The Agonist - Agonist

What Really Happened with the AIG Swaps? It's Not What You Think

Thu, 19 Nov 2009 08:01:11 -0800

By now most people who follow Goldman Sachs in the news know that it received $13 billion from the Federal Reserve to liquidate its portfolio of derivatives with AIG. Because the Fed was willing to pay Goldman par value on these derivatives, even though the market valued them at about 48 cents on the dollar, Goldman walked away with no loss whatever from the AIG collapse. This has been described as a great gift for Goldman and all the other banks who dealt with AIG and who were treated the same way. Many others have described this as a colossal rip-off of the taxpayers.

How did this come about? We know a lot more this week about these transactions because of a report that has been issued by Neil Barofsky, the Special Inspector General for the bank bailout programs. The press has described this report as particularly damning of the NY Federal Reserve which negotiated these deals with the banks, and which was led at the time by Timothy Geithner, the current Treasury Secretary. These press reports, however, have mischaracterized what happened and what went wrong. The NY Fed acted properly and entirely as one would expect under the circumstances when they negotiated these contract abrogations. To see what really went wrong, follow along on the details below.

The AIG Transactions

First, a little bit of background on what got AIG into trouble. The insurance giant had a subsidiary in London called AIG Financial Products (AIGFP). This company developed a business that offered customers financial protection on a derivatives contract known as a Collateralized Debt Obligation (CDO). These derivatives packaged together various debt instruments, such as loans, bonds, mortgage-backed securities, even other CDOs, into a single security. When you bought the security, you received a regularly scheduled set of cash flows generated by these debt instruments as interest payments were made. You paid an up-front premium for these cash flows, which usually took place over a three to five year period during the life of the security.

It is interesting to note that the buyer of the security, and for that matter the seller/creator of the security, had no legal interest in the debt instruments. The bonds or loans could be any debt of this nature where public information was known about the interest rate, and whether or not a default had occurred by the debtor. There could be dozens, or even hundreds of different debt instruments bundled into one security.

These CDOs carried a public rating from Moody’s or S&P or Fitch, any of the three big ratings agencies. Also, you could get a daily price on the CDOs from a third party pricing agent located in London. If the price was 100, the security traded at its par value, meaning all payments were highly likely to take place over the life of the security as required by the contract. If the price was 48, on the other hand, it meant the market believed the security was seriously impaired due to defaults occurring on some of the debt instruments in the security.

Big banks loved to create CDOs up until the market crashed in 2007. CDOs were very lucrative. Banks had loan books that gave them a natural portfolio of debt as a start in creating a CDO, but there also was the booming housing market bubble that allowed for the creation of mortgage-backed securities. A huge amount of CDOs were created based on these mortgage instruments. Banks also realized that when they created and sold these securities to earn the profitable premiums involved, they were still on the hook in case any of the debt instruments in a security experienced a default. They wanted to get rid of this risk as much as possible, and pay away a little bit of their lucrative premiums for the privilege.

Here is where AIGFP comes in. AIGFP invented a derivative that acted like an insurance contract. Banks would pay AIGFP a premium, and AIGFP would promise to indemnify the banks in the event they experienced any losses on a specified CDO. The company used a derivative called a Credit Default Swap (CDS, unfortunately easy to confuse with a CDO) to structure this insurance product.

AIGFP was not regulated by any financial oversight agency. It didn’t even have to keep reserves on potential payouts on these CDSs, and even if it did, it has stated that the reserve amount would have been very small because it did not anticipate significant losses on the underlying debt instruments it was insuring. What AIGFP had going for it, and what the banks liked, was that it was a wholly-owned subsidiary of AIG, which carried a Aaa rating in its own name for everything it did. By virtue of this rating, AIG was viewed as one of the highest quality companies in the financial world – almost as safe and sound as a government.

The most common type of CDOs brought to AIGFP were called multi-sector: they had a little bit of everything mixed into them – loans, bonds, mortgage-backed securities on sub-prime mortgages as well as higher-quality instruments like prime mortgages. As long as none of these different types of instruments experienced unusual rates of default, the entire CDO would be traded on the market at a price close to par, and the ratings agencies would have no cause to downgrade the security.

What began to cause AIGFP trouble with its portfolio of credit default swaps backing up about $72 billion of multi-sector CDOs, was not that there were so many defaults on the CDOS that AIGFP had to make large payments under the swaps. The real problem was a series of collateral obligations AIGFP undertook every time it entered into a CDS, and the collateral conditions varied from one swap to the next.

There were three possible triggers for a collateral payment from AIGFP to the banks that bought insurance in the form of CDSs. The first occurred if the underlying CDOs being insured in the swap experienced a drop in price on the market – say from par value to 48 cents. The second occurred if the ratings given by Moody’s or some other agency on the CDOs were downgraded. The third occurred if AIG’s Aaa rating itself was downgraded.

You can now begin to see the sequence of liquidity disasters that befell AIGFP, and soon engulfed its parent AIG, starting in the summer of 2007 and extending until September 16, 2008 when AIG was near death. First, as the market realized that the US sub-prime mortgage business was experiencing very high and unexpected defaults, everyone looked at multi-sector CDOs that carried a significant percentage of these debt instruments in the security. These CDOs began to trade at lower and lower levels in the market as no one was sure just how impaired they would become.

Second, the ratings agencies began to downgrade dozens of CDOs because of the heightened default risk, and the lower prices in the market.

Third, the ratings agencies realized by 2008 that AIG stood behind the CDO market as insurer for the tune of $72 billion. At first, the long term rating of AIG was lowered, and this began a series of collateral calls from AIGFP’s swap customers. Then, by the summer of 2008, the ratings agencies were looking at downgrading AIG’s short term ratings, and doing so by several notches, which brought into question whether AIG could meet all of its obligations under these swaps. This accelerated the demands for collateral on AIG, which was experiencing a very unexpected triple whammy of collateral calls. By September, 2008, AIG had already coughed up an astounding $30 billion in collateral, and was really only half way through what ultimately it would need to satisfy contractual demands for collateral from the market. It simply ran out of resources to raise any more liquidity, and it faced inevitable default under its swap contracts, which would have led to bankruptcy.

This was the situation facing the Fed by the second week of September, 2008.

The Fed Steps In

The Fed already had its hands full in the summer and fall of 2008. First, Bear Stearns collapsed and was thrown into the arms of JP Morgan Chase, but only after the Fed agreed to take over the Bear Stearns real estate portfolio worth $30 billion in dodgy real estate assets. The quasi-government giants Fannie Mae and Freddie Mac had to be taken over by the government, then Countrywide Financial collapsed and also was pushed into a forced sale to a bank.

There was so much criticism directed at the government for the way in which these rescues were being done, and the amount of taxpayer money spent in the process, that when it came time to deal with the collapse of Lehman Brothers, the Treasury and the Fed threw this firm to the wolves on September 15, 2008. It received no help from the government and was thrown into the bankruptcy courts. This precipitated a global market meltdown.

The trigger for this meltdown occurred at the oldest mutual fund in the US, American Reserve Fund, which took a writedown of $785 million on Lehman Bros. bonds it held in its money market fund. This was announced on the afternoon of September 15, and by the close of business that day massive amounts of withdrawals were taking place at American Reserve since no money market fund had ever experienced such a loss (money market funds were supposed to be as safe as checking accounts).

When the market opened the next morning, mutual funds everywhere couldn’t cope with the withdrawals. The commercial paper market ground to a halt, as did the Eurodollar market for short term loans in London. Stock markets around the globe tanked. The global financial system was nearly paralyzed.

