He's baaaaaack!

 I am recommitting to writing! That means:

1. interviewing ultimate players at UCSC 

2. putting up bits of my writing on disc

3. collecting some of my flaneur writing

stand by for more!

Black is the New Green, Part 1: Lieberman, Big-box Environmentalism, and the Great Climate Sellout

The political tactics around climate change have shifted. Despite a vicious and well-funded rearguard action, there is a general realization that denial is no longer an effective tactic for avoiding the issue. The game now becomes one of minimizing impact, and maximizing profit. The new responses that from the deniers and delayers, nationally and locally, tend to fall into one of four categories:

• Look good while doing nothing of substance (examples are electric utility and most – but not all - other voluntary offset and green power schemes),
• Go about business as usual, adding disingenuous reassuring incantations about healing the earth, maybe later, if we feel like it (we are currently fighting a round of new coal plant proposals across the country that are aggressively pushing this line),
• Cherry-pick the proposals on the table to concoct a poison pill emissions regulation package that makes rational discussion of the best policy answer impossible. Get prominent organizations that actually want to do the right thing to engage you seriously, thereby associating them with a deeply unpopular and flawed proposal. The resulting controversy and confusion kicks the can down the road for another decade or so (Dingell's schizophrenic initiative on climate is an excellent instance of this play).
• Make sure that regulation, when it comes, vastly enriches the usual suspects, while accomplishing little to nothing that substantially changes the medium term carbon emissions vector (a cap-and-trade artificial carbon market with a giveaway is the most egregious example, and is probably what we will end up getting). At worst, this can be combined with the above tactics to actually be counter-productive (the heavily subsidized Archer-Daniels Midland approach to biofuels is a great example of this).

This last play is what Lieberman-Warner is all about. As with the poison-pill strategy, success hinges on co-opting trusted environmental groups and foundations to lend their reputation for integrity in service of your lame initiative. Unfortunately, in the case of Lieberman-Warner, that part has been ridiculously easy. A litany of big-box environmental groups, from Natural Resources Defense Council to National Wildlife Federation, is enthusiastically flogging this legislation around Congress.

This is very, very bad. Why, you ask?

Well, back about three years ago, before it became abundantly apparent how much trouble we are really in, the mainstream consensus among climate scientists was that in order to stabilize atmospheric carbon levels at twice baseline levels (an arbitrary target, but one expected at the time to hold long-term impacts to a serious but not catastrophic level), we would need to reduce current US emissions to 1990 levels by 2020 (something that Clinton already promised and failed to do by 1999), and 80% below 1990 levels by 2050. The dire news coming out of recent climate research indicates that we will have to do better then that. But let's keep that as a baseline for now.

Using that metric, minimally acceptable legislation:

• must result in emission reductions that get us in or below the band of a path that stabilizes carbon concentrations at or below 450-550 parts per million, or twice pre-industrial levels (the overlay graphic above is from a typically optimistic legislative analysis done by the World Resources Institute),
• must front-load the institutional mechanisms that get us there instead of making a meaningless promise to hit an imaginary goal half a century from now (in politics, a decade is a very long time, and fifty years is eternity),
• must be comprehensive,
• must not transfer vast sums of wealth to polluters, and
• must not be so leaky that the goals are a shuck.

It would be nice if the legislation temporarily attenuated the direct hit on small energy consumers until our current round of guzzling cars and appliances die, while assuring that the next car and appliance does the right thing. Given that the price of carbon will ramp in slowly as targets start to tighten, there is no particular reason why industrial polluters should get any kind of pass, let alone a windfall.

This is the non-negotiable threshold position. There are lots of good arguments for doing more than this. Anything *less* than this is not just a waste of time, it is a betrayal of our future. Less simply doesn't get the job done. That is not ideological purity talking. It's arithmetic.

Lieberman-Warner is a warmed-over version of Lieberman-McCain, and fails the above criteria on all counts. It is the least effective serious proposal on the table. Even taking the "mandated" 70% reduction by 2050 seriously, overall reductions end up way above the band of what it takes to reach climate stabilization at 450-550 ppm. It simply does not do what needs to be done.

