice and are of a nature and gravity similar to the attack of 14 February 2005.” From the Tribunal’s Website (

Will the new government cooperate with the Tribunal? “I am not going to make any move against the tribunal without full Lebanese consensus,” says Miqati. Will Syrian and Iran battle each other within this small country… or unite in their own ugly anti-American coalition. Can this new Hezbollah prime minister create a viable and effective government that can stabilize Lebanon? Take a wild guess. The only thing we know for sure is that the politics of the Middle East is rapidly tearing away from American influence. Notwithstanding the fact that Miqati was educated in the U.S., don’t expect his politics to be friendly towards the West. The official U.S, reaction to his appointment: “As we see what this new government does, we will judge it accordingly,” noted Secretary of State Hillary Rodham Clinton.

The United States is now viewed by increasing numbers of people in the region, not just with the hostility of being Israel’s ally or that we have forces deployed in theaters of war in several Muslim countries, but with the disdain of a nation beset with problems linked to Wall Street greed and unable to prevail in any military conflicts in the region to which it has committed its troops. They see us as a failing superpower in steep decline, one not worthy of the same levels of consideration as in the past… they are creating what they believe will be a new Muslim force that will have its own, perhaps superior (in their eyes) power.

As they interpret history, they crushed the Soviets… still dominating the headlines as the recent suicide bombing at a crowded Moscow airport will attest… and they believe that we too will fall. We all know that the United States will be here very long after the Hezbollah government in Lebanon itself fails, but remember, it is often the thought that counts… emboldening those who oppose us. Tell that to the mobs of young Muslim fundamentalists trying to topple Egypt’s Hosni Mubarak through violent demonstrations, the rioting crowds in Tunisia frustrating the government from recovering from the recent forced abdication or the new militant protesters in Yemen.

I’m Peter Dekom, and we can get so caught up in our own pain that we miss the vectors of change overseas that will seriously impact our political future for decades to come.

Wednesday, January 26, 2011

Rules versus Principles

The American legal system – including self-regulating organizations designed to police member bodies – is rife with specifics and rules. And so much of our legal profession has been charged with examining these rules, and, most importantly, how to find ways of interpreting and side-stepping those rules so that corporations and special interests can avoid their clear intent. And if the rules are too tight, the same advisors help lobbyists shape new statutes foisted on the recipients of big campaign contributions, to create either direct exemptions or sufficient ambiguity so that the side-stepping can resume.

You can see these efforts if you are truly bored and sufficiently sleep-deprived – or you are a practicing securities or tax lawyer – in reading complex statutes, particularly in the Internal Revenue Code (better than an ambient-laced cocktail!). “Except as set forth in Subsection 3(b) of Section 234…; provided however, that ___________, and further provided that the provisions of Subsection 3(c) of Section 234… shall be deemed to supersede said….” Yeah well, the average layperson will read that passage straight through, while the patient legal expert will stop and carefully refer to each referenced subsection (which themselves carry additional references, which need to be traced), before finishing the paragraph. Takes hours sometimes, and only those paid to review all the links in detail ever figure it out… if they do.

Where would our legal profession – already suffering an employment slump due to reduced demand and more rigorous cost control by cautious and financially-impaired clients – be without such labyrinthian quests to pursue? But trust me, in the worst economic times, well-heeled mega-rich clients will always be willing to overpay specialists who can circumvent the rules.

On the other hand, we could actually legislate through principles – where objectives are the governing focus and not the path to achieve such objectives – but that does leave a lot of discretion in the courts or other governing bodies… discretion which our Congress frequently grants to administrative bodies, most notably the Department of Homeland Security, which cabinet body has used this discretion to avoid enforcement of many federal statutes in the interest of national security.

In the seemingly mundane world of accounting regulation, for example, there is a stark contrast between the American and British regulations imposed by their private governing bodies as they set rules for certified or chartered accountant to live by – to create uniformity of presentation of financial information across comparable financial statements. Nodding off, are we? Remember, our recent financial collapse was in large part triggered by a failure of transparency – companies were able to hide the salami and avoid reporting their impending demise through accounting tricks. U.S. accountants are self-regulated by the Connecticut-based Financial Accounting Standards Board, and U.K. green-eye-shade wearers by the London-based International Accounting Standards Board. The former is rule-obsessed – predicated on the axiom that financial r ules need to be precise – while the latter is principle-driven – based on the overriding notion that financial statements should be an accurate assessment of a company’s actual financial state. Put another way, Americans prefer form over substance, and the U.K. folks prefer substance over form.