The US government stepped in and guaranteed the safety of all money market funds. It allowed Goldman Sachs and Morgan Stanley, the last two surviving old-line investment banks, to become commercial banks and enjoy the benefits of Fed liquidity. The Fed had been working since the previous week on the dire liquidity situation at AIG, and it had asked JP Morgan Chase and Goldman Sachs to form a bank syndicate to provide AIG with a massive $75 billion loan to solve its liquidity problem.

JP Morgan Chase came up with a package that charged AIG an onerous 11.3% on the $75 billion loan – a full $9 billion a year in interest alone. The banks would take an 80% ownership interest in AIG’s assets. This loan package was also intended to stop the ratings agencies from yet again lowering AIG’s ratings, which would have cost the company yet another round of collateral calls from the market.

There was one big problem, though. When the banks looked at AIGFP’s portfolio of swaps, and the potential collateral demands that could still occur, they realized that AIG, if it could sell all of its assets at decent market prices, still wouldn’t be able to meet the liquidity demands. In other words, the way the market was developing, AIG was headed straight towards default and the bankruptcy courts. Making this situation even worse was the global market collapse occurring at the same time as the result of the Lehman bankruptcy. The banks told the Fed that the loan package had collapsed. The banks effectively threw the AIG problem on to the laps of the regulators, none of whom by the way had any legal responsibility, regulatory oversight, or historical familiarity with AIG. It was an insurance company that had somehow become bigger and more important than even the biggest banks.

In deciding what to do, the Fed had about 24 hours from September 15 to 16 to analyze with the Treasury the AIG situation. They discovered that AIG would default on $103 billion in loans from state and local governments, $50 billion in bank loans and derivatives, $20 billion in commercial paper, and $40 billion in insurance covering 401k retirement packages across the US. The problems ranged from the horrendous to the horrific. The municipal bond market stood to be devastated by state and municipal loan losses. The Lehman bankruptcy involved $8 billion in commercial paper losses, which led to the Reserve Primary Fund disaster, but AIG’s commercial paper losses were much bigger at $20 billion. The 401k losses would affect tens of millions of Americans. AIG’s loan losses spread to banks all around the world.

The Fed and Treasury, standing in the middle of a global financial collapse the day after the Lehman Brothers bankruptcy, felt they had no choice but to save AIG, a much bigger player with far greater reach and implications for economic and financial disaster. The Treasury authorized an $85 billion line of credit at the Federal Reserve NY for the purpose of lending to AIG the amounts needed to post collateral behind its swaps at AIGFP. The Fed had no plan in place on how to do this, so it simply lifted the term sheet conditions from the JP Morgan failed loan package, and used those terms to lend to AIG.

From September 16 through October, the Fed lent $61 billion to AIG, over half of which found its way into the market as collateral to support its swaps. At the same time, AIG was instructed to begin reducing its swap book. This required AIG to turn to all the big banks with which it had a swap portfolio, and ask to close out, or abrogate the swap contracts. The banks would consider doing this, but would not want to be then left with the CDO risk that caused it to enter into the swaps in the first place. There was some talk of AIG therefore taking over the CDOs as well, which had sunk substantially in value because of the default risk, but it was very difficult to agree with each bank on what these CDOs were worth. In fact, the banks weren’t willing to sell these CDOs at any discount whatsoever, despite what the market said they were worth, so AIG turned to the Fed for help, and authorized the Fed to negotiate on their behalf.

Here is where we come to the gist of the Barofsky report and the criticisms of the Fed. But let us recap two critical facts up to this point. As of September 15, AIG was certainly heading for bankruptcy, within a manner of days. The banks stood to lose billions on their swaps with AIG, because they would be under-collateralized if the CDOs fell further in value, and because they could not easily all at once get replacement CDS coverage for their CDOs.

Second, shortly after September 16, the banks began receiving collateral from AIG, courtesy of the Fed via the $85 billion loan authorization. For the next two months, the banks were made whole as necessary whenever their CDOs fell in value. The banks could look at their portfolio with AIGFP and consider it safe and secure because of the collateral, and as important, because of the guaranty of more collateral to come as necessary, courtesy of the federal government.

The Fed Tries Its Hand at Negotiating

In early November the Fed assigned a team of managers to begin negotiating for the abrogation of the CDSs. They chose the eight largest bank counterparties to talk to, including Goldman Sachs, BOA, JP Morgan Chase, Deutsche Bank, UBS, and top of the list was Societe Generale in Paris. The plan was to ask the banks to tear up the CDS contracts through a legal abrogation agreement. It was common for banks to do this in the derivatives market from time to time, though never before on a large scale. The banks always required the customer to pay them for any potential real market losses they may incur in abrogating the contract, plus interest and a bit of a fee for all the trouble. Abrogations have never been cheap, especially if the customer was desperate to get out of a deal.

What would the banks want? Collectively, they held CDOs worth a face value of $62.1 billion, and these were the underlying CDOs behind the swaps bought from AIGFP. The banks wanted to give these over to the Fed and get $62.1 billion back, because otherwise the banks would be stuck with CDOs that were unhedged for further default problems.

The market price for this collective group of CDOs was in early November $29.6 billion, which tells you just how badly the market had trashed these instruments. But the banks held cash collateral of $35.0 billion to protect against just this contingency, and if you add the two numbers up, you come to a bit over the $62.1 billion in face value. In other words, the banks were sitting pretty. They were 100% covered for the existing market losses on these CDOs, and the market pricing was beginning to stabilize.

Remember that all this collateral came from the Fed on behalf of the now moribund AIG. The banks wanted to do a simple deal. They would give the Fed all the CDOs in exchange for $29.6 billion in cash – their current market value. They would keep all the existing cash collateral, so they would be perfectly whole. They would then abrogate the CDSs and have no further claim on AIGFP, as if the whole mess never occurred. The Fed, meaning the taxpayers, would be out $62.1 billion in cash to clean this mess up.

In preparing talking points for the negotiations, the Fed reminded each bank that it would be appropriate to give back some of the collateral to the Fed rather than keep it all. The Fed, by stepping in a month earlier, had saved the banks from billions of losses had AIG gone into bankruptcy, and these losses might have included a systemic crisis in which a few other banks went under and couldn’t pay their obligations as well. “”Be nice to us, given all that we have done for you,” was the Fed motto.

The Fed then tied the hands of their negotiators in several ways. First, the Fed would not threaten to throw AIG into bankruptcy if they didn’t get a “haircut” on the $35 billion in collateral. This would be unethical because the Fed had no plan to put AIG into bankruptcy and everybody knew it. Second, the Fed negotiators would have to do the same haircut deal with everybody. If Goldman Sachs agreed to return 30% of the collateral, JP Morgan Chase would have to agree to the same thing. Third, the banks were told up front that their participation in the negotiations was entirely “voluntary”; nobody was going to be forced to do anything or accept any haircut.

You should not be surprised that seven of the eight banks refused to take any haircut on the collateral and would therefore return none of it. They argued the cash was theirs, not the Fed’s, and they owned it by the sanctity of a legal contract that the Fed was proposing to violate. Second, AIGFP was not in default and there was no bankruptcy, and there wouldn’t be any, so giving back collateral when there was no legal requirement would constitute a breach of fiduciary duty that the banks had to their shareholders. Unstated in all this was the fact that the Fed wasn’t threatening any consequences if the banks refused to give back any of the collateral.