But the reality of the bill is much worse. It isn't comprehensive - it only applies to 75% of current US greenhouse gas sources, ever. It doesn't even start until 2012 (so much for being in a hurry to get it done in 2008). It gives away huge (though declining) indulgences to big industrial and electric generation polluters (effectively exempting them as well) until 2036, and a grab bag of other indulgences forever, seriously weakening the synthetic carbon market that is supposed to solve the emissions problem by internalizing carbon costs. You can see the effect in a recent (optimistic) analysis of Lieberman-Warner from Duke University, with carbon costs not hitting $50/ton (a good rule-of-thumb marker for what you are spending if you are serious) for another 30 years. It is full of goodies for special interests, particularly the coal industry, and has a laughably naive fixation on carbon sequestration, casting it as a gigantic Hail Mary play that magically makes everything work out in the end. Finally, only a tiny fraction of the huge embedded subsidies go to actually help consumers - the rest go to allowing the usual suspects to continue business as usual.

But the most damning indictment of Lieberman-Warner is that the already inadequate 70% reduction number that proponents like to throw around is a fraud. Unlike most of the other proposals on the table, the 70% reduction marker in Lieberman-Warner is indexed to 2005 emission levels, not 1990 levels. And, it doesn't even come close to meeting that disingenuous expectation. The legislation would, in fact, only directly reduce US climate emissions 20% by 2050. That's barely enough to get us back to 1990 levels by 2050. The rest of the assumed savings - the vast bulk of the alleged reductions - in Lieberman-Warner hinge on massive, indirect carbon offsets (extremely dicey to reliably quantify, and really just outsourcing the damage even if you get what you think you getting), and on theoretical free-driver (as opposed to free-rider) emission reductions in the 25% of current US carbon sources that the legislation does not address at all.

Bottom line: Contrary to the hype, Lieberman-Warner would only reduce US carbon emissions to 1990 levels by 2050. If this grotesque legislation becomes the official US response to climate change, we lose.

We haven't even gotten to the question of why we are bothering with federal climate legislation at all while Bush is president, or what happens when Lieberman-Warner is the position we are negotiating down from. On its face, why would any responsible public policy advocate actively support this proposal?

So why have most of the big-box environmental groups signed up for this turkey? We'll talk about that in part 2.

This is what American democracy looks like

Sic en toto:

Washington, DC November 17, 2007


Statement by Deputy Secretary of State John Negroponte in Islamabad, Pakistan

The following is the text of remarks by Deputy Secretary of State John Negroponte upon his departure from Islamabad, Pakistan:

Good morning. I would like to make a brief statement before taking a few questions and departing for Washington.

During this brief trip to Islamabad, I had meetings with President Musharraf and other senior Pakistani government officials, including National Security Advisor Aziz, Vice Chief of Army Staff General Kayani, former Foreign Minister Kasuri, and Inter-Services Intelligence Director General Taj. I also spoke by phone with Pakistan People's Party leader Benazir Bhutto.

In my meeting with President Musharraf, he reiterated his vision for a moderate, prosperous, and democratic Pakistan. Under his leadership, Pakistan has made great progress toward that vision. Over the past few years, the Pakistani people have witnessed expanded and freer media, unprecedented economic growth and development, and the moderation of gender-based laws and school curricula. President Musharraf has been and continues to be a strong voice against extremism. We value our partnership with the Government of Pakistan under the leadership of President Musharraf.

We welcome President Musharraf's announcement that elections will take place in January, a commitment he repeated to me yesterday in categorical terms. He also repeated his commitment to retire from his army post before commencing his second presidential term, and we urge him to do so as soon as possible.

Unfortunately, the recent police actions against protestors, suppression of the media, and the arrests of political and human rights leaders run directly counter to the reforms that have been undertaken in recent years. Their continuation undermines the progress Pakistan has made.

