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Saturday, July 27, 2013

Obama: Egyptian Coup? What Coup?

In late July 2013, the Obama administration decided that it was not legally required to determine whether the Egyptian military had led a coup in ousting President Morsi. The decision permitted the administration to continue $1.5 billion annually in American aid to Egypt. One senior official said only, “The law does not require us to make a formal determination as to whether a coup took place, and it is not in our national interest to make such a determination. We will not say it was a coup, we will not say it was not a coup, we will just not say,” the official said.”[1] I’m reminded of one of Captain Renault’s famous lines in the film, Casablanca. “I’m shocked, shocked to find that gambling is going on in here!” Coup? What coup? To be sure, the administration had its reasons, strategic of course, yet a bigger picture perspective could be helpful here, considering that an effort to violate at least the spirit of a law is involved here.
Administration officials said the U.S. Government would continue to use financial aid as a lever to pressure Egypt’s new government to push through a transition to democracy. Yet what cost to the U.S. Government would this intent to manipulate the Egyptian military exact?
                                                                                            A Coup or a Book-Signing?
                                                                 Refusing even to decide if this is a coup reflects on the refuser.
On July 3, 2013, Egyptian generals deposed President Morsi, put him under arrest, and suspended the constitution. “Under the terms of the Foreign Assistance Act, no aid other than that for democracy promotion can be given to ‘any country whose duly elected head of government is deposed by military coup d’état.’ The law does not allow a presidential waiver, and stipulates that aid cannot be restored until ‘a democratically elected government has taken office.’”[2] Refusing to decide whether a coup took place is essentially refusing to enforce the law, given the events in Egypt on July 3, 2013.
Fittingly, one of Morsi’s senior advisors, Wael Haddara, accused the administration of “verbal acrobatics,” and asked, “With the entire world calling this a coup, why isn’t the American administration calling it so?”[3] The reference to “verbal acrobatics” is particularly important, for it hints on the discrediting long-term impact on the U.S. Government by its president’s decision to take an easy out. Generally speaking, political convenience can come back to bite even if the pain is not ever felt directly. In other words, the Obama administration sacrificed some of the U.S. Government’s credibility to be able to manipulate another government through money.
A similar trade-off existed at the time in Europe regarding the matter of Turkey’s possible accession an E.U. state. Turkey would be the largest state by population, and thus would have tremendous influence in the E.U. Government. The added cultural and political diversity to the E.U. could cause it added strain, if not compromise the very viability of the Union. So why would the E.U. admit Turkey when doing so could put the E.U. itself at risk internally? Similar to the Obama administration’s desire to have more influence in the Egyptian military, the European Commission would like to use Turkey as a “way in” to influence Middle East international relations.
Both cases evince putting one’s own federal government at risk in order to manipulate other governments. At the very least, the strategy of undercutting oneself to extend one’s influence seems counterproductive. That the influence comes well before “the bill comes due” creates the illusion of a costless choice. Looking out for the long-term governing of a union of diverse states, whether in Europe or North America, is easily shirked when the opportunity to pull more levers externally presents itself. A federal government willingly undercutting its own credibility or ability to govern for a short-term advantage is not only short-sighted; it is also indicative of a certain lack of character. The question is perhaps whether that lack of character is societal in nature or merely in ruling elites.
See the video made to accompany this essay: http://youtu.be/_1yuvnOq5YE

1. Mark Landler, “Aid to Egypt Can Keep Flowing, Despite Overthrow, White House Decides,” The New York Times, July 25, 2013.
2. Ibid.
3. Ibid.

Monday, July 22, 2013

Financial Reform: Did Congress Shoot a Blank?

On the third anniversary of the Dodd-Frank Act, former U.S. Senator Ted Kaufman (D-DE) penned an excellent yet concise critique of the law’s efficacy over three years. The news is not good. I submit that it is worse than Kaufman is willing to admit—worse in the sense that Congress had mishandled the writing of the bill before it became law. I will get to this matter after summarizing Kaufman’s points.

                                                                                                     Former Sen. Ted Kaufman
Kaufman points out that the big banks can still take high-risk gambles with FDIC-insured deposits. Essentially, the U.S. taxpayer is underwriting the additional risk. The mammoth $6.2 billion “London Whale” loss at JP Morgan in 2012 suggests that the banks are indeed taking advantage of the loophole. Kaufman points to a second loophole. Although Dodd-Frank contains new regulations on the financial derivatives that had played such a dramatic role in the near-meltdown in September 2008, the big banks can simply move their financial derivatives to “off shore” offices. Citigroup alone has more than 2,000 foreign subsidiaries.[1]

As for the dysfunctional Fannie Mae and Freddy Mac, Kaufman points out that they are not even mentioned in Dodd-Frank! Nor can any solution to the structural conflict of interest facing the rating agencies, which are still “bought and paid for by the entities they rate.”[2] Nor, I might point out, does the law do anything to obviate the “client-pays” conflict of interest facing public accounting firms (e.g., Arthur Andersen as the “permissive” auditor of Enron). I would generalize to suggest that American lawmakers and the general public are woefully ignorant of the harm just in looking the other way rather than deconstructing an institutional conflict of interest. In fact, I submit that such a conflict is inherently unethical, rather than being so only if it is exploited.