The January 21st explains: “This tension between rules- and principles-based approaches surfaced after the Enron Corp. scandal in 2002. Since then, FASB appears to have definitively settled on the rules-based side. [One leading financial expert] says professionals like him prefer this because it allows clearer guidance in advising clients. A principles-based regime, he adds, creates uncertainty.

“Of course, having clear rules with bright-line tests allow them to be circumvented, or, as the New York state [Attorney General] alleges in the civil lawsuit [against Ernst & Young LLP, alleging accounting fraud in the firm's work for Lehman Brothers Holdings Inc. using an infamous ‘Repo 105’ accounting rule]. Take the Lehman case: Repo 105 refers to the accounting treatment that allowed the firm in late 2007 and 2008 to temporarily remove billions of dollars from its balance sheet by using repurchase agreements, a short-term financing technique in which a borrower ‘sells’ collateral to a lender and promises to buy it back later. Repos are normally accounted for as liabilities, but Lehman used Repo 105 to characterize its borrowing as a sale. That allowed it to reduce its balance sheet by jettisoning assets on paper and using the money it received to repay short-term debt. All this was done just in time to report earnings, and was then conveniently reversed.” In English – bad liabilities that would have made the company look bad were temporarily transferred to another related structure where the liabilities could be buried and hidden, and after the reports issued, transferred back where they belonged in the first place.

So in this sphere of accounting transparency, would you prefer clear rules which can easily be obviated by the machinations of “seasoned professionals” or a simply the best estimate, based on all available information, presenting a clear and reasonably accurate picture of the truth? Is this a trick question? The United States has opted for the former. It took a massive conspiracy of folks looking the other way – from debt-ratings agencies to Wall Street financial institution to certified public accountants – to bring down the global financial markets.

I’m Peter Dekom, and I am picturing a green-shade accountant plying his “three-card-Monte” game on a street corner in downtown Manhattan.

State of Confusion: the “B” Word

It’s no secret that some pretty large states have some pretty large deficits, and unlike the federal government, states actually have to borrow (bonds and loans) from the open market to meet revenue shortages; they can’t simply replicate the Federal Reserve and increase the money supply (i.e., the actual method of “printing money”). It’s also no big secret that the biggest liability most these states (and many of the municipalities within them) carry are pension obligations under structures created and committed a long time ago in better times by politicians often seeking governmental union support, benefits that have long been vested, many with cost of living escalators. Within U.S. Constitutional limits, states are considered sovereign – hence existing federal bankruptcy laws (notably Chapter 9 of the bankruptcy code) simply do not have any provisions for states to file bankruptcy; federal law stops at the municipal level.

A tiny, little article (“Give States a Way to Go Bankrupt”), written for The Weekly Standard back on November 29th by University of Pennsylvania law professor, David Skeel, has exploded across the Web… and into the chambers of Congress itself. Skeel addressed whether federal bankruptcy for states could even pass the sovereignty requirements accorded states by the Constitution: “The main objection to bankruptcy for states is that it would interfere with state sovereignty—the Constitution’s protections against federal meddling in state affairs. The best known such barrier is the Tenth Amendment, but the structure of the Constitution as a whole is designed to give the states a great deal of independence. This concern is easily addressed. So long as a state can’t be thrown into bankruptcy against its will, and bankruptcy doesn’t usurp state lawmaking powers, bankruptcy-for-states can easily be squared with the Constitution.”

Skeel goes on to say that, during the Great Depression, when the Supreme Court examined the issue of whether even municipal bankruptcy was constitutional (after it has struck down an earlier version, which usurped too many state prerogatives), it laid the groundwork for the possibility of a bigger financial provision to embrace states: “Because the law was ‘carefully drawn so as not to impinge upon the sovereignty of the State,’ the Court concluded, and made sure that the state ‘retains control of its fiscal affairs,’ it now passed constitutional muster.”