The kicker that destroyed any possibility of the Fed getting some of the collateral back occurred with the French bank. They told the Fed that it was not simply a fiduciary responsibility they had to follow in keeping cash that was rightfully theirs – it was decidedly against French law to give back the collateral because there was no bankruptcy. The French regulators confirmed this in no uncertain terms to the Fed, with the implication that if the Fed pushed on this point relationships with the French government would be damaged. Remember that all the banks had to agree to the same deal, so each bank had a veto power over any deal, and the French bank had the ultimate veto – it was illegal for them to give back the collateral.

The negotiating team reported all this back to Timothy Geithner, and recommended that the Fed settle all the swap abrogations by allowing the banks to keep all the collateral and thereby effectively receive par value on contracts that in the market were worth less than half that. Geithner agreed and the deal was done. The Fed then promptly kept all these details secret, including the names of the banks involved, and even went to court to maintain this secrecy under the financial equivalent of a “state secret” argument. They recently lost this argument on appeal to a higher court, and the Barofsky report severely berated the Fed for this because no terrible consequences have occurred now that the details are known.

What Went Wrong Here?

The Barofsky report lays a pretty heavy blanket of criticism on the Fed for not just the secrecy of their actions, but the actions themselves. The Fed didn’t have to treat everyone all the same. It could have accepted different levels of haircuts. It didn’t have to put so much faith in the sanctity of contracts when AIG was in virtual suspended animation – bankruptcy in all but name.

These criticisms do not show an understanding of how the Fed works. Like any large American organization, it pays considerable attention to the law. Timothy Geithner had a high powered, high-priced General Counsel sitting as his right side all the way. Geithner was told clearly that as long as AIG was not in bankruptcy, the Fed might damage its reputation by violating the terms of perfectly sound legal contracts and insisting on repayment of collateral when it was not legally required. He was also told the Fed had no ethical right to threaten bankruptcy when the threat could not be backed up later in court with proof it was real. He was probably told – though there is no proof of this in the report – that giving any bank preferential treatment on haircuts exposed the Fed later to lawsuits of unfair treatment.

Timothy Geithner is like most American executives – he is a technocrat. He respects technical advice, especially of the legal kind, and he abides by it. Past presidents of the NY Fed might be different – Gerald Corrigan comes to mind during the Drexel Burnham bankruptcy. He would bang some heads together to get an outcome that satisfied the political pressure on the Fed, even if it meant overriding legal advice. Gerald Corrigan, by the way, now works for Goldman Sachs. He might have in this situation taken Goldman Sachs and JP Morgan Chase aside and said, “I want you guys to get your consortium of banks to agree on a haircut – something like 30% would be nice – and I want all of you to come back and voluntarily request that the CDS collateral provisions be waived in favor of paying back to the Fed some amount of the collateral. I don’t care how you do this, and it is not going to be the Fed asking for it – it is going to be voluntarily offered to us.” The banks would not need to be told that there was a steel hand underneath the Fed’s velvet glove.

Maybe Timothy Geithner would have done this, technocrat though he is, if there were enough political pressure on him to save the taxpayers billions of dollars, but there wasn’t. No one in the Bush administration – certainly not Henry Paulson at Treasury – was demanding fairness for the taxpayers. There was public disgust over the whole bailout process, but this disgust got bottled up in a Congress paid for by the financial industry. Barofsky might have mentioned that lack of political pressure, and the consequent insensitivity to taxpayer needs that the Fed and the Treasury displayed, but he didn’t, maybe because his current paymaster, the Obama administration, isn’t showing any such sensitivity either.

Which brings us to the crux of the problem, only hinted at in the Barofsky report. The real problem for the taxpayers didn’t occur when the NY Fed failed to negotiate the return of some of the collateral in November, 2008. The problem occurred on September 16, when the Fed and the Treasury were suddenly faced with a collapsing AIG. Had there been any forethought and planning for such an event, the reaction could have been very different and far less panicky.

The first response should have been: ”Financial markets worldwide are frozen, and they are going to stay frozen for a long time no matter what we do with AIG." In hindsight, this is exactly what happened. The commercial paper market has taken nearly a year to recover a fraction of its previous activity, and this was only after the Fed had to guarantee transactions. Credit spreads took nine months to begin coming down to normal levels. Banks are lending to each other only because governments around the world now guarantee their bank activity, but banks are still not lending to corporations, small businesses, or individuals. The housing market in the US exists entirely on the generosity of Federally-managed firms like Fannie Mae, Freddie Mac, and FHA. In other words, the disaster that the Fed faced on September 16 rolled on despite the rescue of AIG.

If AIG had been allowed to fail, the market would have learned a serious lesson about dealing with companies that act like banks but really have no controls or regulatory oversight like banks. The pain would have been greatest at the banks themselves. Some banks like Citigroup and Bank of America would have been even more crippled than they are now, but their current status as zombie banks would not be any different. The damage done to 401ks could have been mitigated by additional federal government guaranties, but even here the cost while enormous would have been less than what was spent paying off AIGFP’s credit default swaps at par.

Suppose you say that it is impossible to expect government bureaucrats to react on September 16 in any different manner. You can argue that any normal person would have panicked too, and that tough-nosed regulators like Gerald Corrigan don’t come around all that often – in fact these days they are all working for Goldman Sachs. Fine. Where, then, was the prudential planning for this catastrophe. All it would have taken is someone in advance of the crisis – a clever lawyer for example – inserting one clause in the agreements with banks before any collateral was posted with them. It would have said “The Federal Reserve Bank of New York reserves the right at any time to demand immediate repayment of any or all amounts of collateral posted with Bank X, with no compensation required to be paid to Bank X in any form by the Federal Reserve Bank of New York, and Bank X hereby waives all rights to petition for a legal stay of said repayment.” If the banks didn’t like this clause, they wouldn’t get their collateral. They could go ahead and sue the government for breach of contract, but in the meantime they would be experiencing real pain with their CDO portfolio and the pressure would be on them to settle. Once the collateral was out the door, the Fed lost all leverage with the banks, and this is why the November negotiations were a foregone conclusion and a waste of time.

Finally, what is fundamentally missing at the Fed and the Treasury, and certainly now with two successive administrations and almost all 535 public servants in Congress, is the sense that the big financial institutions which have created this monstrous mess are dispensible. The problems that have arisen due to their avarice and misjudgments are only going to be solved over time, and are best solved in bankruptcy courts or through FDIC closure processes, not by making these institutions wards of the state until 10 or so years later they are nursed back to health. The public can and has been protected through deposit insurance, but the collapse of lending and credit in general has not been mitigated one whit by anything done so far to rescue these institutions. Let them die a merciful, quick death if death is their fate anyway. We will all of us individually benefit from such mercy as well.

The Disunification Church

Mon, 16 Nov 2009 06:27:26 -0800

Everything in Rev. Sun Myung Moon’s sprawling religious enterprise is about family.

His Divine Principle, the core of his religious teachings, posits that Rev. Moon and his wife Hak Ja Han Moon are humanity’s True Parents. They were placed on earth by God to rescue humanity from war and want by creating exemplary families that will through behavior and example show the way to world peace and unification. Rev. Moon claims that Jesus did not succeed in his mission to save humanity, because he did not marry. Jesus has therefore anointed Rev. Sun Myung Moon as the true Messiah. In the heavenly realm, Rev. Moon asserts that evil men like Adolf Hitler and Joseph Stalin have repented and have now declared Rev. Moon as the true Messiah. Rev. Moon’s Unification Church’s proper name is the Family Federation for World Peace and Unification.

