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To: JohnM who wrote (105502)3/5/2009 11:17:43 AM
From: JohnM  Read Replies (1) | Respond to of 542597
 
Joe Klein writes an interesting column on Afghanistan and Pakistan.

Tough. Very tough.
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The Afghanistan Problem: Can Obama Avoid a Quagmire?
By Joe Klein Thursday, Mar. 05, 2009

On the Friday after he was inaugurated, Barack Obama held a full-scale National Security Council meeting about the most serious foreign policy crisis he is facing — the deteriorating war in Afghanistan and Pakistan. "It was a pretty alarming meeting," said one senior Administration official. "The President was extremely cool and in control," said another participant. "But some people, especially political aides like Rahm Emanuel and David Axelrod who hadn't been briefed on the situation, walked out of that meeting stunned." The general feeling was expressed by one person who said at the very end, "Holy s***."

The situation in Afghanistan and Pakistan has only gotten worse since then. Both countries are suddenly boggled by constitutional crises; both Presidents — Hamid Karzai and Asif Ali Zardari — lead governments teetering on the edge of chaos. And the war is going badly on both sides of the border. The Pakistani Taliban has taken over the Swat Valley, a mere 100 miles (160 km) from Islamabad, and has wreaked havoc with NATO supply lines into Afghanistan through the Khyber Pass; the Afghan Taliban staged a dramatic terrorist attack in downtown Kabul. In his first major decision as Commander in Chief, Obama promised an additional 17,000 troops for Afghanistan, but he still hasn't fully defined the U.S. goal there, even though he repeatedly insisted during the campaign that this war — the war that began as an effort to find Osama bin Laden and dismantle al-Qaeda — was in the national interest and had to be won.

A policy review is under way — a fourth policy review; Obama was greeted by three when he took office, but none was entirely satisfactory. This was something of a surprise because one of the studies was conducted by General David Petraeus, whose counterinsurgency doctrine and strategic brilliance turned the tide in the Iraq war. In this case, Petraeus brought in hundreds of people from a range of government agencies and a raft of outside experts. "You had people from the Department of Agriculture weighing in," one expert, a Petraeus admirer who participated in the study, told me. "There were too many cooks. The end result was lowest-common-denominator stuff. The usual Petraeus acuity wasn't there."

Indeed, several senior Obama Administration officials told me that the least heralded of the three studies — the one by General Douglas Lute, the Bush Administration's "war czar" — was the most valuable. Lute, who is staying on in the Obama Administration, is known to be very skeptical about the Pakistani army's willingness to fight the Taliban, and equally critical of the Karzai government in Afghanistan. But Lute was operating with the smallest staff, and didn't provide much detail about what to do next. (Read "Pakistan's Prospects.")

Among other things, Petraeus' review called for additional troops to be sent to Afghanistan, beyond the 17,000 Obama ordered. The Administration wasn't ready to do that, at least not yet. And so, the fourth policy review was ordered up — this one conducted by Bruce Riedel, a scholar at the Brookings Institution. The Riedel review won't be done until the end of March, but it has already achieved some clarity about U.S. goals and priorities: "Afghanistan pales in comparison to the problems in Pakistan," said an official familiar with Riedel's thinking. "Our primary goal has to be to shut down the al-Qaeda and Taliban safe havens on the Pakistan side of the border. If that can be accomplished, then the insurgency in Afghanistan becomes manageable."

That sounds reasonable enough, except that historically it has proved to be impossible. "People talk glibly of 'the total disarmament of the frontier tribes' as being the obvious policy," wrote the young Winston Churchill, who gallivanted, a bit too gleefully, with a 19th century British expeditionary force through the areas where al-Qaeda and the Taliban are now ensconced. "But to obtain it would be as painful and as tedious an undertaking as to extract the stings of a swarm of hornets, with naked fingers."

Through sheer brutality, the British were able to manage the area — now called Pakistan's North-West Frontier Province — but never quite subdue it. The chances of subduing it today are even more remote. "Obviously, we're not going to invade Pakistan," said a senior member of the Riedel review. "We have to convince the Pakistanis to do the job. But we haven't had much luck with that in the past." In fact, the Pakistani army and Inter-Services Intelligence agency have supported the Taliban as a counterforce against India's influence in Afghanistan, just as they supported jihadi groups like Lashkar-e-Taiba, which carried out the Mumbai massacre. "Our hope is that the Pakistani army is beginning to understand that the Taliban represent an existential threat to their country," said the Riedel team member. "Certainly, President Zardari understands that. The Taliban killed his wife, Benazir Bhutto, and he's now target No. 1. But does he have any influence over the army? And is the army really concerned about the threat? I'll believe it when I see it." (See pictures of modern archaeology in Afghanistan.)