Shouldn’t states have the have options that we accorded General Motors and Chrysler? Shouldn’t they be able to restructure their way out of collective bargaining agreements and pension burdens that literally consume so much cash for past employees that states are not able to provide or maintain vital current services? Are government pensioners in a sacrosanct category where ordinary workers in the private sector are not? Some say many government workers opted for job and pension security, even early retirement, in exchange for lower pay during their working lives. In today’s market, it’s hard to claim that government workers are underpaid, but back when they took those jobs… maybe. Still if we are dismantling our educational systems and cutting back on public safety, necessities for the future and the present, perhaps something has to give.

Let’s face it; some states, like California and Illinois, are in debt so deep that there really isn’t an exit strategy unless those pension and union obligations can be altered… altered big time. The alternative is a massive federal bailout to maintain these states, and that will happen whether we like it or not… unless we give states some new tools to deal with their vested obligations. But even the hint of such a huge change in our bankruptcy laws has already put some downward pressure on municipal bonds:Slightly more than $25 billion has flowed out of mutual funds that invest in muni bonds in the last two months, according to the Investment Company Institute. Many analysts say they consider a bond default by any state extremely unlikely, but they also say that when politicians take an interest in the bond market, surprises are apt to follow…

For now, the fear of destabilizing the municipal bond market with the words ‘state bankruptcy’ has proponents in Congress going about their work on tiptoe. No draft bill is in circulation yet, and no member of Congress has come forward as a sponsor, although Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possibility in a hearing this month.” New York Times, January 20th. Even if a state did not avail itself of actual bankruptcy under any semblance of a new statute, wouldn’t the mere existence of such a law encourage stakeholders, unions and pensioners in particular, to come to the bargaining table to discuss reality? And the state retirement plans were born in the days of the “defined benefit plan” (where a fixed level of monthly compensation, sometime with COL escalators, is paid), while most of us – where we even have such plans – are stuck with the new and less-predictable “defined contribution” plans (where you get a fixed pile of cash on retirement, and it’s up to you how to live on that sum).

Skeel makes a compelling closing argument for this novel approach: “This brings us back to the issue of federal bailouts. When taxpayer-funded bailouts are inserted into the equation, the case for a new bankruptcy chapter becomes overwhelming. And it’s a case for Congress to move now on the creation of a state bankruptcy law… The appeal of bankruptcy-for-states is that it would give the federal government a compelling reason to resist the bailout urge. President Obama is no doubt grateful to California for bucking the national trend in the election this month, but even he might resist bailing the state out if there were a credible, less costly, and more effective alternative. That’s what bankruptcy would offer.” The Weekly Standard. Raise taxes to new unprecedented levels to pay our retirees, some of whom leave their jobs with full benefits in their 50s after fewer than 30 years on the job? Or we can sit back and watch the sun set on states that are no longer able to function in the here and now. Or….. ???? Hey, got a better idea? Let’s hear it!

I’m Peter Dekom, and we really do need to figure out how to live in this newly reset world.

Monday, January 24, 2011

Do Japanese Really Need to Save Facebook?

Facebook has almost 600 million members worldwide, 75% of whom are outside of the United States. Indonesia as has about 34 million and Turkey 25 million members, but guess which developed and electronically sophisticated country has a population that, for the most part, doesn’t even know who Facebook's CEO, Mark Zuckerberg, is?! Well, the film, Social Network, is playing in Japan now, so they might find out. Yep, only a tiny – irrelevant? – percentage of Japan has climbed on the Facebook bandwagon: a mere 2% of Japan's online population (in the U.S., the number is 60%). What's goin' on here?!

Well, when a culture that prides itself on individual anonymity – avoiding being the "nail" that sticks up – comes face-to-face (yes, pun intended) with a social networking site that is all about revealing yourself and your activities to the world… sometimes culture wins. But Facebook is exploring how to penetrate his seemingly impenetrable market. The January 10th New York Times explains exactly what has captured Japan's online imagination: "Japanese, until now, have flocked to various well-entrenched social networking sites and game portals — like Mixi, Gree and Mobage-town. Each has more than 20 million users, and each offers its own approach to connecting people online… One trait those sites have in common is crucial to Japan’s fiercely private Internet users. The Japanese sites let members mask their identities, in distinct contrast to the real-name, oversharing hypothetical user on which Facebook’s business model is based… Japanese Web users, even popular bloggers, typically hide behind pseudonyms or nicknames."