Mr. Moon and his wife have 14 children. As you may expect, they are described on the Unification Church website as having raised exemplary families. They are accomplished religious leaders (many of them are referred to as “reverend”), business executives, community organizers, artists, and of course, peace advocates – though no mention is made of Moon Young-jin, who died of suicide in 1999.

Naturally, with so many talented children, many of them have found their way into employment in the family business. In fact, all the critical management positions in the Moon conglomerate are held by his children – an arrangement as nepotistic as it could possibly be, though conceivably justifiable since the companies are privately owned by Moon.

More after the jump.

Rev. Moon is turning 90 this year and has decided to retire to the Garden of Eden, as he refers to a private resort he is building in Hawaii. He therefore announced his successor to be Moon Hyung-jin, age 30, known as Sean. Technically, Sean Moon has been named head of religious missions, but that is the “whole enchilada” when it comes to ultimate authority and power in a church whose founder is the Messiah, sent to deliver salvation for you and me.

This appointment has not set well with Preston Moon (Moon Hyun-jin), who is head of International Operations, which includes primarily management of The Washington Times, Rev. Moon’s conservative mouthpiece founded in 1984. Preston Moon has expressed his unhappiness by going rogue – two weeks ago he fired the top management of The Washington Times, had them escorted out of the building by security guards, and confiscated their laptops and cell phones. This has left the newspaper in turmoil, with a lot of speculation as to whether it can survive this upheaval. The newspaper has run deficits from the beginning, and is supposedly suffering dearly in this recession.

What Preston Moon expects to achieve from this coup is unclear. His newspaper has survived only on the subsidies from profitable Moon businesses, especially True World Foods, which provides over 75% of all sushi to US restaurants, and counts 9,000 customers currently. Preston Moon’s recent title as head of International Operations may give him control over the fisheries business, though that is unclear because in the past Rev. Moon himself has kept his hand firmly on this, his biggest money earner.

Another possibility is that Preston Moon has an ally in his brother, Justin Moon (Moon Kook-jin), age 39, responsible for what are described as Korean Business Ventures. This includes a variety of activities in South Korea, as well as the largest commercial hotel in North Korea (Rev. Moon is as close to Kim Jung-il as he is to George H.W. Bush, on whom he has lavished hundreds of thousands of dollars in speaking fees). Justin Moon also manages another lucrative franchise, Kahr Arms, located in Blauvelt, NY. This company manufacturers handguns and automatic weapons, and business has been booming since the election of Barack Obama. The church explains this investment in armaments as necessary to effect world unification, though the truth is probably to be found in Justin Moon’s biography. He founded Kahr Arms with money from his father, and he has had a love affair with handguns since age 14.

If Justin Moon is helping his brother, it is being done quietly. For the moment, the official line from the church this week is that Preston Moon operated in an “unprecedented” manner. This was the description provided in a press release issued by Rev. Moon In-jin, Tatiana Moon, who is head of the Unification Church in the US. She said that press reports claiming there was a feud underway between Preston Moon and Sean Moon were completely untrue. Instead, what had happened is that Preston Moon had acted unilaterally and without authority from True Parents.

True Parents are heartbroken and dismayed over what has happened, especially in light of the fact that they have been guiding our movement worldwide, over the last several months, specifically to remain united with their spiritual leadership.

In other words, according to the church, it is time for Preston Moon to come back into the fold, in obedience to his parents. It is easy to imagine Rev. Moon as “heartbroken”. Obedience to one’s parents is the prime virtue in Korean culture, and Rev. Moon is suffering considerable shame from this disrespect. The losses he has piled into The Washington Times have been a small price to pay for the influence he achieves from this newspaper. It is all part of a pattern of subsidies to conservative causes, like his investment in Timothy LeHaye’s Left Behind series, or the millions spent in keeping Jerry Fallwell’s Liberty University afloat. Preston Moon’s action may have damaged the paper irrevocably, and Rev. Moon may be forced to fire him for insubordination.

But if it comes to that, what sort of Messiah is Rev. Moon if he cannot control his own “exemplary” family? All of these children mentioned have been born and raised in America. They all attended Harvard or Columbia (Harvard has profited nicely from the Moon family), and they may be more American than Korean. Someone has to run the business empire when Rev. Moon dies, and Preston Moon may feel his business experience trumps the religious credentials of his much younger brother, Sean Moon. In fact, Sean’s credentials aren’t all that sterling – he left the church for a while after his brother killed himself, and Sean became a Buddhist before returning to his True Parents.

Perhaps the crux of the problem is that it is not clear what Rev. Moon is leaving behind. Is it a religion, or a multi-billion dollar business? These two things are not necessarily incompatible – look at any televangelist today (especially the exceptionally wealthy Pat Robertson). But for the two to work together, you need one person projecting an image of religious sanctity and evangelism, while running a corporate empire in the background. By splitting up his empire, giving each child a business to run, and leaving the least-business like child to carry on the religious mission, Rev. Moon has failed to create a structure that blends business and religion. And if you can’t do that, what’s the purpose of having a religious cult in the first place?

Boy Does Wall Street Have a Deal For You!

Thu, 12 Nov 2009 07:56:40 -0800

American cowboy capitalism at its finest is on display today as Kohlberg, Kravis & Roberts (KKR), one of the country’s largest leveraged buy-out firms, is proposing to bring the Dollar General company back on to the public market. You – yes you, oh innocent investor – can buy a piece of this company for just $22 a share! Any why not? Dollar General is one of those stores where everything is on sale for $1, and cash-poor, recession plagued Americans have been flocking to stores just like these.

This is the only part of the retail sector that has been doing well. Wal-Mart, Dollar General and similar low cost vendors have been holding their heads above water while everyone else has been sinking. But before you plunk down your $22/share, come along with me on a ride through the fine print of the prospectus, to learn just what is going on here. You’ll understand better that the role the Wall Street boys want you to play is that of the sucker – the person who gets them out of a tight jam for a mistake they made.

That’s what everybody said about KKR 2-1/2 years ago when they bought all the shares of Dollar General and took them private. KKR, along with Citigroup and Goldman Sachs and a few other Wall Street firms, bought Dollar General for $7.3 billion, of which $2.8 billion was cash, and the rest - $4.5 billion - was borrowed from banks using Dollar General’s own assets as collateral.

If KKR can get $22/share for their Initial Public Offering this week (IPO), Dollar General will be valued at $7.8 billion, so that looks at first like a modest profit for KKR and its fellow buy-out partners. But this is a leveraged buy-out deal, so the real question is, what happened to all the debt taken on to buy this firm?

The answer is, it’s still there. The Dollar General company the public is being asked to buy this week has $4.1 billion in debt, down just slightly from the $4.5 billion that KKR dumped on it when it took the company private. Every quarter the company has to service this debt by paying interest to the banks, and that interest amount consumes 39% of the company’s operating earnings. This is ten times the debt burden of the average retail company.

The first thing you have to know, therefore, is that you are buying a company that may have kept its head above water in this recession when it comes to sales revenue, but it is drowning nonetheless in debt.

The second thing you should look at in an IPO like this is the price/earnings ratio, or P/E ratio. The price per share divided by the earnings per share tells the multiple of annual earnings investors are willing to pay for a company. For example, Wal-Mart trades at a P/E of 15, meaning at its current stock price investors are willing to value the company at 15 times its annual income. This is a company much larger than Dollar General, but in somewhat the same business, so investors treat the two companies as comparable.

