Wednesday, November 23, 2011

Report on Bahrain's Crisis Released Today

Readers of this blog may recall several postings on the Arab Spring in the early months of 2011, especially reports on my friend Shubbar who was arbitrarily arrested and imprisoned for fifty days--just because he was the son-in-law of a prominent opposition leader. He was one of many victims of a harsh crackdown by Bahrain's security forces, carried out by the Sunni-dominated government against protesters from the Shia majority.

Another prominent victim was the Bahrain national team soccer star Alaa Hubail, whose story was recently covered in this poignant ESPN report:

Today, however, the government of Bahrain received a 500 page report from an independent commission that it had appointed to study the crackdown. To its credit, it allowed the commission to work quite freely in Bahrain and it allowed the document to be made public on the Web.

A quick review of the report suggests that the Commission was very careful to document facts as much as possible. For example, their staff compiled sixty vivid, firsthand accounts of arbitrary arrest and torture (see Annex B in the document).

In addition, Annex A records all the deaths tied to the unrest and crackdown:
  • Thirteen civilian deaths attributed to security forces
  • Eight civilian deaths "not attributed to specific perpetrators"
  • Five deaths attributed to torture
  • Four expatriate workers killed
  • Five police officers and military members killed (three by protesters)
  • Eleven killings that occurred "outside the Commission's temporal mandate" (after the cutoff date)
In a crude calculus of the two sides' losses, at least forty opponents of the government were killed, in contrast to three members of the police and security forces.

Scanning the bulk of the report feels a bit like reading a divorce proceeding, with the two sides bitterly disputing each point. But its thoroughness is a tribute to the work of the commission and its chairman, M. Cherif Bassiouni.

How this will play in the Bahraini government is the real question. My hunch is that the younger members of the royal family will try to use this as ammunition to force out the old guard (the prime minister), but they'll have an uphill battle, as Anthony Shadid pointed out yesterday in the New York Times.

Saturday, November 19, 2011

Alone in a Dark Room With a Pile of Money: What Would You Do?

Review of Michael Lewis, Boomerang: Travels in the New Third World (New York: W.W. Norton, 2011)

Michael Lewis, author of Moneyball and The Blind Side, first came to prominence with Liar's Poker, his memoir of going to work for the Wall Street bond trading firm Salomon Brothers in the mid-1980s (a book I finally read this summer). Liar's Poker is a hillarious send-up of the big shots who ran Salomon by someone who saw their greed and recklessness firsthand. Lewis was close enough to be on the inside, but critical enough to keep his distance; his account turns out to be readable introduction to Wall Street, specifically the bond market, in the 1980s.

An art history major at Princeton who ended up making a tremendous amount of money shortly after graduation, thanks to Salomon Brothers, Lewis maintains a bemused and detached tone throughout Liar's Poker. It's as if he never believed that he was smart enough to work there. His detachment was evident when he quit while he was still young. (Of course, it didn't hurt that he had a nice financial cushion.)

Twenty years later, his knowledge of the global bond market--including the introduction of mortgage-backed bonds--would help him later unravel parts of the global financial crisis of 2007-2009. His first book on the crisis, The Big Short (reviewed last year in this blog), explained how several smart investors predicted the crisis and were able to "short" collateralized mortgage bonds when their value crashed. ("Shorting" is basically betting that the value of an asset will fall in the future, by borrowing it and selling it in the present. If indeed the investor is correct, then they benefit by buying the same asset at a lower price in the future.)  Hedge fund investors like John Paulson and Kyle Bass made out like bandits when the mortgage-backed bond market collapsed, because they had essentially shorted these bonds by investing in credit-default swaps.

Lewis starts Boomerang by confessing that he ignored some of what Kyle Bass, a Texas-based investor, had told him back while he was researching The Big Short. Bass had told Lewis that the next big crisis was going to be in the market for government bonds (sovereign debt). At the end of 2008, Bass was predicting that Greece would probably default within two years and possibly cause the Euro currency to collapse. "He was totally persuasive. He was also totally incredible" (xv). How could some guy in Dallas figure this out when almost no one else could? The guy seemed a little crazy. So, as Lewis puts it, "I made my excuses . . . and more or less dismissed him. When I wrote the book, I left Kyle Bass on the cutting room floor." (xvi).

But Bass was right. It turned out that private bank debts were becoming public debts in both the US and Europe, as the Fed and the European Central Bank bailed out private banks. Iceland and Ireland had already crashed. And Greece was the tipping point.

What happened? Lewis travels to Iceland, Greece, Ireland, Germany, and California to tell their stories before and after the collapse of the global bubble. In each place, he singles out cultural factors that make each place unique. This cultural approach is quite simplistic, but it does help explain how different countries react when they are "left alone in a dark room with a pile of money" (the pile of money being a huge expansion of bank lending). It also roots the financial problems in a larger context than mere government regulation. It turns out that we all have a cultural and moral problem.

Greece, on Lewis' view, simply lacks any public spiritedness and is so corrupt that even a group of Greek monks participated in the corruption. No one pays taxes and everyone is looking to bilk the government.

In Iceland, he contends, a male-dominated fishing culture led to excessive risk-taking. Once the fisherman of Iceland got rich, they needed to find something else to do. International banking and speculation was it.

"But while the Icelandic male used foreign money to conquer foreign places--trophy companies in Britain, chunks of Scandinavia--the Irish male used foreign money to conquer Ireland. Left alone in a dark room with a pile of money, the Irish decided what they really wanted to do with it was buy Ireland. From each other" (84, emphasis in original). In other words, Ireland had a massive real estate bubble that has now popped. According to one estimate, "Irish bank losses alone would absorb every penny of Irish taxes for the next four years" (85). Ouch! But the Irish are buckling down and embracing austerity to pay down the debt (quite in contrast to Greece).

The Germans, being so-rule oriented (or so Lewis argues), trusted the bond credit ratings agencies that said that mortgage-backed bonds and collateralized debt obligations were AAA (the safest of any bonds), so they ended up getting stuck buying lots of these. Too bad for them.

Finally, there are the Americans. California's dire public finances (especially at the local level) are a microcosm of the national struggle to balance budgets. But it's not just the mortgage bankers or governments who are to blame. Public-sector unions also took advantage of the financial boom to wrest huge pension guarantees from governments. And private citizens borrowed to the hilt. The problem, writes Lewis, is "with the entire society."
It's what happened on Wall Street in the run-up to the subprime crisis. It's a problem of people taking what they can, just because they can, without regard to the larger social consequences. It's not just a coincidence that the debts of cities and states spun out of control at the same time as the debts of individual Americans. Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of the society to the bottom. They'd been conditioned to grab as much as they could, without thinking about the long-term consequences. Afterward, the people on Wall Street would privately bemoan the low morals of the American people who walked away from their subprime loans, and the American people would express outrage at the Wall Street people who paid themselves a fortune to design the bad loans (202).
Lewis, usually a hillarious and light-hearted story-teller, ends up in prophetic mode, issuing a jeremiad: "Everywhere you turn," he writes, "you see Americans sacrifice their long-term interests for a short-term reward. What happens when a society loses its ability to self-regulate, and insists on sacrificing its long-term self-interest for short-term rewards? How does the story end?" (205)

In the end, Lewis' book offers a sober diagnosis of the American character, covering Wall Street bankers, politicians, unions, and households. We're all in this together, but how in the world do we get ourselves back on track in living for the long-term?

Let us know if you figure that out.