Daring to say loans made no sense
Sometimes, if you want the real answer, you have to ask a dumb question.
Alex Blumberg, a producer at "This American Life," a public radio show that specializes in old-fashioned storytelling about local slices of Americana, has never owned a house or had a mortgage, let alone covered the financial industry. Nonetheless, he was fascinated as he watched the subprime mess unfold.
His dumb question? "Why are they lending money to people who can't afford to pay it back?"
In 2006, Blumberg began bothering his friend Adam Davidson, an experienced business reporter at National Public Radio, about subprime loans. Davidson, who had a broad knowledge of global capital markets, patiently walked him through collateralized debt obligations, yield and risk curves, and the growing amount of international capital in need of a home. But Blumberg still didn't get it. How could securities based on lending money to bad risks be good business?
"I was embarrassed for him," Davidson said. "I understood how money flowed around the world and I was talking to big-picture thinkers."
Soon, Blumberg was madly surfing the Web and torturing his wife and friends with arcane talk about loan syndication and credit-default swaps. "It was a very unhealthy obsession," he says now. "I just couldn't understand how they could expect to be paid off when everyone I knew was maxed out on their credit cards. And these were very big loans."
He decided to do the story for "This American Life," a show that has a reputation for discussing things like summer camp and inner demons.
"I told him, I don't know how you're going to do a story about mortgage securitization for 'This American Life,' but good luck," Davidson said. But by December of last year, both Davidson and the broader markets were beginning to have their doubts about whether the fallout from subprime lending had actually been contained.
The more they talked, the more Davidson realized the education was going both ways. They eventually came up with a one-hour collaboration between NPR News and "This American Life" called "The Giant Pool of Money" that was broadcast last May and became a much downloaded primer on all the mayhem that followed. (You can find it at thislife.org/Radio_Episode.aspx?sched=1242)
Blumberg and Davidson were hardly the only ones asking questions. Nearly 19 months ago, under the headline "Mortgages May Be Messier Than You Think," my colleague Gretchen Morgenson wrote, "as is often the case, only after fiery markets burn out do we see the risks that buyers ignore and sellers play down."
As the assumptions that had blown air into the bubble began to dissipate, many mainstream reports became increasingly skeptical in their reporting and blogs like Calculated Risk offered increasingly alarming insights.
After large-scale financial disasters, the press is usually criticized often justly for ignoring the problem, but it's hard to make that case with the subprime mess. If no one saw this coming, they were not looking.
"This has been a very slow-moving train wreck," said Andrew Leckey, director of the center for business journalism at Arizona State University. "But it came wrapped in the warm feelings of home ownership while the executives behind it used obfuscation and a lack of transparency to lie about how deeply they were in the subprime business."
As Davidson and Blumberg showed, there's more than one way to get behind the lies. Using an ad they placed on Craigslist, "Were you employed in the subprime mortgage industry?" , the pair proceeded to assemble a remarkably likable rogues gallery of participants up and down the subprime food chain. One was Clarence Nathan, who sounded like a nice guy, but his house was in foreclosure, and he did not have full-time employment. He had no assets to speak of, and yet he received a loan for $450,000.
And then Blumberg asked Nathan the stupid question: "Would you have loaned you the money?"
Nathan answered: "I wouldn't have loaned me the money. And nobody I know would have loaned me the money. I know guys who are criminals who wouldn't loan me that, and they break kneecaps."
The pair suggested that an excess of global capital, a doubling in available capital in just six years to $72 trillion, left a "giant pool of money" in need of returns. Enter mortgage-backed securities. A lot of them.
One of the remarkable things about the report is the absence of evildoers, even though the cumulative effect of their behavior is now threatening to upend our nation. Early in the broadcast, we hear from Mike Francis, an executive director at the residential mortgage trading desk of Morgan Stanley. "From our standpoint it's like, there's a guy out there with a lot of money. We've got to find a way to be his sole provider of bonds to fill his appetite. And his appetite's massive."
The story then turns to another Mike, Mike Garner, a bartender in Nevada turned mortgage bundler. Garner said that market appetites for anything that resembled a mortgage pushed loan standards down: "No income, no asset. You don't have to state anything. Just have a credit score and a pulse." (Blumberg pointed out that the pulse thing was optional: 23 dead people in Ohio were also approved.)
Garner's boss had been in the business for 25 years and knew something was wrong. "It makes me sick to my stomach the kind of loans we do."
It was not a very common response. Glen Pizzolorusso was an area sales manager at WMC Mortgage in New York and a young ninja in this new world. Just out of college, he had five cars, a penthouse and a vacation house in Connecticut. And a taste for good living.
"We ordered three, four bottles of Cristal at $1,000 per bottle," he said on the broadcast, recalling a night when he had a table at Marquee, a nightclub in Manhattan. "They bring it out, you know they're walking through the crowd, they're holding the bottles over their heads. There're firecrackers, sparklers. You know, the little cocktail waitresses," he said. "You know so you order three or four bottles of those and they're walking through the crowd and everyone's like: Whoa, who're the cool guys? We were the cool guys."
Pizzolorusso himself soon fell behind on his own mortgage. "We could take joy in his deep-frying in his own greed, except for the fact that we all will end up getting billed for the Cristal." Blumberg said: "I admire him very much for talking to us. He was completely honest about how he behaved."
Kevin Kelly, a writer and thinker who helped invent Wired and The Whole Earth Catalog, is a huge fan of "The Giant Pool of Money."
"It was not an abstract," he said. "These were ordinary people doing ordinary things that accumulated in the wrong sequence and creating a system that failed. Normally, the scale prohibits people from understanding, but it was broken down into parts and sets of behavior that regular people could understand."
It was clear even last spring that the people who perpetrated this fraud knew at some level what they were doing.
Davidson said that the idiosyncrasy of the instruments, combined with the overlay of technology, allowed the traders to live in denial. They would sit at terminals and use data, historical data that had been gathered before they started giving out money to people with no ability to pay, and decide that the risks were manageable. All of it was unreal, ineffable, tough to know. Except the way it turned out, as Davidson notes near the end of the story.
"It's as if the global pool of money thought it was putting trillions of dollars in a savings account, but really, half of it was going into a furnace. The money is gone, burned up, never to come back."
That was five months ago, and now that same furnace is about to burn public money. Davidson and Blumberg are working on a follow-up report to be broadcast next week on "This American Life," that looks into the wreckage of a calamity their reporting all but predicted.
Blumberg said that back when they first started, "there were all these respected economists saying that no, it's not a bubble, and yes, there would be a correction, but it would be a soft-landing and I think people were too intimidated to question that," Blumberg said.