What to do? Actually, there's a consensus within the Obama Administration about how to approach the Pakistan part of the problem. The policy might be described as comprehensive diplomacy accompanied by lots of money. The diplomatic task is to nudge India and Pakistan, who nearly came to an agreement in their eternal Kashmir dispute in 2007, toward a lessening of tensions in the hope that the Pakistani army will turn to the struggle against al-Qaeda and the Taliban.

The money would come in a massive economic-aid package, the Kerry-Lugar bill, which would send $1.5 billion to Pakistan for each of the next five years — although how that aid would be distributed, a crucial question given Pakistan's rampant corruption, has yet to be determined. Military aid to Pakistan will continue as well, but with more strings and supervision than during the Bush Administration. "We have to re-establish close personal relationships with the army," said a senior member of the National Security Council, who was involved in an intense series of meetings with the Pakistani military leadership during the first week of March. "We have to be sure they're on the same page as we are. Based on what I saw, they aren't yet."

And what about Afghanistan? It is, once again, a sideshow, given the focus on Pakistan — but it is also where Obama's most important decision will be made: To escalate or not? The military is in favor of an Afghan surge to protect the entire population in the provinces affected by the Taliban insurgency. That could mean another 15,000 troops, or more, on top of the 17,000 already sent. It might even succeed; the Afghan people are terrified by the Taliban, but they do want law and order — which the corrupt Karzai government has failed to provide and Petraeus-style counterinsurgency tactics emphasize. But why expend that sort of effort on a sideshow?

Obama's civilian advisers fear a quagmire. But they know that some middle ground, between a "Central Asian Valhalla," as Secretary of Defense Robert Gates put it, and the current slide into chaos, has to be found. "We have to stabilize the military situation," said an Obama aide. "Continue to build up the Afghan army, and help the government to become more effective." In other words, hope that the disintegration of Afghanistan can be prevented while waiting — and hoping — for the Pakistanis to take effective action against the al-Qaeda and Taliban safe havens.

Taken together, the emerging Pakistan and Afghanistan policies sound ... impossible, but unavoidable. They will also be politically treacherous. Already, John McCain has made it clear that his position on Afghanistan will be the same as it was on Iraq — in favor of more troops. Obama could easily find himself in the same sort of hawk-vs.-dove debate that has boggled American Presidents from Vietnam to Iraq. Traditionally, Presidents favor more troops — and precipitously lose public support. In this case, Obama's margin for error is minuscule, given the enormity of the economic crisis. He simply can't get bogged down in Afghanistan. And he simply can't allow al-Qaeda and the Taliban free rein. And every option in between seems either a gamble or a fantasy.

time.com



To: JohnM who wrote (105502)3/5/2009 12:35:07 PM
From: biotech_bull  Respond to of 542597
 
Thanks John, Here's another critique of the current policy towards banks, from McKinsey Quarterly, that offers specific alternative proposals that make sense - well worth a read

A better way to fix the banks
Here’s a plan that could solve the toxic-asset pricing problem voluntarily—without requiring Uncle Sam to nationalize the whole industry—and make (pretty much) everyone a winner.

FEBRUARY 2009 • Lowell Bryan and Toos Daruvala

This short essay is a Conversation Starter, one in a series of opinions on topical issues. Read what the authors have to say, then let us know what you think.

In recent speeches, President Obama and Fed Chairman Ben Bernanke have said clearly that the United States will provide whatever capital is needed to keep US banks solvent and that they do not plan to nationalize even deeply troubled banks. This is good news, because economic recovery requires a healthy, profit-motivated US banking system.

However, there has largely been silence from the administration on taking any action to remove bad loans from bank balance sheets. Until the hundreds of billions of dollars of impaired assets that currently weigh down bank balance sheets are removed, credit flows will be restricted. If we wait for the banks to absorb the losses from these loans (net of recoveries), we will wait a long time, and the economic turnaround will be very slow in coming.

To date, plans to remove these bad assets have foundered on precisely how to do so—specifically, on how best to value the assets. Details matter. The Treasury has launched a program to use “stress tests” to identify, proactively, the bad assets on bank balance sheets, using financial models to project future loan values and loss rates under different economic scenarios. The intent is to get better answers about the extent of future losses and to better understand which banks are healthy. But what happens next? Which valuation method will be used to buy the bad assets? If prices are set too low, banks won’t sell the assets unless forced to do so. If prices are too high, the existing shareholders would be “unjustly enriched.” This dilemma is what stopped the first Paulson plan to remove toxic assets, and no amount of stress testing gets you around it.