I urged the Government to stop such actions, lift the state of emergency, and release all political detainees. Emergency rule is not compatible with free, fair, and credible elections, which require the active participation of political parties, civil society, and the media. The people of Pakistan deserve an opportunity to choose their leaders free from the restrictions that exist under a state of emergency.

Looking to the future, the United States believes that the best way for any country to counter violent extremism is to develop and nurture a moderate political center. We believe this is true for Pakistan as well, and in my talks I encouraged reconciliation between political moderates as the most constructive way forward. A democratic Pakistan that continues the fight against terror is vital to the interests of both the United States and Pakistan. In the current circumstances, engagement and dialogue – not brinksmanship and confrontation – should be the order of the day for all parties.

The United States supports the Pakistani people in their efforts to develop a prosperous and democratic nation.

Do you see anything in here that doesn't leave genuine democratic resistance and the rule of law twisting slowly in the wind, as Musharraf and Bhutto quarrel over divvying up the spoils? I don't either.

Lahore, November 2007

It is humbling to see what real resistance to dictatorship looks like. Sometimes, living in a country without a pretense of democracy has its advantages.

This is what democracy looks like

Protest at Lahore High Court November 5, 2007

Iraq: Democrats fold, yet again

Read it and weep:

Democratic leaders in Congress are quietly preparing to give President Bush essentially everything he wants to keep the Iraq war going for at least another six months without forcing any change in course.

Swept into power on the votes of war-weary Americans last year, Congressional Democrats have so far failed in all their attempts to curtail Bush's war efforts. As they consider the president's latest request for $200 billion in supplementary war funding party leaders have pledged not to hand over another "blank check."

But, as Roll Call reports, a "blank check" is exactly what appears headed for the Pentagon.

"Democratic leaders continue to fear GOP attacks that cutting off or slowing funds would hurt the troops, despite anger among the Democratic base over the party’s failure to use Congress’ power of the purse to end the war," reports the Capitol Hill newspaper's Steven T. Dennis.

It's no longer clear to me why Bush even bothers to bait Democrats in Congress, except maybe just for fun.

Groundhog day

Hawhahahahahahahaha...

Chalabi back in action in Iraq
Nancy A. Youssef | McClatchy Newspapers
last updated: October 28, 2007 04:46:47 PM

BAGHDAD-Ahmad Chalabi, the controversial, ubiquitous Iraqi politician and one-time Bush administration favorite, has re-emerged as a central figure in the latest U.S. strategy for Iraq.

His latest job: To press Iraq's central government to use early security gains from the surge to deliver better electricity, health, education and local security services to Baghdad neighborhoods. That's the next phase of the surge plan. Until now, the U.S. military, various militias, insurgents and some U.S. backed groups have provided those services without great success.

That the U.S. and Iraqi officials are again turning to Chalabi, this time to restore life to Baghdad neighborhoods, speaks to his resiliency in this nascent government. It's also, some say, his latest effort to promote himself as a true national advocate for everyday Iraqis.

Welcome to Jonestown

When Forbes comes out with an article like this, you know that we have entered the magic hour:

Drinking The Kool-Aid

Investors clamored for shares of Countrywide Financial Friday, as the embattled mortgage lender became a perhaps surprising beacon of hope on Wall Street.

After weeks of bad news from financial players, Countrywide's $1.2 billion third-quarter loss was no surprise. However, the company expressed optimism for the future, and expects to turn a profit in the fourth quarter.

The response to Countrywide's forecast was immediate, as shares soared in morning trading. The home mortgage lender was up $1.99, or 15.2%, to $15.06.

Riverbend is back!

Anything that I can say pales in comparison to our favorite Iraqi expatriate blogger.

By the time we had reentered the Syrian border and were headed back to the cab ready to take us into Kameshli, I had resigned myself to the fact that we were refugees. I read about refugees on the Internet daily, in the newspapers, hear about them on TV. I hear about the estimated 1.5 million plus Iraqi refugees in Syria and shake my head, never really considering myself or my family as one of them. After all, refugees are people who sleep in tents and have no potable water or plumbing, right? Refugees carry their belongings in bags instead of suitcases and they don't have cell phones or Internet access, right? Grasping my passport in my hand like my life depended on it, with two extra months in Syria stamped inside, it hit me how wrong I was. We were all refugees. I was suddenly a number. No matter how wealthy or educated or comfortable, a refugee is a refugee. A refugee is someone who isn't really welcome in any country- including their own... especially their own.