With each of the big Japanese sites carrying ten times the local volume of social networking over Facebook (which was introduced into Japan in 2008), Zuckerberg has a long and tough road to build. Folks in Japan already have their social networks up and running, their contacts built-in, and operations are smooth and normal. Unless Facebook were to buy one of these Japanese "giants," it may be well-nigh impossible to create the mass exodus from existing sites required to make Facebook the relevant "go-to" Japanese social network, even if those Japanese privacy peccadilloes can be overcome.

What these competing sites like? "Most similar to Facebook is Mixi, started in 2004. Users post photographs, share comments and links, and interact on community pages that have become huge forums based on themes as diverse as recipe-sharing and Michael Jackson. Mixi has more than 21.6 million members… Fast-growing Gree, which overtook Mixi this year with nearly 22.5 million registered users, has expanded by buttressing a popular game platform for mobile phones that offers free games, which users play with manga-style avatars; fancy outfits or tools for games are available for a fee… Mobage-town, which has almost 21.7 million users, offers a similar combination of avatars, games and accessories. It also lets users earn virtual gaming money by clicking on advertisers’ Web sites." NY Times.

To make matters worse (for Facebook, anyway), these portals are not above employing those aspects of Facebook that do travel well, even into privacy-conscious Japan: "Now, all three sites are starting to incorporate elements of Facebook — like allowing third-party developers to make apps for the sites — giving Japanese users little reason to switch… Mixi, meanwhile, has been adapting some techniques of other popular Silicon Valley start-ups. Since late 2009, for example, Mixi users have been able to send short, real-time messages with a maximum of 150 characters, akin to Twitter, the popular microblogging service." NY Times.

Indeed, some U.S. Web communicators are having vastly better luck than Facebook in this Asian nation. "[Local practices] have not kept many Japanese consumers from taking to Twitter, which is catching on here at a speed Facebook may envy. A partnership with Digital Garage, a local Internet and mobile services company, has touched off a surge in Twitter users, who numbered about 10 million in Japan in July, according to Nielsen Online NetView. But Twitter does not require users to reveal their identities." NY Times. Hmmm…. Tokyo-based MMD Laboratory recently surveyed 2,130 Japanese Web-users; 89% said they were reluctant to reveal their real names. In a 2010 Microsoft survey, more than half the Japanese surveyed noted that none of their social network "friends" were friends in real life. This is going to be interesting!

I'm Peter Dekom, and sometimes, it is interesting to lie back and watch it happen.

Sunday, January 23, 2011

98 millionths of a second – the time for a round-trip of a NASDAQ trade order to be implemented and confirmed. Electronic trading, increasingly away from the largest traditional stock exchanges, is the how the markets work today… like massive schools of fish, turning to dive and swim in a uniform and seemingly choreographed sweep. “The N.Y.S.E. accounted for more than 70 percent of trading in N.Y.S.E.-listed stocks just five years ago. Now, the Big Board handles only 36 percent of those trades itself. The remaining market share is divided among about 12 other public exchanges, several electronic trading platforms and vast so-called unlit markets, including those known as dark pools.” New York Times, January 3rd.

Outside of the N.Y.S.E. and NASDAQ, the next two biggest such exchanges, which combined handle about 20% of the 8.5 billion in such average daily transactions, are located in northern New Jersey and Kansas City, Missouri: Direct Edge and the BATS Exchange, respectively. Stakeholders in Direct Edge include Goldman Sachs, Knight Capital, Citadel Securities, International Securities Exchange and JP Morgan. The government regulator – the Securities and Exchange Commission – has fostered the use of such electronic trading in sequential rule-making that began in the 1980s, ostensibly because that such automated trading has dramatically driven down the cost for consumers when they buy and sell stocks.