You would think, therefore, that the P/E implied for Dollar General at an initial public price of $22/share would be about 15 times earnings, but it is not. By setting the price at $22/share, KKR is asking investors to buy the company at a P/E of 29. KKR is claiming that the Dollar General franchise is twice as valuable as Wal-Mart’s franchise, not so much in terms of size, but in terms of growth potential.

You have every right to believe this if you wish, and buy Dollar General at $22/share if you wish, but check out first some more fine print. In May of this year, Dollar General granted 732,000 shares as stock options to management, and it used two models to figure out what the company was worth and what price to set for these options. One model estimated the present value of all future cash flows for the company, and the other looked at market prices for comparable companies. The average of the two models valued the company at $12.95/share.

To defend its new price for the IPO, KKR says that the stock market has rallied over 60% from its lows this year, so naturally Dollar General must be worth much more too. Certainly the stock market has put on an impressive rally, but using the other model – the cash flow model – it cannot possibly be the case that Dollar General’s future cash flows will now have doubled in such a short period of time.

Something is wrong here, unless you are a Dollar General executive, because you are going to make a quick $9/share profit if investors snap up the company stock at $22/share. And if you are KKR, the company is worth about $13/share when it comes time to valuing the executive stock options, but $22/share when it comes time to asking the public to buy into the company.

Are you still tempted? How about this delicious morsel in the fine print of the prospectus. Last month, knowing they were going to take Dollar General public, KKR, Goldman Sachs, Citigroup and the other owners paid themselves a dividend out of Dollar General’s earnings. The amount - $239 million – exceeded the quarterly operating earnings of the company, so some of it had to come from the company’s remaining equity. How convenient that the owners enriched themselves royally just before the IPO, and thereby reduced the equity cushion of a company already loaded up with too much debt.

As a final straw, guess which Wall Street brokers are going to bring the IPO to market and earn all the fees from underwriting this offering? How about KKR, Goldman Sachs, and Citigroup? As if they haven’t already earned enough money off this company.

There are dozens and dozens of companies like Dollar General that were taken private by leveraged buy-out firms during the market frenzy that peaked in 2007. They were all bought with little cash and enormous amounts of debts, and they are sitting like time bombs on the balance sheets of the leveraged buy-out firms that misjudged the market. As the months go by and the buy-out firms watch their fees from their investors get eaten up by high interest costs, they are getting more and more desperate to dump these companies back on to the public markets and naïve individual investors.

How wonderful, then, that we’ve had a 60% rally in the stock market since March. Do you think, maybe, Wall Street has a vested interest in keeping this rally going and exciting you and me about green shoots?

(Many of the facts on this IPO can be confirmed in this article on Bloomberg:

http://www.bloomberg.com/apps/news?pid=20601087&sid=awIsi0HV9G34&pos=6)

Why This Economic Recovery is Destined for Disaster

Mon, 09 Nov 2009 17:48:15 -0800

A most revealing comment was made today by The Maestro, Alan Greenspan, speaking at a conference in Alberta on energy and the global economy:

We have been very fortunate that the stock markets moved back and are re-liquifying the whole process.

He pointed to the “wealth effect” created by a rising stock market, especially when investors cash in their capital gains.

In olden times, before Alan Greenspan spent over a decade as Federal Reserve Chairman, Fed officials worried about the growth in money supply, the level of prices in the economy, unemployment, and the strength of the dollar overseas. In fact, if you read the enabling legislation for the Fed, these are the things the Board of Governors should be concentrating on.

Greenspan of course is no longer the Chairman of the Federal Reserve – his protégé Ben Bernanke is. For the most part, when he was Chairman he never spoke about the stock market for fear of influencing its direction. Now that he is a private citizen, he can blurt out whatever he wants to say, and how illuminating it is to hear him talk about the stock market “re-liquifying” the economy.

Not for nothing was he given the sobriquet “Bubbles Greenspan” when he was in office. Economists, Fed watchers, traders, investors – all sorts of people suspected Greenspan never met a financial bubble he didn’t like. He cheered on the 1990s tech bubble as an example of a paradigm shift in the economy. He sat back idly while the housing bubble in this decade blew out of all proportions. The best he could say was that central bankers were helpless in the face of growing financial market distortions, and all they could do was clean up the mess afterwards.

The reality was that he encouraged these bubbles through deliberate inaction. After the end of the tech bubble he was terrified of deflation, pushed interest rates to 1%, and kept them there long enough for a housing bubble to ignite. He gave speeches encouraging home buyers to take out adjustable rate mortgages – the type that have blown up disastrously in the face of thousands of homeowners. He wanted the explosion in consumer spending that resulted from the housing bubble. He didn’t care if he caused asset inflation, as long as it didn’t seep into the general price levels of the economy.

Were he still at the Fed, he’d obviously be very pleased with the stock market recovery this year, because it makes people more confident, it gives them the illusion of being wealthier, and in some cases if they cash in their gains, it gives them real money to spend. Maybe he’d be happy with the weak dollar, and the fact that the infamous “carry trade” has moved from Japan to the U.S. Now the speculators of the world borrow dollars at 0%, driving the exchange rate down for the dollar, and they invest in the hottest commodities, like gold, Chinese real estate, oil, equity markets everywhere, high yield bonds, and even mortgage backed securities.

Does Ben Bernanke believe in the re-liquifying dreams of The Maestro? In the infamous words of Sarah Palin, “You Betcha!” Just look at his actions. He has pushed interest rates to zero and said they will stay there for a long, long time. He is knowingly encouraging the carry trade and devaluing the dollar. Neither the Fed nor the Treasury has lifted a finger to support the dollar on the exchange markets. He has thrown trillions of dollars at the banks and encouraged them to revive their speculative practices from a few years ago before the crash. He is trying desperately to get the securitization business up and running again, and he would love the hedge fund and leveraged buyout boys to get back into the equity extraction game.

Of course, he would also love to see more controls on leverage this time, smaller bonuses being paid to bankers, and less swagger emanating from Wall Street, but he’s not pressing too hard on these points. The important thing is to get the economy back to where it was before 2007. Nor is he alone in this desire; the G-20 countries this weekend said the same thing – it is way too early to remove the excessive liquidity that has been pumped into the global economy.

This stock market rally is therefore both welcome and engineered by our financial masters. So is the bubble in gold, the collapse of the dollar, and in Asia, the construction of even more high rises and industrial parks that are destined to remain empty.

Not a single lesson has been learned from the market collapse last year. Every effort is being made to avoid letting anyone suffer any pain for their mistakes. The great global reflation that is underway is nothing but a repeat of the bubble-inducing liquidity push that occurred at the start of this decade. The whole effort is a tremendous gamble – a hope that real and substantive economic activity will be ignited by all this speculative activity.

But remember what Greenspan said is the end result of the stock market rally – a “wealth effect” – spending on vacations, McMansions, luxury automobiles, and other goodies for the wealthy who happen to own an equity portfolio. You yourself won’t be getting a decent raise in your salary; it certainly didn’t happen during the last two bubbles. The cost of education or medical care isn’t going down. In short, the real economy is not going to rebound based on the most recent bubbles.

Inevitably these bubbles too must burst. Where will we be then? For one thing, there will be a lot of embarrassed economists, almost all of whom now are predicting a slow but steady recovery, because that’s what the Leading Economic Indicators say, along with the stock market, credit spreads, and all the usual auguries. Few people are willing to say “this time is different”, but it really is different. The old tools of the past don’t work anymore. We are not suffering through a typical recession caused by overinvestment, excess inventories, and so on. This is much rarer – a recession caused by the collapse of credit, by too much outstanding debt that must now be paid or defaulted on, by deflation, and by a government that won’t be there this time to lift us up.