As for the “ordered liquidation” feature of Dodd-Frank, Kaufman’s critique portrays the mechanism as if it were a sand castle sitting just above a rising tide. Although making actual sand castles on some beach might teach members of Congress how to get along, an orderly liquidation of one bank is not likely to be sufficient to stop the contagion of fear and short-selling from spreading to other banks, as they are so interconnected. Would an orderly liquidation procedure invoked for all of the large banks stave off the collapse of the financial system? 
Kaufman cites an analysis by Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., which finds that JPMorgan Chase, Citibank, and Bank of America had become the three largest banks globally during the three years of Dodd-Frank’s existence. Add in Wells Fargo and those four banks have combined assets of 97% of the U.S. GDP in 2012.[3] Given the continued high-risk trades and possibility of off-shore financial derivative “bundling” and selling, the “too big to fail” problem has grown more perilous, not less. Meanwhile, only 155 of the 389 rule makings required by Dodd-Frank were finalized during the law’s three years of existence.[4] Put another way, a law that is utterly insufficient to eliminate the “too big to fail” systemic risk was after three years still “half baked.” The obvious question is why, and in Washington that question is answered in terms of power.

Kaufman points to the legislators in Congress who “passed the buck” to the regulators, who would have to face the powerful Wall Street lobbyists. However, he doesn’t include the impact of those lobbyists on the members of Congress themselves. That is to say, the law may have been watered down as it was being written, or “marked up,” as lawmakers gave too much influence to the financial interests that would face stiffer regulation. It is not uncommon for legislative aides to use legislative clauses written by the regulated entities themselves. Here we have stumbled on yet another tolerated structural conflict of interest!

Therefore, we can generalize perhaps in concluding that the Dodd-Frank law is insufficient even in theory, let alone practice, to solve the problem of systemic risk because of the excessive influence of Wall Street over lawmakers. As Sen. Dick Durbin said in the wake of the banks' culpability in 2008, the banks still "own" Congress.[5] That is, the endurance of excessive systemic risk has in great part been due to Congress having become more of a plutocracy than a house of the people. Consider, for example, how much chance the proposal by Sens. Warren and McCain to break up the megabanks has in the U.S. Senate (not to mention the House!), and it will be clear just how much power Wall Street actually has in Washington. This is the real problem, any solution to which is sadly not even on the horizon, and this is, kein Zufall, no accident either.

1. In a “slip of the tongue,” Kaufman wrote “subsidies” instead of “subsidiaries.” Might he have been wanting, at least unconsciously, to tell us more?
2. Ted Kaufman, “Happy Birthday to Dodd-Frank, A Law that Isn’t Working,” Tedkaufman.com. Accessed July 22, 2013.
3. Ibid.
4. Ibid. Kaufman cites the Davis Polk law firm as coming up with the numbers.
5. U.S. Sen. Dick Durbin (D-IL) said “Congress is owned by the banks” after they stopped his amendment that would have allowed judges to modify contested mortgages in foreclosure.

Sunday, July 21, 2013

Syria: From Protests to War

In the midst of all of the excitement and exuberance of a political protest, the protesters themselves in Syria were probably not thinking of the future of bloodshed that would ensue as Syria slid into full-blown civil war in 2011. As with most civil wars, civilians, even children, have not been immune from paying the price. On July 20, 2013, for example, government forces besieged the town of Saraqeb, striking it with rockets and tank fire, according to the Syrian Observatory for Human Rights.[1] The following day, Assad’s forces fired mortar rounds into a main market in the town of Ariha, killing at least 20 civilians.[2] Without doubt, the protesters during the Arab Spring in Syria could hardly have foreseen all the bloodshed. Had they known, it is not a sure thing that they would have or even should have gone ahead with the protests.
The contrast from taking time off work to join a protest march on a sunny day to finding one’s home destroyed and relatives dead in the rubble cannot be overstated. An ocean of time separates mouthing abstract democratic platitudes with friends and finding oneself in a world of hunger, fear and death. It is also difficult to relate the primped world of seasoned politics to the stygian hell of war. Yet politics and war are both about power and civic conflict. It can take surprisingly little for the civilized conflict in legislative chambers over power to break down into force and violence. The question is perhaps whether moving to democracy in an authoritarian state can be accomplished without giving violence the upper hand.

                                                                        After the Protests
                                                       A Syrian boy is being pulled out of the rubble of his house in Saraqeb.  Source: Getty
Put another way, protesting authoritarian rule on behalf of democratic principles is not something that should be taken lightly. In considering the full weight that such protests can have, the adults are making a decisive judgment for not only themselves, but also the children who would not be immune from the horrors of war. This is not to say that being willing to stand up for freedom is not worth it. Rather, it is to say that the implications ought not to be downplayed or even ignored in assessing at the outset whether launching protests to directly confront a ruthless dictator is the best means of ushering in democracy. People having a lot of power do not tend to give it up willingly, and they have the means to protect it by harming those people who would take it away.

See the video that complements this essay: http://youtu.be/NJm3ZaamhgA


Barbara Surk, “Syrian Army Bombs Northern Rebel Town of Saraqeb, Children Among the Dead,” The Huffington Post, July 20, 2013. 2. Jamal Halaby and Zeina Karam, “Syria Violence: Assad Forces Kill At Least 20 Civilians in Ariah, Dozens of Rebels Near Damascus,” The Huffington Post, July 21, 2013.