"That's the story of my life, asking the stupid question," he said.
Cadbury withdraws China chocolate on Melamine concern
LONDON: Confectionery group Cadbury on Monday said it was withdrawing all of its 11 chocolate products made in Beijing on concern over the possibility of contamination with melamine.
"The withdrawal is due to concern about the possibility of melamine contamination in our chocolate," said a spokesman.
The products were sold in mainland China and also exported to Taiwan and Hong Kong with one product going to Australia.
Cadbury's business in China is currently small with annual sales of less than 0.5 percent of the group's total revenue.
"We believe it is appropriate to take a precautionary step to withdraw from the market all of our Cadbury chocolate products that have been manufactured in Beijing, pending further supply of fresh product," the group said in a statement.
Amazon deforestation rises dramatically
RIO DE JANEIRO, Brazil: The Amazon is being deforested more than twice as fast as last year, Brazilian officials said Monday, acknowledging a sharp reversal after three years of declines in the deforestation rate.
Brazil's Environment Minister Carlos Minc said upcoming nationwide elections are partly to blame, with mayors in the Amazon region turning a blind eye to illegal logging in hopes of gaining votes locally.
Non-government environmentalists blame the global spike in food prices for encouraging soy farmers and cattle ranchers to clear land for crops and grazing.
Elections no doubt play a part, but "the tendency of deforestation rising is deeply related to the fact that food prices are going up," said Paulo Adario, who coordinates Greenpeace's Amazon campaign.
"When you have elections, the appetite of authorities to enforce laws is reduced," Adario said. "But the federal government has to step in and do its job."
Amazon destruction jumped 228 percent in August when compared to the same month a year ago, according to a report from Brazil's National Institute for Space Research. Some 756 square kilometers (292 square miles) of Amazon was destroyed last month, compared to 230 square kilometers (89 square miles) in August 2007.
The institute uses satellite imagery to track illegal logging, said the destruction was likely even worse than its figures show, since no information was available for about 26 percent of the Amazon covered by clouds.
Six killed in landslide in western Georgia
TBILISI: Six members of the same family were killed in a landslide caused by days of heavy rain in western Georgia, the region's political leader said on Monday.
The landslide late on Sunday swept away the family's home in the village of Khala in the Black Sea region of Ajara. Dozens of other homes in the village were reported to be under threat."For the past week the rain has not stopped," Ajara administrative leader Levan Varshalomidze told Reuters.
A sweltering summer in the Caucasus country has given way to cooler temperatures and heavy rains since mid-September. Hailstorms in eastern Georgia have damaged vineyards and heavy flooding has hit the Poti region on the Black Sea coast.
Fiat races into Serbian car business
BELGRADE: Fiat, the Italian automaker, will begin making 200,000 cars a year in Serbia starting in 2010 as part of a more than $1 billion joint venture signed on Monday, fanning hopes of a revived Serbian car industry.
For Fiat, the investment is part of a response to a changing global market, its chief executive, Sergio Marchionne, said after signing the accord with Serbian officials in Belgrade.
"Regardless of world economic difficulties, Fiat is working on consolidating its future on its own," Marchionne said.
"There are things we can neither predict nor change, but we can create conditions to respond in the fastest and most efficient way."
Marchionne said the plant, in Kragujevac, would be designed to allow the gradual expansion of production by 100,000 units.
Fiat's bus and truck arm, Iveco, is planning the production of 2,200 buses as part of a wider deal, with Magneti Marelli, the Italian automotive industry supplier, starting production in Serbia.
The ventures, worth a total of 940 million, or $1.35 billion, including 260 million to be provided by the Serbian government, will create 4,700 jobs and result in 1 billion worth of annual exports to Serbian neighbors and European Union markets.
The government will also invest 300 million in new roads, railways, power transmission and environmental protection in the Kragujevac region. It has long been one of the poorest areas in Serbia after the car industry collapsed in the early 1990s following the violent breakup of Yugoslavia and the loss of markets.
The government, led by Prime Minister Mirko Cvetkovic, is willing to offer the same incentives to one more big investor in the car industry.
The Serbian president, Boris Tadic, who is due to visit Germany on Tuesday, said Monday that there had been negotiations with Volkswagen, but he declined to say whether a deal was imminent.
Warren Buffett to buy a 10 percent stake in Chinese battery maker
HONG KONG: Warren Buffett, America's best-known investor, announced Monday that he had agreed to buy a 10 percent stake in a Chinese battery manufacturer that plans to sell electric cars in the United States by 2010.
MidAmerican Energy Holdings will pay $230 million for the stake in BYD. Buffett's Berkshire Hathaway in turn owns 87.4 percent of MidAmerican.
Based in Shenzhen, a mainland Chinese city adjacent to Hong Kong, BYD is one of the world's largest manufacturers of rechargeable batteries for cellphones and other uses. But it also has a fast-growing auto manufacturing subsidiary that accounts for nearly a third of the company's total revenues and makes fuel-efficient compact and subcompact cars for the Chinese market.
Wang Chuanfu, the president of BYD, said that the company's alliance with Buffett was not just about raising capital for the manufacturer, which relies heavily on short-term debt.
"If BYD were to enter the North American market, Mr. Buffett's investment would enhance the BYD brand name," Wang said at a press conference in Hong Kong on Monday afternoon.
He added that BYD would sell cars in the United States and might even move up its plans for entering the market in 2010, by investing some of Berkshire's money in accelerated research.
David Sokol, the chairman of Mid-American, said at the press conference with Wang that Berkshire Hathaway wants to address climate change and sees electric cars as a way to do so. "This is a technology that can really be a game changer if we're serious about reducing" emissions of carbon dioxide, the main gas associated with manmade global warming, he said.
MidAmerican, a collection of electric utilities in the Midwest and the western United States, sees plug-in electric cars as the best approach because the United States already has the infrastructure to supply electricity for recharging almost anywhere, Sokol said. By contrast, plans for hydrogen-fueled vehicles would require the installation of many hydrogen-fueling centers.
MidAmerican also sees promise in BYD's battery technologies for storing wind energy and solar energy, Sokol said. Difficulties in storing energy for when the wind is not blowing or the sun is not shining have limited the deployment of these technologies.
More broadly, Berkshire Hathaway wants to tap into China's engineering talent and is doing so through BYD, which has 11,000 engineers and technicians among its 130,000 employees. "They're graduating about six times as many engineers in China as the United States," Sokol said.
Buffett did not attend the news conference, but said in a statement that he was impressed with Wang's record as a manager.