Perhaps then our central bankers will learn that asset bubbles are just another form of inflation, one that benefits a few of the wealthiest in the world, and hardly anyone else. Unfortunately, when an asset bubble bursts, we all share the pain.

Cupidity and Stupidity Both Run Rampant on Wall Street

Sun, 25 Oct 2009 06:04:52 -0700

If Wall Street bankers are so smart, how can they be so dumb when it comes to paying out bonuses?

Don’t these people read newspapers? Don’t they watch Dylan Ratigan on CNBC or Glenn Beck on FOX News, castigating bankers for their greed and ingratitude to the taxpayers who saved their firms? Haven’t they sat through one speech too many by President Obama insisting that they stop giving million dollar and multi-million dollar bonuses? Have they no idea what it means for the average worker to struggle in an economy with 10% unemployment and another 8% underemployed?

And yet Goldman Sachs is on schedule to give out record bonuses this year totaling nearly $20 billion, or half a million dollars on average per employee. Morgan Stanley is not far behind, and the investment bankers and traders at Merrill Lynch (now wholly owned by Bank of America) and Bear Stearns (now wholly owned by JP Morgan Chase) are going to be treated royally as well. What is it about these people who are supposedly so smart in figuring out the markets but dumb as posts when it comes to judging the larger world in which they operate?

To get to the bottom of this, it helps to know the environment in which these people have been operating, and the history behind Wall Street’s investment banking culture. It is a culture of entitlement, born of the fact that these investment banks operate like private partnerships, even though they are now all public companies.

Thirty years or so in the past, all the Wall Street firms were private partnerships. The partners were the owners, and their personal wealth was held in their ownership shares in the partnership. If it was a profitable year, the partners personally benefited, and their ownership position increased, some of them more than others because shareholdings were divvied up based on a partner’s contribution to the firm. As a Wall Street banker, you could live well enough, but not astoundingly so until you retired, which is when you could cash out your personal shares by selling them for cash to the remaining partners.

This system had discipline to it, because if the firm had a bad year the partners felt it immediately with a hit to the value of their holdings in the firm. Wall Street firms therefore kept a very close eye on risk and return, and for the most part avoided risk by making their money scalping a little bit here and there off each bond or stock offering they brought to the public on behalf of their clients.

Around 1980, this system began to break down. Investment bankers were watching some of their clients in the hedge fund business, or in the leveraged buyout business, make unbelievable fortunes by taking big risks and reaping outlandish rewards. Wall Street knew that their customers weren’t any smarter than they themselves were (the customers were often far dumber), and they realized they could do as well for themselves if they could have access to big amounts of capital in order to take on much more risk.

The public had to be brought into the partnership. In other words, the Wall Street firms had to abandon the partnership legal structure, organize themselves as a public company, sell shares of equity to the public, and use the capital they received to ramp up their risk taking. The secret of making this work for the Wall Street bankers was a fundamental understanding of how public companies in America operate: the shareholders are passive, often indirect investors, through mutual funds especially which don’t pester management with uncomfortable questions and rarely vote against management on any issue brought to the shareholders. This system allows management in corporate America to act as if they own the company themselves, and to run the company in their own personal interest.

This is precisely how Wall Street firms behaved themselves once they went public. The management acted like partners even though they were technically now beholden to the shareholders. They redirected the firms’ focus onto much riskier activity, and added huge amounts of debt to their balance sheets so that like hedge funds or private equity firms, they could begin making 20% to 30% returns on their equity. They began paying out gargantuan bonuses using a formula that paid out in bonuses around half of their revenue – not net income (a much smaller number). Profits that otherwise would have gone to the shareholders as retained earnings were instead paid out year after year in multi-million dollar bonuses.

The shareholders put up with this because, first of all they were passive investors. The average American corporate employee who owns a 401k checks a box saying “stock market investment portion”, but they don’t get to say which stocks are bought. This decision is left to some mutual fund manager who may decide to hold Goldman Sachs shares for six months when it looks like the market is rallying short term. If the mutual fund owns the stock long term, it still hasn’t been in a position to complain in the past twenty or more years, because the stock markets were enjoying an unprecedented, extended rally, especially for financial industry stocks.

The only time this system broke down was once last year, when Lehman Bros. was thrown on to the ropes over rumors (largely true) that it had huge losses in its real estate portfolio and it was in danger of running out of liquidity. Mutual funds dumped the stock in a frenzy, pushing the price close to zero. The collapse in value was also helped along by a peculiar propensity of Wall Street firms to engage in naked short selling, pushing shares lower even though the seller doesn’t own or hasn’t borrowed the shares from someone else as would be the case with normal short selling.

Lehman, unlike Bear Stearns which was forced to merge with JP Morgan Chase by the federal government, was allowed to go bankrupt. The resulting systemic crisis was so severe that the government stepped up immediately in support of all the other remaining Wall Street firms, each of which was beginning to experience the same pressure on their stocks as Lehman had gone through before bankruptcy. Goldman Sachs and Morgan Stanley were allowed to become commercial banks, borrow from the Federal Reserve, and receive all sorts of benefits and privileges, including sweetheart deals with the government that provided them with guaranteed profits.

The federal government even took shareholdings in these investment banks, through the TARP investment legislation. So how were you – the taxpayers – treated by the Wall Street firms? Like dirt, basically. You were treated like any other shareholders. You were ignored. Goldman Sachs in particular has gone on doing exactly what it always did, expecting its shareholders to be perfectly happy that the stock price of the firm is rising again, and then paying out 50% of this year’s revenues to themselves as employees. Goldman Sachs is making some small concessions to public pressure; it’s paying a measly $100 million to one of its charitable funds, and it is paying some of the bonuses in GS stock rather than cash. Still, the shareholders are taking it on the chin once again. Money that would have gone into their account as retained earnings is siphoned off into bonuses for management and staff.

You can see what has gone badly wrong here:

a) Wall Street bankers convert to a public corporation from a partnership, but continue to act as if they are a partnership, rewarding themselves with absurd bonuses at the expense of the public shareholders.
b) Wall Street bankers leverage their firms to the hilt, and eventually a highly leveraged financial system hits a wall in 2007 and collapses.
c) The federal government steps in and rescues all sorts of collapsing firms like Fannie Mae, Freddie Mac, and AIG (a company that was neither a commercial nor an investment bank and had no claim on government support other than the risk its collapse posed to the overall economy, or at least to Wall Street).
d) The “market” – the be all and end all in the world of high finance – is not allowed to work its magic. The weak, the stupid, the greedy, and the corrupt are not forced to face up to their faults and suffer the consequences of their mistakes. Market discipline is squelched by the government in the interest of preventing what is assumed to be a calamitous fall in national economic output.
e) The surviving Wall Street firms have no reason therefore to change their risk taking appetite, nor their avaricious habits when it comes to paying themselves bonuses.

Given this sequence of events, should we all just get used to Wall Street extracting preposterous amounts of personal wealth from the economy? In the short term, yes. Nothing can be done now short of clawing back the bonuses through legislation, which is not going to happen from a Congress bought and paid for by Wall Street.

But note this: Wall Street’s current behavior may be myopic in the extreme. A day may come, sometime soon perhaps, when the credit crisis reasserts itself. Money and credit may once again become hard to get; there is already talk by the government of shutting down many of its support programs. Even if these programs are allowed to remain, the continuing liquidation of debt by American consumers and corporations is on its own likely to bring back credit constraints. When Wall Street turns once again to Washington for protection, this time the door may be closed. This time even a paid-for Congress and a compliant administration in the White House may have had enough. This time Goldman Sachs may be pushed into the pit with Lehman Bros.