Our aim is not to plunge into those political debates but rather to propose a broad answer to the valuation challenge under two basic assumptions: (1) forced asset sales are appropriate only for deeply troubled financial institutions, and (2) what’s essential now is a powerful and compelling voluntary program that motivates the rest of the banks to clean up their balance sheets before the deteriorating economy and forced write-downs in the future also cause them to become deeply troubled.

This risk cannot be overstated. McKinsey—as well as others, such as Goldman Sachs—estimates that US banks may currently hold as much as $2 trillion of impaired assets. Given the likely depth and duration of the recession, the losses on them could eventually exceed $1 trillion—on top of the $500 billion in losses already realized. Whatever the precise tally, the final reckoning is certain to be larger than many US banks can absorb out of common equity and from their earnings.

So what needs to be done? The answer first requires a brief detour into Accounting 101, which will also explain why the market in bad loans has so far been moribund. At present, assets on bank balance sheets are valued in either of two ways: fair value or hold-to-maturity value. Where possible, fair value uses mark-to-market accounting; however, absent the ability to determine a real market price, a mark-to-model approach must be used. In hold-to-maturity accounting, so long as principal and interest get paid under the terms of the original loan agreement, assets remain on the balance sheet at their original value. Most securities are valued using fair-value accounting (unless they are treated as long-term investments). Most loans use hold-to-maturity valuations. To date, the lion’s share of the mark-downs absorbed by banks have been on securities and loans subject to fair-value accounting. However, more than 60 percent of the credit on the balance sheets of US banks uses hold-to-maturity accounting, and it is within these assets that the bulk of future losses will occur.

Now assume you want to create a market for such impaired assets. The problem with fair-value accounting is that in the absence of a real, active market to set prices, the only alternative is to mark to someone’s model. But whose? Since private investors are motivated to make money, they want to use conservative assumptions to value securities. That, in turn, gives banks little incentive to sell—and so most have not. Absent government coercion, such a standoff will probably continue. As for the even bigger amount of potential bad loans that banks now value under hold-to-maturity accounting, the problem is that while you can actuarially foresee, under various assumptions, that some percentage of a portfolio will go bad, you can’t know which specific loans will default or how much of the original loan value you will recover. That too is a recipe for inaction.

To break the logjam, we propose that the government step in and establish a voluntary program to create a real market price and terms for the sale of bad assets. Rather than use modeling for valuation, the program would set discounts from either of the two basic approaches to accounting value, based on some recent past date (for instance, December 31, 2008). A reasonable level might be 10 percent off for securities already marked to fair value and 20 percent off for loans being held to maturity. Upon their sale to the government, existing shareholders would absorb the loss taken on the discount, and that loss of common stock value would be replaced by converting TARP1preferred stock to nonvoting common (which would be vested with voting rights if sold to private parties).

Under this approach, the banks themselves could determine which assets to sell to the government, based upon its posted terms and conditions. If, over time, the government wanted to encourage sales, it could reduce the discount. If it wanted to discourage them, it could raise the discount. As time passed, the accounting valuation date would also be updated (for instance, from year-end 2008 to June 30, 2009).

The government would be partially protected from overpaying through this approach by its increased ownership of common stock in the bank, which means it would recover, as a shareholder, much of whatever it overpaid. If it underpaid, it would keep the gain. In addition, the government could provide an incentive for the banks, which should know these credit instruments best, to maximize the value of the assets they offload to it—say, by allowing them to earn a percentage of the subsequent asset recovery price as a servicing fee.

By our rough figures, if the government purchased $1.5 trillion in assets with an average 20 percent discount from accounting value ($300 billion), it would end up acquiring an ownership stake of some 36 percent in the industry as a result of the conversion of preferred stock to common or the injection of new common stock to make up for the equity lost through its discounted purchases. While that is a significant stake in the banking industry, it remains considerably less than what would occur under full-blown nationalization. And if restoring the ongoing-concern value of banks helped the industry’s valuation to regain its January 2007 level (about 20 percent less than its high), we calculate that the government’s shareholdings would be worth about $560 billion. Upon sale to private hands, this kind of gain would go a long way to recouping the costs of TARP.

There can, of course, be many variations on this proposal. Our point is that the government should be offering carrots, not just sticks, if it wants the banking industry to move quickly to get rid of bad assets—and to avoid the likelihood of even greater pain down the road.

mckinseyquarterly.com