But those who have the more sophisticated computer programs and state-of-the art hardware have also created tactical advantages that smaller players simply do not have. While automated “flash trading” – where sophisticated computer programs instantaneously implement buy-sell orders based on their trend analysis without the intervention of human “decider” – has been banned, the penalties for violating this rule haven’t really been established. On the other hand, with more, smaller exchanges, the competitive playing field has been expanded, and, generally, smaller traders can function with vastly less expensive commissions and per-trade costs.

But to play in this new electronically hyper-accelerated game, the truth is that if you don’t have high-speed analytical software on the fastest computers, this is anything but a level playing field: “Even the savings of many long-term mutual fund investors are swept up in this maelstrom, when fund managers make changes in their holdings. But the exchanges are catering mostly to a different market breed — to high-frequency traders who have turned speed into a new art form. They use algorithms to zip in and out of markets, often changing orders and strategies within seconds. They make a living by being the first to react to events, dashing past slower investors — a categ ory that includes most investors — to take advantage of mispricing between stocks, for example, or differences in prices quoted across exchanges.

“One new strategy is to use powerful computers to speed-read news reports — even Twitter messages — automatically, then to let their machines interpret and trade on them… By using such techniques, traders may make only the tiniest fraction of a cent on each trade. But multiplied many times a second over an entire day, those fractions add up to real money. According to Kevin McPartland of the TABB Group, high-frequency traders now account for 56 percent of total stock market trading. A measure of their importance is that rather than charging them commissions, som e exchanges now even pay high-frequency traders to bring orders to their machines.” NY Times.

These new exchanges have spread into commodities/derivatives groups (e.g., Globex), and some massive computer-based warehouses have chosen to locate away from New York but directly on some of the fastest fiber-linked lines in the United States. For the most part, these networks work flawlessly, even if they are providing an unfair advantage to those with special access to the systems.

But when they fail, the speed at which they can infect the entire trading community is alarming: “THE ‘flash crash,’ the harrowing plunge in share prices that shook the stock market during the afternoon of May 6 last year, crystallized the fears of some in the industry that technology was getting ahead of the regulators. In their investigation into the plunge, the S.E.C. and Commodity Futures Trading Commission found that the drop was precipitated not by a rogue high-frequency firm, but by the sale of a single $4.1 billion block of E-Mini Standard & Poor’s 500 futures contracts on the Chicago Mercantile Exchange by a mutual fund company.

“The fund company, Waddell & Reed Financial of Overland Park, Kan., conducted its sale through a computer algorithm provided by Barclays Capital, one of the many off-the shelf programs available to investors these days. The algorithm automatically dripped the billions of dollars of sell orders into the futures market over 20 minutes, continuing even as prices started to drop when other traders jumped in.” NY Times. The fact that such electronic clearinghouses are fairly centralized and obviously dependent on fiber linkage and the Web – even with safe duplicate sites “mirroring” the data stored on the main units – also makes our financial system that much more vulnerable to a terrorist attack.

On a macro-level, this electronic advantage seems to be one more piece of evidence that economic polarization is accelerating, providing further “special treatment” for those at the top of the economic ladder. We see the increasing alienation of the common man – most recently from the powerful Tea Party grassroots resentment of a government that they no longer trust giving special interests special rights and powers – and should continue to see this frustration in the coming years… a phenomenon that should provide for increasing political volatility and legislative friction.

I’m Peter Dekom, and if you an average American, prepare for a below-average life!

Saturday, January 22, 2011

Hu's on First


Hey, who's on next? Chairman Hu Jintao's visit to the United States was both symbolic and substantive… but the visit may be his last as China's leader; his tenure runs through 2012, at which time he must step down. Trained as a hydraulics engineer, Chairman Hu (pictured above left) has brought a strong but steady "practical" conservatism to his office: "Hu possesses a low-key and reserved leadership style. His rise to the presidency represents China's transition of leadership from old, hard-core communists to younger, more pragmatic technocrats. Since his ascendancy, Hu has reinstated certain controls on the economy relaxed by the previous administrati on, and has been highly conservative in his attitude to political reforms. In foreign policy, Hu advocates for an approach termed 'China's peaceful development,' pursuing soft power in international relations. Through Hu's tenure, China's global influence in Africa, Latin America, and other developing countries has increased." Wikipedia