BYD cars on display at auto shows in China have tended to buttress the notion that the company's expertise lies more in batteries than automotive design.
Gasoline-powered BYD models already sold in China are unmemorable economy cars with little of the styling flair on which Western automakers pride themselves. The uneven purple paint on one BYD car displayed at a recent Chinese car show drew a gaggle of amused American auto executives who made derisive remarks.
But expertise in automotive design and manufacturing is easy to acquire these days. Other Chinese automakers have already hired some of the best Italian designers, while layoffs at big Western automakers mean that many talented engineers are available.
Battery expertise is much harder to find. Yet mastering battery technology is widely regarded in the auto industry as the linchpin to the production of electric cars with the range, horsepower and torque needed to compete with gasoline-powered cars.
Sokol said that MidAmerican was impressed by BYD's ability to produce electric cars that have a range of almost 306 kilometers, or 190 miles, on a single charge, and can be 80 percent recharged in 15 minutes. BYD plans to start selling electric cars in China at the end of this year.
BYD is working on all-electric cars, in which all of the power to move the vehicle comes from a series of batteries attached to an electric motor. That distinguishes them from hybrids like the Toyota Prius, which use an electric motor and battery to supplement the power from a gasoline engine.
BYD is using lithium-ion batteries. Japanese automakers have struggled to make sure that the batteries do not overheat and cause fires, an extremely rare occurrence but one with potentially deadly implications.
Sokol said that Berkshire Hathaway first became interested in BYD on a suggestion from Charles Munger, a longtime adviser to Buffett who is also the chairman of the Wesco Financial Corporation, another Berkshire Hathaway subsidiary.
The theory and reality of France's EU leadership
PARIS: In a time when world leadership appears in short supply, Nicolas Sarkozy is making a case that he can be leader of a Europe able to take a greater hand in global decision making.
It's an interesting idea, absent clear U.S. command for the moment and even, perhaps, extending beyond the arrival of a new president in January.
It depends on not focusing too hard on the details of a Europe whose divisions confront and usually overwhelm its ambitions.
It also means believing both in a multipolar vision of the world and in the long-shot notion Europe's former Soviet bloc countries might soften their conviction that only the United States can guarantee their freedom.
Sarkozy, all the same, has some things going for him:
A degree of success in negotiating on behalf of the West to remove Russian invasion troops from Georgia. The bully pulpit of the European Union's rotating presidency. And no real challenge to his primacy from Britain, or a Germany handcuffed by national elections in 2009 that could focus on the question of where it stands between the United States and Russia.
Of course, there's the problem of a recession looming in Europe, which Sarkozy acknowledges. The subject remains an official no-no across the Rhine, recessionary statistics in the second quarter be damned. In fact, a whole series of difficult German-French contradictions are avoided, wadded in cotton and traditional desires of good will.
"There are tests that forge great character," Le Figaro, a newspaper close to the president, wrote in an editorial. "Nicolas Sarkozy intends to prove that he has the fabric of a European leader able to confront the world's storms."
He has approached some of them with something that may appear to be wisdom. Sarkozy has characterized the world financial crisis as one involving speculative rather than productive capitalism, caused by ridiculously rigid beliefs in the law of the market. In this process, America gets spared being singled out as sole source of the problem.
This is important because it reaffirms Sarkozy's decision that France could never lead Europe without having shed the label of American's eternal antagonist.
But an examination of Sarkozy's leadership qualifications has its smudges and chinks.
On the economic side, in the middle of a crisis whose ongoing horrors are ones of bad debt and liquidity, Sarkozy has indicated France will stay a massive debtor and postpone its promise to live up to EU debt and deficit criteria until at least 2012.
On Russia and Georgia, José Manuel Barroso, the president of the EU Commission, has said Sarkozy supports re-starting postponed EU talks with Russia on a Strategic Partnership as soon as Moscow pulls its forces out of "Georgia proper."
NATO and Barack Obama see things differently: in the presidential debate on Friday, Obama insisted the Russians "have to follow through on the six-point cease-fire. They have to remove themselves from South Ossetia and Abkhazia," the Georgian provinces effectively annexed by Russia.
Other disagreements that keep Europe from speaking with a single voice (and Sarkozy from claiming he can talk as leader of a determined unit) are tucked under a blanket.
For fear of discomforting Angela Merkel - a Sarkozy adviser told me last week the president would consider her losing elections next year a disaster for Europe - France says next to nothing about how using more atomic energy would help break its dependency on Russian energy. (And absolutely nothing about exclusive sweetheart deals, like the German-Russian Nord Stream pipeline, that kill Eastern Europe's confidence in the solidarity of their big continental allies.)
In terms of the diverging French and German approaches marking out convenient responsible parties in the financial meltdown, the difference in tone is sharp.
Sarkozy has avoided the name game. The German government dived into it, offering a chorus of besserwisserei or a know-it-all lecturing, to the Americans.
Financial Times Deutschland described as "droning self-righteousness" an attack by Peer Steinbrück, Merkel's Social Democrat finance minister, in which he said the United States will lose its status as the superpower of the global financial system.
Die Welt went so far as to talk about a "change in course" by the pro-American chancellor herself. In focusing on the Americans turning a deaf ear to calls for more financial regulation, Merkel "took the role of a schoolteacher," it said, and skipped over the fact "that Germany was one of the top profiteers from the American cheap money policy."
Other signs of profound European splits, and the difficulty of finding leadership positions to overcome them, were at hand.
An FTD report last week, quoting from a French Foreign Ministry paper presented at a conference of European foreign ministers three weeks ago, illustrated the extent of divisions between countries increasingly mistrustful of Russia and others wanting to retain a status quo relationship.
The newspaper said the French document argued that Russia's invasion of Georgia "confirms that our post-Cold War plan to bind Russia to Europe has failed" and that "there is no doubt that Europeans and Americans did not correctly evaluate re-awakened Russian power."
Asked about the discussion paper, a French spokesman replied: "There are all kinds of different ideas in it. It was just that, something to prompt discussion."
In that case, its existence points out the distance separating a Europe of multiple positions on the financial crisis, its relationship to America and Russia, and its energy dependencies, from the unity that would make a bid for a role in world leadership more meaningful.
Sarkozy's interest in standing at the head of Europe looks completely legitimate. But the gap between ambition and the complications of the task is enormous.
Could the European Union of October 2008 offer the world a new, clear handhold on stability as it negotiates a series of dark passages?
Reality says do not consider the question again until after America speaks on the first Tuesday in November.