Warning: financial meltdowns in mirror may be closer than they appear

As we head into what looks to be an...ummm...exciting news week, it seems like a short review of last weeks frantic attempt to salvage US financial markets is in order.

First up:

Kohlberg Kravis Roberts, which had more than $100 billion of buyout financing pending this summer, was theoretically the private equity firm most at risk from a debt market collapse.

But while most firms waited for the debt markets to regain their strength after the credit crunch, KKR pushed through financing for UK chemist group Alliance Boots and US commercial payments processor First Data. Next week, it is scheduled to complete on US power generator TXU.

KKR, which manages more than $53 billion in funds, is hardly out of the woods, a reality it has acknowledged by talking to US bank Citigroup about creating a holding company to buy orphaned leveraged loans.

The bank has been one of KKR's largest arrangers of leveraged finance and, at one point this summer, had underwritten $50 billion of debt that had yet to be syndicated.

Uh oh.

Credit markets are collapsing, and one of the most aggressive leveraged buyout firms in the world is in trouble. And because KKR is in trouble, Citigroup, their cheerful banker, is also in trouble. What to do?

Citigroup is understood to be underwriting $8 billion in debt for the holding company, which will leverage the $2 billion of equity provided by KKR through its Strategic Capital fund. According to a banker familiar with the arrangement, the fund would buy the loans for KKR deals that are struggling to be sold to third parties.

Ummm, excuse me?:

Perhaps the most mind boggling aspect of this deal is that the LBO loans KKR is reportedly interested in buying are the loans Citigroup made to finance KKR acquisitions, including the buyout of First Data. Follow this closely: Citigroup is lending money to a KKR vehicle that will buy up loans Citigroup made to KKR owned companies.

This is a classic maneuver when you are a powerful financial player who is all-in and frantically bluffing. Bogus mark-to-market accounting and transaction laundering through lame shell corporations was at the heart of the Enron financial meltdown five years ago. You would think that we might have learned something from that experience. How does KKR get away with it?

According to bankers and investors, KKR has made more progress than its rivals because it refused at an early stage to back down on deals. Once the banks appreciated the possibility of losing the firm's fees, they softened their stance.

KKR paid $424 million in fees to banks in the first nine months of this year, making it one of the top three fee payers to Wall Street behind Blackstone Group's $496 million and Goldman Sachs Capital Partners' $449 million, according to data provider Dealogic.

The bank most affected by KKR's financing is Citigroup, which has agreed to finance, and often lead, nearly all KKR's deals this year including TXU, with $37.35 billion of loans in the pipeline.

OK, let's review. Big sleazy leveraged buyout firm, check. Greedy and stupid large bank, check. Frantic rearranging of deck chairs on the Titanic, check. But oh, it gets better.

Before exploring the iceberg looming underneath the tip of this bizarre little news item, let's briefly go back to a simpler time, about six months ago, when KKR and Goldman Sachs locked down one of the biggest deals ever - the just completed leveraged buyout of Texas Utilities (TXU), one of the largest, dirtiest, and most corrupt (it is Texas, after all) electric utilities in the country. Consumer and environmental advocates had already soundly thrashed utility plans to build a dozen new, expensive, and environmentally catastrophic coal-fired power plants. The resulting political pressure was making it impossible for the Texas state government to quietly accept KKR's assertion that the state had no authority to put conditions on the sale. KKR was working hard to acquire TXU in one of its largest acquisitions ever, but couldn't line up the financing without some certainty about what the future might hold for the utility.