Hu has a legacy opportunity to impact the long-term relationship with the United States, but tension between the two countries continues – over our perpetual desire to see China improve its human rights stance (they view political activism like an horrific virus), our military support for Taiwan (the Republic of China, which the Peoples Republic claims is nothing more than its own territory), the fact that China keeps its currency forcefully devalued against the dollar to encourage U.S. consumers to keep buying its products (and not buy American-made goods) in addition to other trade barriers that impair our ability to transact business in China, the PRC's ineffective attempts to reign in piracy of America's intellection property and China's strong objections concerning U.S. military activity (most recently in support of South Korea after the North shelled a disputed i sland) in what China perceives to be its neighborhood. Hu's recent visit was part of a joint attempt by both countries to effect new channels of cooperation and communication, even as they "agree to disagree" on many substantive issues.

Hu can leave a legacy of improved Sino-American relations… or he can push China further to the top of the global economy in defiance of American interests. Undoubtedly, he will do "a bit of both." But his time to make that mark is rapidly running out. And this little excerpt from the January 21st New York Times may provide a hint as to China’s new “attitude” towards the US: “The Treasury Department estimated that China reduced its holdings of Treasuries by nearly $11 billion in November alone. For the 12 months through November… China reduced its holdings of Treasuries by more than $36 billion.” They’re bailing… Hmmm… a big deficit economy with one big buyer apparently leaving the market for U.S. debt. Which brings me to the next big question: Who is likely to succeed Hu? Until very recently, the byzantine Chinese political system made guessing the likely successor a fool's game, but recent signs – the kind of precursors to power we have witnessed in the past – suggest that a probable choice has emerged: Xi Jinping, China's Vice-President.

57-year-old Xi (pictured above right) has been outspoken about corruption – a huge drag on China's overall aspirations – and is considered more liberal than Hu, but is also heavily focused on growth and economic reform. With an undergraduate degree in Marxist theory and graduate training as a chemical engineer, the latter at the same prestigious university where Chairman Hu received his degree (Tsinghua), Xi "currently serves as the top-ranking member of the Secretariat of the Communist Party of China, the country's Vice President, Vice-Chairman of the Central Military Commission [see below], Principal of the Central Party School and the 6th ranked member of the Politburo Standing Committee, China's de facto top power organ." Wikipedia. In mid-October, Xi was accorded those additional military responsibilities (vice-chairman of the party’s Central Military Commission; Hu is chairman), very much tracking Hu's own path of ascension to power.

Perhaps as a sign of his political astuteness, Xi has played it close to the vest, since it doesn't take much to derail a candidacy to one of the most import power positions on earth, easily rivaling that of the President of the United States. The October 18, 2010 Economist opines: "Like Mr Hu before him, Mr Xi has given few clues as to his political views. While all top-level leaders share a dedication to ensuring economic growth, social stability and the party’s firm grip on power, there are differences of opinion among them on a variety of policy issues. Chief among these are questions concerning the appropriate degree of government involvement in the economy; the degree to which even small amounts of political liberalisation should be tolerated; and the appropriate balance between the interests of China’s upper and lower classes, and its urban and rural citizens. Mr Xi has largely clung to the centre ground in these debates, so far as public pronouncements reveal them."

It's hard for most Americans to believe that the personality of China's next leader will have much of an impact on their daily lives, but it will. Not only is China a giant exporter into the U.S. economy – creating a massive trade imbalance – but their purchase “to date” of U.S. debt instruments has created a combined currency reserve of over $2 trillion held by the PRC. Their military is accelerating into super-modernity, a clear challenge to America's supremacy in this quadrant (see my Raptor-Like Rapture blog on January 7t h), and they're sucking up commodities (see my It’s the Lease We Can Do blog on December 29th) as their standard of living rises… pressuring rising prices from oil to foodstuffs across the board. China's labor force is increasingly educated, bringing them in head-to-head competition with America's "high-value-added" creativity. In short every aspect of American life is likely to be impacted by China and her policies… and the personality of the captain of that ship is an essential ingredient in our future.

I'm Peter Dekom, and learning about China's next leader should be on everyone's list of "things to do."