French court clears Sarkozy son in scooter case
PARIS: A French court on Monday cleared one of President Nicolas Sarkozy's sons of fleeing the scene of an accident involving his scooter.
Jean Sarkozy, the president's 22-year-old second son, was accused of damaging a BMW with his scooter on the Place de la Concorde square in central Paris in 2005 and leaving the scene.
Jean Sarkozy has always denied the incident happened.
The plaintiff M'Hamed Bellouti, who has called himself a supporter of Sarkozy's Union for a Popular Movement (UMP), was seeking some 260 euros ($376) for repairs to his car and 4,000 euros in damages.
The court ordered Bellouti to pay 2,000 euros in damages.
"Justice is the same for everyone ... you cannot make reckless allegations," said Thierry Herzog, Jean Sarkozy's lawyer.
Bellouti said Jean Sarkozy had been treated favourably. "I knew the legal system was unfair, but to be fined for wasting court time is surreal," he said.
He has said the police did not follow up on the accident and that three letters addressed to Jean Sarkozy by his insurance company were unanswered.
Jean Sarkozy, who married a member of the family that founded one of France's biggest retailers earlier this month, has launched his own political career.
A law student, he was elected this year to the post of local councillor in the wealthy Paris suburb of Neuilly-sur-Seine where his father had been mayor.
Five hours after I'd started visiting some of Jean-Paul Gaultier's favorite places in Paris, a woman I did not know grabbed my manhood.
I'd gone up to Montmartre to buy a ticket for the following evening's show at the Moulin Rouge, the colorful if over-touristed cabaret whose gaudy charms have long held sway over the imagination of the designer we associate with Madonna's cone bra and the male skirt. Ticket purchased, I walked a block south and stumbled onto a rival establishment called Cabaret Frou Frou, whereupon a husky-voiced young woman hurriedly sat me down in front of a metal pole and offered me a dance.
Aha, it dawned on me. Not a cabaret, but something more intimate. I tried to make my apologies, but she cut me off. "I do a dance!" she said in heavily-accented English.
She then proceeded to "walk" her index and middle finger up my inner thigh and grab me. I stood abruptly and said, "Sorry, no. I'm ... Je suis homosexual."
She stared at me unmoved, as if I'd just told her that my hobbies include raising chinchillas.
Heretofore, my chief anxiety about traveling to France had always been that, at some point during my trip, I would be called upon to pronounce the name of the town Ypres. But my Frou Frou experience had now redrawn that map. The French: unexpectedly handsy.
A month earlier, I'd written to Monsieur Gaultier and asked him to send me a list of the places in Paris that are the most meaningful to him. I knew that the selections made by an avatar of louche glamour and subversive wit would provide a refreshing tonic to the City of Light's inherent sentimentality. Not only has Gaultier inspected many of the city's public and private spaces as possible sites on which to stage fashion shows, but he's an artist who's always looking for visual appeal, and often finding it in unlikely places.
The idea was that I would spend three days visiting some of these locales and then have dinner with him at a restaurant of his choice, Jules Verne, the Alain Ducasse 120-seater on the second platform of the Eiffel Tower, before visiting the rest. And so, one June night just two days after l'incident Frou Frou, I found myself accompanied by Gaultier and his director of communications, Jelka Music, zooming toward the Eiffel Tower in a black SUV driven by the designer's driver and bodyguard. "We go to a cliché, but a fabulous cliché that I love," the blond and boyishly enthusiastic Gaultier told me with some merriment.
Talking to Gaultier is like being with your favorite eccentric uncle, the one who bought you liquor in high school, his crystal blue eyes glisten with warmth and pop with curiosity; when he's very excited, his left pinky twitches. He added, "I love postcard clichés. You have to be a genius to take a good picture of Paris. So many have already been taken."
Gaultier's admiration for the Eiffel Tower, over the years he has recreated the monument's iconic architecture in both clothing and jewelry, became palpable when we got in its elevator and stared at the structure's workings: "It's like lace," he said. "Like metallic lace." The messenger bag slung over Gaultier's shoulder only enhanced his affect of childlike animation. As the elevator eased upward, the recesses of my mind bodied forth the name Willy Wonka.
Once in the twinkly and glass-drenched dining room, Gaultier, all courtliness and je-vous-en-prie, insisted that I have the seat with the best view. To dine elegantly at a great height over Paris is to render yourself at once rooted but vulnerable, you feel like a jewel on a tiara, but you're glad that the city is not known for its earthquakes. As we sipped pink Champagne and gazed down at a doll-size Paris, I thought, I could get very used to being Jean-Paul Gaultier.
I'll admit I hadn't expected to be at the Eiffel Tower with him. Weeks earlier, when I'd thought about the picks that I might get from the enfant terrible of French fashion and now the chief designer for Hermès, whose high-low aesthetic is a heady cocktail of exquisite tailoring and satiny, trusslike corseting, I imagined a smattering of after-hours S & M clubs, perhaps a to-the-trade-only boutique specializing in 18th-century military epaulets carved in sandalwood by a Formosan prince and his colony of lepers. But instead I received a list of 15 or so locations, some of which, like the Moulin Rouge and the Folies Bergère and the flea market at Clignancourt, could not accurately be described as recherché.
And so I made my way into Gaultier's Paris, hoping to be able to find the beating pulse behind the postcard cliché. The only hotel on Gaultier's list was the Pavillon de la Reine, where he had lived for two years during the 1990s. This vine-covered, 54-room mansion is separated from the lovely Place des Vosges in the Marais district by a hush-inducing private courtyard. Though I had not been able to secure a room, Laure Pertusier, the hotel's elegant, young director of sales gave me a tour. As we took in the hotel's cozy blend of 17th-century wooden beams and Louis XIII-style fireplaces and antiques, Pertusier told me that Pavillon's clientele was "not the Champs-Élysées crowd. Not so bling-bling."
She added, "Famous people who don't want to be recognized like the hotel. Otherwise they go to the Ritz or the Crillon." She showed me a picture of the Victor Hugo suite in which Gaultier had lived, it featured a lovely, monochromatic, Laura Ashley-type floral wallpaper, and told me, "We had the idée to change the name of the room to Gaultier." I said, "You'd have to change the wallpaper."
The Gaultier spirit is more readily identifiable at Paris's wax museum, Musée Grévin. As a child, Gaultier loved its Palais des Mirages, a heavily mirrored formal parlor with elaborate chandeliers. You stand cheek-by-jowl with a busload of tourists, whereupon the lights dim and a whirlwind of elephant braying and blinking lights transforms the room into a bumptious, cloudy fantasyscape; it's as if you're trapped inside Marie Antoinette's hypothalamus, but Marie has a head cold.