Their solution? Do an endrun around state consumer and environmental advocates by cutting a backroom deal with two national environmental groups, Natural Resources Defense Council (NRDC) and Environmental Defense Fund (EDF). TXU gets the considerable aura of respectability of NRDC and EDF, NRDC and EDF enhance their reputation as effective players in the big leagues. Except KKR and Goldman Sachs have already reneged on their part of the deal. In point of fact, they gave away nothing to buy the reputation of two of the leading environmental groups in the country for political purposes, and have since announced plans to build two new nuclear plants that were never mentioned in the previous negotiation.

Had NRDC and EDF not lent their active support to the TXU deal, there is a very good chance that the buyout would not have gone through. Had the deal not gone through, KKR Goldman Sachs, and Citigroup would be in a stronger financial position right now. Just as many Democrats continue to enable the Bush administration through meaningless compromises, NRDC and EDF enabled a huge leveraged buyout that is one of the key components of of KKR's, and now Citigroup's, current problems. The moral of the story (applicable to NRDC and triangulating Democratic politicians alike) is that the consequences of dealing with sleazeballs in good faith can be unpredictable, extreme, and not at all what you thought you were getting.

Now, back to the iceberg. How big a problem does the unease about KKR and Citigroup represent? Well, what we are talking about here is a recently popular form of asset laundering known as securitized investment vehicles (SIV), the corporate version of packaged subprime loan portfolios. Here's the problem:

SIVs use short-term funding like asset-backed commercial paper to buy longer-term assets, which include mortgage-backed securities. The debt markets stalled during the summer's credit turmoil, leaving investors reluctant to buy or sell securities like commercial paper. There are some $400 billion worth of SIV investments globally, according to Standard & Poor's. Banks currently are not required to divulge what kind of assets are held in their SIVs, though any losses would have to be reported in quarterly earnings reports.

$400 billion is about how much we've pissed away so far on George's Excellent Adventure in Iraq, about half of the entire annual economy of Texas or New York, roughly the entire annual economy of the Phillipines, slightly less than the entire annual economy of Iran. It's a lot of money, and if it vanishes suddenly for no good reason, financial markets may vanish shortly thereafter. And there's the rub - nobody knows outside of the banks that created the SIV exactly what assets are in those SIV's, or how much they are actually worth if the economy goes south. This is exactly the same problem that is causing the subprime mortgage collapse (in fact, some of tha SIV assets probably are subprime mortgage packages). And, because the whole Ponsi scheme floats on short-term commercial loans, things can get ugly very quickly when the short-term commercial loan market seizes up. In fact, the subprime mortgage collapse has triggered a collapse in investment in short-term commercial paper over the last two months. Investors don't like being told that nobody knows what their investment is worth. Lowering interest rates just makes the problem worse - why would any investor accept a lower return for a riskier investment?

Let's be clear about exactly what SIV's are. Short-term commercial paper is how business prevents timing issues on a scale of weeks to months from getting in the way of financial transactions that are done deals on paper. It provides liquid cash flow, an essential lubricant of business, and has generally been considered a low-risk, low-yield investment market.

Global banks started using their reputation as major players to tap the traditional low-risk, low-cost, and high liquidity of short-term commercial loan markets to get money for cheap. They then rolled that money over into high-risk, high-return, long-term investments, keeping them afloat by continuously rolling over the short-term commercial paper. These banks, and their friends, are making money by borrowing cheap money from low-risk markets, and investing in expensive loans to high-risk markets. The effect is to contaminate short-term commercial credit markets with risky loans to unknown players.

So. the biggest single pusher of SIV's has been - say it with me now - Citigroup. Their beautiful relationship with KKR has left them holding about $100 billion in seven huge SIV's, roughly a quarter of the entire market in these securities. In turn,

KKR is behind nearly 40%, or $28 billion, of buyout financings in what credit rating agency Fitch estimates is a $72 billion high-yield pipeline in the US.

And, just to remind you where we started,

Kohlberg Kravis Roberts, which had more than $100 billion of buyout financing pending this summer, was theoretically the private equity firm most at risk from a debt market collapse.