One way or another, the day of multi-million dollar bonus payments in the finance sector is coming to an end, not just for Wall Street firms, but for the hedge funds and leveraged buyout firms that are no longer able to work their alchemy because no one is willing to finance them. The global economy can no longer afford to have so much of its wealth siphoned off to such activity. In this respect, if we return to our opening question “How dumb can Wall Street be?” – the answer is very dumb indeed. So dumb that they can’t see that business as usual exists now only because the government and the taxpayers short-circuited the market mechanisms that would have destroyed Goldman Sachs, Morgan Stanley, and probably Citigroup, Bank of America and quite a few other big players as well.

Business as usual also exists because the global bond market is still allowing America to borrow trillions of dollars in new government debt. This too is coming to an end. Long term interest rates have been ratcheting up lately, and something happened last week that was very important but got hardly any notice. Moody’s the ratings agency said for the first time that the US cannot expect to maintain its Aaa rating forever in the face of such deficits. In fact, the firm suggested that the US has about three or four years to begin reducing its deficit or its Aaa rating will be lost.

Is there somebody out there on Wall Street, in the upper echelons of Goldman Sachs or Morgan Stanley or JP Morgan Chase, who is paying serious attention to what is happening to the US credit position? Is there anybody thinking long term? If so, they have to understand that the game is over, and their financial and securitization business model is broken beyond repair. If so, they should be pounding the table in their board room, demanding that the bank or firm change course immediately and exit these businesses.

If so, we won’t hear about them until long after these companies have themselves gone to the wall and finally faced up to the market discipline that should have been imposed last year when the credit crisis first erupted.

Sick As A Dog/Past Tense

Wed, 14 Oct 2009 09:30:40 -0700

Apologies all around for the delay in getting the site up. I was practically bed-ridden for a few days and then generally out of it after that. I'm close to 100% now. I'm just grateful whatever it was that laid me low wasn't swine flu. Anyhow, we now return you to your regularly scheduled blogging.

Here's a little humor for you: here.

Addendum: A new blog worth celebrating has arrived at the New York Review of Books!

China's Export Drive Moves Into High Gear

Wed, 14 Oct 2009 07:14:15 -0700

During this decade the global economic and financial dynamic that mattered most was the United States - China relationship. China sold cheap manufactured goods to American consumers desperate to maintain their standard of living in the face of a shrinking job market and declining real wages. Americans borrowed money to pay for the essentials of its lifestyle - college education, premium health care, two or more cars, etc. The Chinese were the major lenders to American consumers, financing the purchases of the goods China was selling.

What this dynamic was doing was forestalling the inevitable decline in the American standard of living that began when Deng Hsiao Ping first unleashed China's capitalist spirits. The West looked on this development greedily - 800 million new consumers ready to buy Western products! This was a great misconception, because it assumed somehow that China was going to make its way up the economic ladder by making Westerners richer. In fact the reverse began to happen. Hundreds of thousands of entrepreneurial manufacturers arose in China, with access to labor willing to work for pitiful wages and no benefits, and with no governmental regulation on working conditions or environmental degradation. The result has been an economic catastrophe for the West, which has seen its manufacturing sector whittled down, its trade deficits soar, and its debt levels skyrocket.

The credit crisis that arose in 2007 and 2008 was the end of the line for this financial dynamic, despite every effort of the US to keep the game going. The only way to do this is for the US to turn to the last agency that can still borrow money - the federal government. Last year the US government borrowed or issued debt guaranties for an amount equal to its entire gross national product for 2008. Since obviously no nation can borrow its way to prosperity, this is a last ditch effort at maintaining a First World lifestyle through programs that subsidize car purchasers and housing sales. This game can go on a few more years until China finally chokes on all the US paper it is accumulating, and which is progressively becoming less and less valuable since there are no other buyers.

There are already signs that the Chinese government has had enough and is buying only as much US paper as can help stabilize the global financial markets. If you want to see what really is going on, though, read this article in today's NY Times:

http://www.nytimes.com/2009/10/14/business/global/14chinatrade.html?_r=1&ref=business

In it you will notice that China is ramping up its export machine, moving into downscale, cheaper products that are the only goods Americans can afford anymore. In doing this, China has replaced Germany and Canada as America's biggest trading partners. China is, as the article states, grabbing a bigger piece of a shrinking global trade pie.

The economic name for the effect of this export push is deflation. The low cost global producer is slashing prices, further undermining the export capabilities of the West, and further eroding Western living standards. Americans companies will not be able to restore wages and salaries to even the low levels seen at the peak of the market in 2007. Even government workers are now taking pay cuts, if they can even keep their jobs at all.

The West, and the US in particular, is unable to maintain its First World status. China is moving up from its Third World status (or at least the 10% of China's population which is benefiting from its export drive), and somewhere in the middle Chinese rising living standards will meet up with declining American living standards. This process will play out in years, if not decades, and the only people in the US who can still profit from it are the financiers who extract middle-man profits from shuffling pieces of debt around the globe. Making the whole situation even worse is that India, Brazil, Russia and other countries are pushing just as aggressively on Western living standards.

If you are an American and want to survive this, you have got to get your living costs down. You have to find a cheaper mortgage or cheaper housing, you have to monitor your food costs, shrink your electrical and heating bills, renegotiate your homeowners and life insurance, and pray that the federal government does something to reduce health care costs. Your wages are going to stagnate for a long time to come - if you can keep a job - and you are going to have to play the deflation game yourself when it comes to managing your costs.

If you are successful, you'll wind up in that Second World medium where Chinese and American living standards merge. If you fail, you're going to end up like the poorest Chinese, trying to wrest a subsistence living from a cruel and uncaring global economy.

The Mountains, Land-Reform and Jobs

Sun, 11 Oct 2009 10:23:11 -0700

I was involved in two pretty interesting conversations with Ruy and Plutarco while in Nicaragua. They spanned about three days, but below you will find the gist of them both. I traveled with a friend who wrote up the conversations in dialogue form, as my Spanish leaves lots to be desired.

Ruy:

On Evangelicos

Ruy: “There are a lot of evangelicos here. You know, the people here have a lot of illiteracy and no education. When the evangelicos come, the people don’t know any better. They take, and take and take and the people just flock to the church and give what little they have to these thieves; puto evangelicos estupidos.

More after the jump.

Continued

On Ortega

· They are all the same (politicians). He is just another politico now.

· I’m not an Ortegaist, but I do have respect for him for standing up to the US

· Lo que me importa es trabajo, si tengo trabajo, estoy bien con el politico (I just want to be able to make my own way and I don’t have confidence in the politicians.)

On The Sandanistas

· I was taken into the mountains for three years. They took me, I did not want to go. “No, no fue voultario”. I went to a training camp with the Russians and they taught me how to fight.

· I saw two of my friends murdered in front of me in the mountains. One of my friends got his head sliced off, right in front of me. There was nothing I could do. When you are in the mountains the only thing you can think of is your own skin. Your own skin, that’s all you can worry about. This affects a person.

On 'The mountains'

BR- Did the war impact the whole country or was it mainly isolated in North?

R- Yes, it was mainly in the North; in the mountains. They would take people from the countryside but the fighting was in the mountains.

BR – How are the people in the mountains now?

R – Oh, there is no more fighting in the mountains. The fighting has stopped. Its safe.