Downstairs I found some 300 wax figures. These included Jeanne d'Arc at the stake; a bloodied heretic tied to a board by the Inquisition; Henri IV, stabbed in a carriage; a skeleton in armor; and Jean-Paul Gaultier. I thought: the unstated theme of this museum is bondage.
The two Gaultier locales that I am the most eager to return to the next time I go to Paris are the Natural History Museum and, just across the street, the tearoom and the hammam of the mosque known as La Grande Mosquée de Paris. The former is divided into two huge, hangarlike buildings the child-friendly Grande Galerie de l'Evolution, and the fabulously eerie Galeries de Paléontologie et d'Anatomie Comparée .
The evolution building is a soaring, 19th-century iron-framed, glass-roofed structure with dramatic pools of light; from these pools emerge taxidermied interlopers such as sharks and monkeys. But it's the stampede of fossils at the paleontology museum that most impressed; once you enter the main room, about 100 animal skeletons, including those of whales, yaks and hyenas, look as if they're about to flatten you. I loved it, and longed to lie down on the floor and have hyena hooves paillard me.
For 58 euros, I then had a massage and steam bath at the mosque's somewhat ramshackle and warrenlike hammam; those of my spirits that weren't lifted by this gentle regimen were done so by my subsequent inhalation of mint tea and baklava in the mosque's placid outdoor tearoom. While women in headdresses smoked a hookah next to me, and a flight of tiny birds pecked at my baklava crumbs, I sipped at my tea, and thought: In the future, I will acknowledge only things related to paleontology and baklava.
"ONE thing I don't like about Paris is Haussmann," Gaultier told me at Jules Verne, speaking of the city's master planner. "Which is sad because it is much of Paris. Galeries Lafayette: Non. I love the Île de la Cité, Montmartre. Voilà. I like places where it's like a little village. I'm very lucky because the place where I live, it's near Pigalle, it's called Rue Frochot, is an allée behind a gate. With a tree, like in the country."
Gaultier's candor about his home address had inspired me to tell him that I'd "seen" him at the wax museum. He had gasped: "Une catastrophe! We all look oar-ible! The only ones who look how they are in reality are the footballers."
I had opined that the unexpected legacy of a visit to the Grévin is that one is reminded how tiny the famous are. The 5-foot, 11-inch Gaultier had huffed, "That, too: totally wrong!"
Switching the topic to another venue of illusion, music halls, I'd asked Gaultier why he had included the Folies Bergère and the Moulin Rouge on his list. He'd reminded me that as a child, he got into trouble when his teacher found him sketching costumes from a televised performance of the Folies Bergère; but when the teacher taped one of the sketches to Gaultier's back, the punishment backfired, and Gaultier became a schoolyard celebrity.
"Then I did a revue with my teddy bear at home," he said. "I pretended he had breasts. The first cone bra I did was for my teddy bear, not for Madonna. I had a strawberry box for the stage, and I put a lot of feathers on my teddy bear for the headdress. I used feathers from my cleaning brush for the finale."
Gaultier's penchant for glitter, nurtured by trips to Théâtre du Châtelet with his grandmother, would later exhibit itself when the 17-year-old mailed Pierre Cardin some sketches in 1969. Much to Gaultier's later embarrassment, "I mean, it was so tacky," he has said, he had souped up his sketches with gold foil paper and sequins. Cardin, charmed, gave Gaultier his first job in fashion.
The Folies Bergère and the Moulin Rouge are not what they used to be; Gaultier suggests instead that one go to the chic and highly choreographed striptease that is Crazy Horse. There, 12 semiclad woman, all with the same delicious measurements, caper and vamp to songs amid futuristic light projections and scrims.
"I adore. Very modern. I brought Madonna there two times, she loved it. Ah, oui. Go, go, go. It is beautiful and phantasmatic. For me, it's not erotique. It's extraordinary, phantasmatic, fetishistic."
The cinema has been an even greater influence than the music hall on Gaultier over the years (and, indeed, Gaultier did the costumes for "Bad Education," "The Fifth Element" and "The City of Lost Children," among others). He had included the movie theaters La Pagode and Le Grand Rex on his list of favorite places. The former, in the Seventh Arrondissement, is an antique pagoda built for the wife of the owner of Le Bon Marché department store in 1896, and was saved from demolition in the 1970s by a group headed by Louis Malle; the latter, in the Second Arrondissement, is the largest theater in Europe (around 2,750 seats), and often the site of rock concerts.
Gaultier told me that as a child growing up in the suburb of Arcueil, he'd seen a billboard for "Cleopatra" staring Elizabeth Taylor, then at the Rex. "She looked enormous, and in gold. I thought, 'Oh my God, I need to go there.' "
Though the Ducasse meal was extravagantly sauced and beautifully presented, I'd felt I needed to ask Gaultier about the other restaurant he'd mentioned on his list, Casa Olympe. Saying that it's near his house and "almost my canteen," he'd said that the restaurant was very small and unpretentious.
"The first time I went there, I chose one beautiful mushroom, a girolle, with garlic," he said. "Olympe brought it out in a pan, with eggs broken on it, like in the countryside. Fabulous. The next day I went with friends and said, 'I would like to have four girolles like yesterday,' and she said, 'Non.' She said, 'I went to the market today and the girolles were not beautiful, so I did not take them.' I loved that."
"You like to be slapped," I suggested. "In some way, yes," he said.
After dinner, taking the elevator down the tower, Gaultier had looked slightly panicked for a minute and said, "We didn't talk about Angélina." I thought, Angelina Jolie? But Music, the communications director, had explained, "It's a dessert."
"I can't believe you're talking about food after that meal," I'd said, referring to the fact that each of our desserts had had two parts and had been supplemented by a tray of petits fours, as well as plates bearing two kinds of marshmallows, one of them passion fruit.
"No. This is different," said the man who wanted to be a baker before he wanted to be a designer, and who once dressed models in brioches. Gaultier, it turns out, is a fan of the super-rich, tennis ball-sized confection known as a Mont Blanc, a ball of meringue is topped with Chantilly and a lot of wormy strands (or vermicelles) of chestnut paste, that is served at the tearoom, Angélina, next door to the Meurice hotel near the Louvre.
Indeed, much too early the next day, I tucked into one of these atom bombs, and was immediately flooded with the sensation of having foie gras-ed my digestive system. Looking across the room filled with maiden aunts and the occasional family from Akron, I thought, I am now officially an 89-year-old woman. Upon realizing that the Mont Blanc had caused me literally to break out into a sweat, I headed off for the Hermès store near the Madeleine and thence to Gaultier's own store on Rue Vivienne, spritzing myself with free cologne at both locations. I was smelling beyond my means.