This is from this context from which we must consider both the recursive perpetual money machine that the $8 billion loan by Citigroup to Citigroup in order to prop up KKR, and the impending bailout of Citigroup:

In a far-reaching response to the global credit crisis, Citigroup Inc. and other big banks are discussing a plan to pool together and financially back as much as $100 billion in shaky mortgage securities and other investments.

The banks met three weeks ago in Washington at the Treasury Department, which convened the talks and is playing a central advisory role, people familiar with the situation said. The meeting was hosted by Treasury's undersecretary for domestic finance, Robert Steel, a former Goldman Sachs Group Inc. official and the top domestic finance adviser to Treasury Secretary Henry Paulson. The Federal Reserve has been kept informed but has left the active role to the Treasury.

The new fund is designed to stave off what Citigroup and others see as a threat to the financial markets world-wide: the danger that dozens of huge bank-affiliated funds will be forced to unload billions of dollars in mortgage-backed securities and other assets, driving down their prices in a fire sale. That could force big write-offs by banks, brokerages and hedge funds that own similar investments and would have to mark them down to the new, lower market prices.

The ultimate fear: If banks need to write down more assets or are forced to take assets onto their books, that could set off a broader credit crunch and hurt the economy. It could make it tough for homeowners and businesses to get loans. Efforts so far by central banks to alleviate the credit crunch that has been roiling markets since the summer haven't fully calmed investors, leading to the extraordinary move to bring together the banks.

In recent weeks, investors have grown concerned about the size of bank-affiliated funds that have invested huge sums in securities tied to shaky U.S. subprime mortgages and other assets. Citigroup, the world's biggest bank by market value, has drawn special scrutiny because it is the largest player in this market.

Known radical Alan Greenspan is skeptical:

"It's not clear to me that the benefits exceed the risks",Greenspan said. "The experiences I've had with that sort of intervention are two-sided."

Greenspan drew a distinction between the bail-out of a single large hedge fund to prevent the widespread sell-off of assets - as happened with Long Term Capital Management (LTCM) in 1998 - and efforts to prop up an entire asset class, as in the case of the proposed superfund.

In the case of LTCM, "a single company" that was "excised out of the market", there had been a potential for "a dangerous firesale of those assets". When shareholders came in and took out LTCM, that "eliminated that aspect of market disruption".

In contrast, "here we're dealing with a much larger market", he said. "They're not talking about going in and absorbing sub-prime mortgage asset backed [securities]. They're talking about essentially increasing the liquidity of those who have the SIVs [structured investment vehicles] and the like."

Greenspan is right to be skeptical. The shiny new Super-SIV is just the KKR-Citigroup do-se-do writ large.

And who are the geniuses who came up with this cunning plan? Well, the negotiator at Treasury who convened the bailout group is Robert Steel, a former Goldman Sachs vice-chair and the top domestic finance adviser to Treasury Secretary Henry Paulson. And Henry Paulson? Well, before George Bush appointed him to replace the ill-starred John Snow, Paulson was the Chairman and CEO of - say it with me now - Goldman Sachs. And while we're on the subject, remember Robert Zoellick, the World Bank chair who was replaced by our good friend Paul Wolfowitz? He left the World Bank so that he could become a managing director at... do I even have to tell you?

And what is Goldman Sachs up to these days?

A Goldman Sachs filing with the US Securities and Exchange Commission has led to allegations that it may have inflated profits in the third quarter to a spectacular $8.23 billion by booking paper gains on mortgage derivatives at too high a value.

Analysts cited by Fortune Magazine claim that almost a third of the bank's revenue came from "short" positions on the lowest tier of mortgage derivatives and other forms of toxic debt.

These assets are extremely hard to price, and were not in fact realised. More than $2.62bn of declared profits were made entirely on house estimates at the underlying value.

Charles Peabody, an analyst at Portales Partners in New York, said there were concerns that Goldman had set optimistic values on instruments for which there was in reality little or no functioning market.

"Common sense tells me that a lot of these losses were real and a lot of their gains were paper, and that's something we'd like to know more about," he said.

Oh yes. These are exactly the guys we want leading the way out of this mess.

It's going to be a very interesting next few months.