BR- What I’m trying to ask is how the war affected the people there.

R – Oh, there are a lot affected people there, crazies. The war makes you crazy. You can’t see what we saw and not be affected. I had to take off for seven years to clear my head. I went to South America and United States. It took a long time.

BR- You are really lucky you could do that. I imagine few people had this luxury. Are there are a lot of people with problems there?

R – Yes. The people in the mountains were affected. There are a lot of crazies there. The men beat their wives and there is a lot of drinking. Lots of violence, fighting in the bars.

Plutarco

BR- What do people around here do for a living?

P- Mostly fishing and small farming. Remember you saw the shrimp/salt farms on the way to town.

BR- there’s a lot of people here . . . .they all do fishing and farming . . . is there enough work for them?

P – More people used to work, things used to be better. People used to be able to get able to borrow money to grow their business and get them through hard times. The government used to help.

BR – In the 80s?

P- Yes. Now people can’t get any help. There are no loans and if you can get loans, they are too expensive. Interest is too high.

BR- What does the government do now?

P-They do what they can, but there’s no money.

BR- so do they give materials for houses or food?

P- Yes, materials for building (not sure if he was just agreeing to be polite . . . . .but t he clear message was that people were not getting what they used to)

BR- Didn’t the Sandanista’s give people land?

P- Yes, sort of. They gave it to cooperatives, for community co-ops. But the profit was never for the individuals. The government set the prices at which they would buy the whole sale product.

P- Now, its just too hard. People can’t get money to grow or sustain during hard times. You can’t barrow money and then owe the same amount in interest in less than 5 years. This does not make sense.

BR- Its good you know this. A lot of people have gotten into trouble by not understanding this.

P- Yes, people do what they have to. I watched my father do business when things were better. He would barrow money to sustain us when crops were bad. But, you can’t do that now.

BR- What about NGO’s or micro lending?

P- That’s only for the leaders of the community. They will receive the money for the community but it never gets to the community. They are the only ones that benefit.

BR- So the community politicians are just like the national politicians.

P- Exacto.

P – See this road, see how bad it is? It was great during the 80s. No one has cared to keep it up since then. They used this to get people for the mountains.

(Both Ruy and Plutarco would speak of “the mountains” not “the war”. There was something interesting about this but my Spanish is not good enough to explore this nuance. Nor was I comfortable enough to explore the irony in his complaint of the deterioration of the road used to take children from his town to the mountains.)

BR – The Sandanista’s would come for Soldiers, like they did for Rudy?

P- They like people from this area, rural people.

BR- Stronger?

P – Yes, and not political.

BR- Would they take mainly children?

P-Yes, you had to be (13, 14 or 15, I can’t remember) years old. I was not quite of age and they had already taken my two older brothers so my mother pleaded with them and I was able to stay with her but it was not easy. It was just me, taking care of the family. Then my brother came home from the mountains and he was not right. It was very difficult.

P- They also took land from the people here.

BR- Part of the land reform?

P- No, not for the people. For his people. See these hills, all of them, all this land? He gave this to one person. This is really good land. It goes all the way up there and all the way back there. From those hills you can see everything. It’s a lot of land, really good land.

BR- I thought he took land from Somoza to give to the people?

P – This land was from someone who bought it. He was not a polititician. He paid for the land. They took it when he died and the land was in probate. His family tried to fight it, they are still fighting it. That’s always how it is. The rich people have all the lawyers and judges and they just get more and more.

(then we started driving by the owners that were given the land)

P- there they are; see, they are not poor. They did not need the land. See how nice their truck is.

BR – So this was not land given to the people?

P – No this was land given to one person, for their own benefit. One of Ortega’s cronies, as a reward.

Many thanks to BR for the transcription, as I seem to have been overcome by a severe case of laziness.

Final Granada Photos

Wed, 07 Oct 2009 20:10:34 -0700

I fly home tomorrow, so this is the last batch of photos from Nicaragua. Enjoy!

More on Crime Rates in Nica.

Wed, 07 Oct 2009 17:25:04 -0700

SP -- your comments on Nica's crime situation are spot on. In an earlier incarnation, I covered all of Central America (well, never made it to Belize....) for one of the analytical arms (OK, chose your own body part) of the USG. At the time, Nica in the run-up to the return of Comrade Danny and was a particular favorite of mine. The Nicas are probably the most interesting of the Ladino groups in the region.
The lower crime rate CAN in part be traced to the socialized medical & educational programs the Sandis brought in. Another factor is that Nica expats during Danny's previous time at the trough departed the country as family units (middle class & all that). More important, most settled in Florida -- not the west coast, where local gangbangers were a dominant influence.
Young Salvadorians left home for LA to avoid the meatgrinder of the war and to make a contribution to the household coffers. They returned home (well, we've been sending them, haven't we?) with the tools and the talent to bring east LA to Central America.
If you've time, I'd suggest a swing thru Honduras. I always found it a very downbeat & fundamentally depressing society -- possibly because of their "good doggie" history with the Colossus of the North (no, Not Mexico!).

Crime In Granada

Wed, 07 Oct 2009 12:31:33 -0700

For a long time Nicaragua has had the lowest crime rates of any Latin American country. I don't know if that was a function of a semi-socialist/communist history or the simple fact that there just isn't much left to steal in a country when a former president pilfered the state coffers of $100 million. (Yes, that is chump change back home, but here?)

Sadly, crime is on the rise and Conservatives back home, while they love to berate Daniel Ortega, they'd love the privatization of the police function here. From a Nica Times article, October 2-9 issue:

The communications officer for the National Police of Granada, Luis Carrillo, says citizen security is not just the police's responsibility. He says that everyone has to work together to ensure 'citizen security.'

Might I suggest to Officer Carrillo that he import some gun-toting white southerners for his vigilante justice project?

Heat

Wed, 07 Oct 2009 12:07:31 -0700

Have I mentioned how uninspired I am when it comes to writing? I think it's the heat. It's downright devastating. Singapore was hot and so was much of the area around the Straits, but this heat? Good grief. I had a hard time finishing my pancakes this morning it was so hot.

Flor De Cana

Wed, 07 Oct 2009 11:16:08 -0700

I've never been a big fan of the rum. At least until I tried Flor de Cana, the local Nicaraguan brand of rum. It's nice and goes down smooth. I should know, some surfers and I polished off a full bottle a few nights back on the beach at El Popoyo.

I might be a convert. The only problem is I seem to fall in love with local blends, like Yeni Raki, that are well nigh impossible to get at home.

Life is rough.

On a side note, yesterday, for the first time in my life I was corrected by a local for calling myself 'an American.'

"I know you are an American," Walter told me. "So am I!"

Soy Tejano, then," I said.

He looked at me with his head cocked to one side. "Huh?"

"Texas," I said.

"Oh, you are a Norteno," he said.

"Sure thing."

He does have a point. Of course, I've heard 'yanquis' and 'gringo' here in Nicaragua more than anywhere else in my life as well.

It's A Strange World

Tue, 06 Oct 2009 14:58:25 -0700

Had someone told me twenty years ago when I was majoring in Russian, ready to fight the Cold War and all that, that twenty years to the day I would be spending my 39th birthday in a Nicaragua where Daniel Ortega was president and enjoying myself immensely, I would have laughed in their face.

Alas, here I am. 'Tis a strange life and a stranger world. Lots of new photos from the Lago De Nicaragua here.

En Nicaragua, Beisbol es rey!

Sun, 04 Oct 2009 17:19:48 -0700

More photos from Granada, here.