Eager to reassert my masculinity, I went to Crazy Horse that evening. If my experiences seeing a show at Moulin Rouge and visiting the lobby of the Folies Bergère had brought me in touch with a colorful, if slightly dusty, kind of camp, Crazy Horse was something altogether different. The room is all black and red lacquer; each table has a glass Champagne bucket lighted by an illuminated marble slab beneath it. The effect is highly chic. The show is by turns beguiling and slightly silly, but always bubbly.
During the break, I read an alphabetized list of people who've patronized the establishment over the years; on seeing the unlikely names Simone de Beauvoir, Patricia Hearst, Randolph Churchill, Seiji Ozawa and Georges Pompidou, my eyes flitted to the letter R's, hoping to find Eleanor Roosevelt.
On my last day in Paris, I headed for the flea market at Clignancourt. Though a longtime favorite of Gaultier's, he'd told me he now does most of his flea market-going in London or New York, because in Paris he is recognized and followed around by style mavens who want to see what he's buying.
The flea market is immense, and, unlike American fleas, has a section, the Marché Paul-Bert, with high-end antiques and gorgeous home furnishings. As I walked around, I remembered what Gaultier had told me at the Eiffel Tower about shopping at flea markets: "The old fabrics are sometimes nicer than the new ones. One time I bought the jacket of a fat man, and I put that jacket on a girl because I liked the fabric. I took it in, and I rolled up the sleeves. I made a new silhouette."
Such, I thought, is the power of Gaultier's Paris. It may present itself as one easily recognizable, if not clichéd, thing, a fat man's jacket or a cabaret called Frou Frou, but, in fact, it's something else entirely. Something less expected. We come for the choreography, but we are delivered something more brutal.
EXTRAORDINARY, PHANTASMATIC AND FETISHISTIC
HOW TO GET THERE
Many major carriers, including Delta, Air France and Continental, fly from New York-area airports to Charles du Gaulle airport in Paris. Round-trip fares for travel in October start at around $775, according to a recent Web search.
WHERE TO STAY
The young fashion crowd, many of whom will be in Paris for the spring/summer Ready-to-Wear shows being held through Oct. 5, loves the 20-room Hôtel Amour (8, rue Navarin; Ninth Arrondisement; 33-1-4878-3180.) Each room is uniquely decorated on the theme of love by a different artist (e.g., Marc Newsom, Sophie Calle); the hotel's brasserie is open late and has a garden. Doubles from 140 euros, around $200 at $1.46 to the euro.
The phrase "design hotel" finds its most literal embodiment at Hôtel du Petit Moulin (29-31 rue du Poitou; Third; 33-1-4274-1010; www.hoteldupetitmoulin.com), conceived by Christian Lacroix. He has had a field day in each of the hotel's 17 rooms, with a pastiche of styles ranging from Baroque to pop. Rates are 190 to 350 euros. Breakfast, 15 euros.
Pavillon de la Reine is a 54-room hotel in the Marais (28, place des Vosges; Third; 33-1-4029-1919; www.pavillon-de-la-reine.com. Rooms start at 370 euros.
WHERE TO GO (THE GAULTIER TOUR)
Crazy Horse Paris, 12, avenue George V; Eighth; 33-1-4723-3232; www.lecrazyhorseparis.fr; The show, including a half bottle of Champagne, or two drinks, starts at 70 euros a person.
Bal du Moulin Rouge, 82, boulevard de Clichy; 18th, 33-1-5309-8282; www.moulin-rouge.com. The show begins at 9 p.m. and costs 99 euros, including a half-bottle of Champagne. An 11 p.m. show costs 89 euros.
La Grande Mosquée de Paris, 2 bis, place du Puits de l'Ermite; Fifth; 33-1-4535-9733; tea room: 33-1-4331-1814; www.mosquee-de-paris.org.
Grande Galerie de l'Evolution, 36, rue Geoffroy Saint Hilaire; Fifth; 33-1-4079-5479 or 33-1-4079-5601
Galeries de Paléontologie et d'Anatomie Comparée, 2, rue Bouffon; Fifth; 33-1-4079-5479; www.mnhn.fr. Admission is 8 euros.
Le Jules Verne, Eiffel Tower, second platform, Avenue Gustave Eiffel; Seventh; 33-1-4555-6144; www.lejulesverne-paris.com. Prix-fixe dinner 190 euros.
Casa Olympe, 48, rue St-Georges; Ninth; 33-1-4285-2601
Angélina, 226, rue de Rivoli; First; 33-1-4260-8200.
Hermès, 24, rue du Faubourg Saint-Honoré; Eighth; 33-1-4017-4717; wwwhermes.com.
Jean-Paul Gaultier boutique, 6, rue Vivienne; Second; 33-1-4286-0505; www.jeanpaulgaultier.com.
La Pagode cinema, 57, bis rue de Babylone; Seventh, 33-1-4555-4848.
Théâtre du Châtelet, 1, place du Châtelet; First; 33-1-4028-2840; wwwchatelet-theatrecom.
Musée Grévin, 10, boulevard Montmartre; Ninth; 33-1-4770-8505; www.musee-grevin.com. 19.50 euros.
Le Grand Rex cinema, 1, boulevard Poissonnière; Second; 33-1-4236-8393; www.legrandrex.com.
Marché aux Puces de Clignancourt; Avenue de la Porte de Clignancourt; 18th. Located in the north of Paris, this is most easily reached by cab. Make sure to visit the Paul-Bert and the Serpette markets.
Amazon deforestation rises dramatically
RIO DE JANEIRO, Brazil: The Amazon is being deforested more than twice as fast as last year, Brazilian officials said Monday, acknowledging a sharp reversal after three years of declines in the deforestation rate.
For U.S. stocks, worst single-day drop in two decades
Even before the opening bell, Monday looked ugly.
But by the time that bell sounded again on the New York Stock Exchange, seven and a half frantic hours later, $1.2 trillion had vanished from the United States stock market.
What had started 24 hours earlier, with a modest sell-off in stock markets in Asia, had turned into Wall Street's blackest day since the 1987 crash. The broad market, as measured by the Standard & Poor's 500-stock index, plunged almost 9 percent, its third-biggest decline since World War II. The Dow Jones industrial average tumbled nearly 778 points to 10,365.45.
Across Wall Street, no one could quite believe what was happening on the floor — the floor of the House of Representatives, not the New York Exchange.
As lawmakers began to vote on a $700 billion rescue for financial institutions, the trading desk at Voyageur Asset Management in Chicago went silent. Money managers gaped at a television screen carrying news that seemed unthinkable: the bill was not going to pass. Shortly after 1:30 p.m., the rescue was rejected.
"You just felt like the world was unraveling," Ryan Larson, the firm's senior equity trader, said. "People started to sell and they sold hard. It didn't matter what you had — you sold."
Frustration, and then panic, coursed through the markets. Investors feared the decision in Washington would imperil the financial industry, as well as the broader economy.
At the Federal Reserve and other central banks, policy makers were also anxious. Even before the vote on Capitol Hill, central bankers tried to jump-start the credit markets. They offered hundreds of billions of dollars in loans to banks around the world because banks and investors were unwilling to lend to each other. But neither the stock market nor the credit markets appeared to respond.
Just 24 hours earlier, few imagined Monday would play out this way.
U.S. House rejects plan for bailout
WASHINGTON: Defying President George W. Bush and the leaders of both parties, rank-and-file lawmakers in the House on Monday rejected a $700 billion economic rescue plan in a revolt that rocked the Capitol, sent markets plunging and left top lawmakers groping for a resolution.
The stunning defeat of the proposal on a 228-205 vote after marathon talks by senior congressional and Bush administration officials lowered a fog of uncertainty over economies around the globe. Its authors had described the measure as essential to preventing widespread economic calamity.
The markets began to plummet even before the 15-minute voting period expired on the House floor. For 25 minutes, uncertainty gripped the nation as television showed party leaders trying, and failing, to muster more support. Finally, Representative Ellen Tauscher, Democrat of California, pounded the gavel and it was done.
In the end, only 65 Republicans, just one-third of those voting, backed the plan despite personal pleas from President George W. Bush and encouragement from their presidential nominee, Senator John McCain. By contrast, 140 Democrats, or 60 percent, voted in favor, many after voicing grave misgivings. Their nominee, Senator Barack Obama, also backed the bill.
By the end of day, the Dow had fallen almost 778 points, or nearly 7 percent, to 10,365. Credit markets also remained distressed, with bank lending rates rising and investors fleeing to the safety of Treasury bills.
Among opponents of the rescue plan, some Republicans cited ideological objections to government intervention, and liberal Democrats said they were of no mind to race to aid Wall Street tycoons. Other critics complained about haste and secrecy in assembling the plan.
But lawmakers on both sides pointed to an outpouring of opposition from deeply hostile constituents just five weeks before every seat in the House was up for election as a fundamental reason that the measure was defeated. House members in potentially tough races and those seeking Senate seats fled from the plan in droves.
"People's re-elections played into this to a much greater degree than I would have imagined," said Representative Deborah Pryce of Ohio, a former member of the Republican leadership who is retiring this year and voted for the plan.
Congressional leaders in both parties said they did not know how they would proceed but were examining options, including having the Senate, where there was more support for the bailout, advance a bill after the Jewish New Year on Tuesday. Congressional leaders said any doubt about the need for action should have been removed by the market fall.
"We're not leaving town till we get it fixed," said Senator Mitch McConnell of Kentucky, the Republican leader.
At the White House, Bush met with his economic advisers as well as the Federal Reserve chairman, Ben Bernanke, to discuss next steps. "I was disappointed in the vote," Bush said, appearing in the Oval Office with President Viktor Yushchenko of Ukraine. "Our strategy is to continue to address this economic situation head on."
The Treasury secretary, Henry Paulson Jr., who was the main architect of the financial rescue plan, said he would continue to work with congressional leaders "to find a way forward to pass a comprehensive plan to stabilize our financial system and protect the American people." He added, "This is much too important to simply let fail."
McCain and Obama renewed their calls for swift action, though each campaign sought to partly blame the other for the defeat.
At the Capitol, Democrats accused Republicans of failing to deliver enough number of votes. "Sixty-seven percent of the Republican Conference decided to put political ideology ahead of the best interest of our great nation," the Democratic whip, Representative James Clyburn of South Carolina, said after the vote.
Representative Roy Blunt of Missouri, the Republican whip, said that before the vote he had tallied 75 votes in his conference in favor of the plan. By the time the votes were cast, the Republicans could deliver only 65 of them.
Other top Republicans pointed at what they saw as a partisan speech by Speaker Nancy Pelosi in advance of the vote as a factor, a charge Democrats derided.
Republicans said they had alerted Democrats they might not have the numbers required. But they never recommended the legislation be put off and in the end they were unable to win any last-second converts to change the votes that would have been necessary to turn defeat into victory.
Representative John Boehner of Ohio, the House Republican leader, said he tried repeatedly and unsuccessfully to sway a handful of holdouts, but eventually gave up.
"You can't break their arms, you can't put your whole relationship on the line with them and ask them to do something they do not want to do and have that member regret that vote for the rest of their life," said Boehner, who said he could not remember a time when the muscle of both parties and the White House failed to produce a victory.
The outcome after a slightly more than 40-minute vote on the House floor left lawmakers almost speechless. Even the strongest opponents of the measure did not expect to prevail, and the leadership of both parties, while increasingly nervous, figured they would squeak out a victory despite a parade of Republicans and Democrats to microphones to assail the measure. At the White House, the deputy press secretary, Tony Fratto, said just before the vote: "We're confident that it will pass."
Under the proposal, the Treasury Department could tap up to $700 billion in taxpayer money in installments to buy troubled debt from financial firms, in the hopes of freeing up credit to fuel normal economic activity.
In the final stages of negotiations, new provisions intended to recoup taxpayer losses were added. They helped the measure win support from Boehner and some other House Republican leaders, who had strongly opposed an earlier version of the bill. But they did not put the package over the top.
In impassioned speeches on the House floor, Democrats and Republicans alike vented their frustration over the nation's perilous economic condition and the uncomfortable position they were in, facing pressure to approve an unpopular bailout package during an election year, with no guarantee that it would work.
"This is a huge cow patty with a piece of marshmallow stuck in the middle of it and I am not going to eat that cow patty," said Representative Paul Broun, Republican of Georgia.
"Nobody wants to do this," said Representative Edward Markey, Democrat of Massachusetts, who nonetheless voted for it. "Nobody wants to clean up the mess created by Wall Street recklessness."
In the speech that Republicans said infuriated them, Pelosi accused Bush of squandering the budget surpluses of the Clinton years. "They claim to be free-market advocates, when it's really an anything-goes mentality," she said. "No supervision. No discipline. And if you fail, you will have a golden parachute and the taxpayer will bail you out."
Democrats later said that if her speech truly cost votes, then Republicans, in the words of Representative Barney Frank, Democrat of Massachusetts, were guilty of punishing the country because Pelosi had hurt their feelings.
As the voting time expired on the floor, party leaders realized they were coming up far short. At 1:49 p.m., it was 205 for and 228 against. At 1:54 p.m., they inched closer: 207 to 226, as some representatives changed their votes. What followed was a remarkable stalemate on the House floor, with top lieutenants in both parties clutching lists of votes, as they clustered in the well and made unusual forays into what is normally enemy territory across the aisle.
"I was asking where the hell their votes were," said Representative Rahm Emanuel of Illinois, the No. 4 Democrat.
Blunt said he told Democrats he thought he could flip five votes, if Democrats could do the same. Democrats had warned that the Republicans that they would need to produce 80 to 100 votes to adopt an unpopular plan championed by the Republican White House. Ultimately, the Democrats decided the votes were not there and they allowed the gavel to come down. Opponents of the measure said they expected the administration and congressional leaders to try again on a rescue proposal and were not worried about being held responsible for the stock decline or other economic uncertainty.
"I think we will be back in a couple of days with a proposal more palatable to more members," said Representative John Yarmuth, a Kentucky Democrat who voted against the plan. "You don't make the biggest financial decision in the history of this country in a few days' time without hearings."
But Representative Tom Davis, a Virginia Republican who is retiring from Congress and who backed the proposal, said those who opposed to the measure might be hearing a different message from their voters if economic conditions worsen. "The members who voted no will have some culpability," he said.
The House leadership said Monday night that the House would reconvene at noon Thursday, though it was not known if another economic plan would be on the table.
"Stay tuned," said Pelosi, who seemed physically drained. But she added: "What happened today cannot stand. We must move forward, and I hope that the markets will take that message."
Representative Greg Walden, an Oregon Republican who supported the bailout, said lawmakers may quickly discover "whether this is as dire a situation as we were told."
"This is playing with fire," Walden said. "It's very, very dangerous."
Fitting the facts to the story
It's a pleasure to read a master stylist like Garrison Keillor ("Where were the cops?" Sept. 25, 2008) expressing well the outrage of many about the financial market bailout.
But surely substance matters. Much of Keillor's article appears aimed at tarring and feathering John McCain, in the act of collecting "all the things we don't like," "all the people we don't like" and connecting as many dots in-between as possible, whether they fit facts or not.
So Keillor writes, "The Republican Party ... was taken over by crooked preachers who demand Americans trust them because they're packing a Bible and God sent them on a mission to enact lower taxes, less government."
But weren't there Bible-thumpers and God-fearing legislators among "true conservatives" who rebelled Thursday night? So what does one thing in the end have to do with the other?
Cliff Tan, Stanford, California
Crisis reaches European institutions
FRANKFURT: The turmoil that has rocked the U.S. banking system spread to Europe on Monday, buffeting institutions in at least four countries with a chain of new failures. The U.S. Federal Reserve and the European Central Bank weighed in later in the day, intensifying their efforts to loosen up drum-tight credit markets that could eventually put a brake on the overall economies.
The Fed more than doubled its pool of cash to inject into the financial system - known as currency swap lines - to $620 billion.
Yet official efforts to stem the crisis had little of the desired confidence-boosting effect on markets, despite an apparent effort to demonstrate that governments are putting a floor underneath them.
"It looks as though they are trying to make particularly significant statements by making the numbers as high as possible," said Simon Adamson, a banking analyst with CreditSights in London. "But it may be that the market is becoming inured to these kinds of numbers."
Instead, the day resembled a frenzied search for the next victim.
Belgium, the Netherlands and Luxembourg coughed up 11.2 billion, or $16.2 billion, to rescue the retail bank Fortis. The British Treasury said it had seized the lender Bradford & Bingley, after no private buyer emerged. Germany and its banks promised 30 billion to save Hypo Real Estate, a commercial property lender.
Wachovia, an American retail and mortgage lender, sought safety in a sale to Citigroup, but markets then turned on National City Bank, a regional lender based in Cleveland.
In Europe, investors pounded the shares of Commerzbank, a German bank with operations that resemble those of Hypo Real Estate, while Royal Bank of Scotland suffered because it was part of a banking consortium with Fortis that bought ABN AMRO last year. Dexia, a French-Belgian bank that lends heavily to municipalities, plunged on rumors of an impending capital increase.
The race to find affordable credit also sank Glitnir Bank of Iceland, which sold a 75 percent stake to its government. The bank said that the past two weeks - since the bankruptcy of Lehman Brothers - had raised the cost of short-term funding to unbearable levels.
The latest turn of events also dealt a blow to bank executives and politicians who had ventured the occasional comment in recent months that the worst was over for Europe. Peer Steinbrück, the German finance minister, crowed last week about the end of U.S. dominance in finance, and the validation of Germany's more conservative banking system.
That may still be true, but European officials left little doubt Monday that they were unnerved as credit markets pummeled institutions that betrayed even a whiff of weakness.
"I can only hope that confidence will come back," said Jean-Claude Juncker, finance minister of Luxembourg, "and that this casino game that's going on independently from the good fundamentals stops."
The ECB, which has stepped in repeatedly to ensure adequate overnight cash for banks, went even further Monday. It granted banks in the 15-nation euro area a 150 billion loan for 30 days and promised more to head off the end-of-the-year cash squeeze that is normal in good times, and will probably be intense this year.
But systemic bailout along the lines of what the U.S. Treasury secretary, Henry Paulson Jr., proposed to Congress still seems unlikely in Continental Europe, analysts said. The rush toward the U.S. plan was underpinned by a housing market that shows few signs of recovery, a fact that gives experts confidence that case-by-case rescues can do the job in Europe.
"It's completely unnecessary to do a Paulson-style plan in Europe," said Sylvester Eijffinger, a professor of European financial economics at Tilburg University in the Netherlands. "These are isolated problems."
The exception may turn out to be Britain, analysts said, where a housing crisis similar to the one in the United States is feeding the banking crisis.
Bradford & Bingley lost it all because it gave mortgages to landlords who used rental income to repay the loans. But a British economy that is poised for a painful recession on the back of a near-dead real estate market proved a merciless environment for the six-year-old lender.
The main source of nervousness in financial markets is still the United States.
But since some European banks were no strangers to the global borrowing binge, they are finding no relief from the jarring and persistent tightening of credit.
On Monday, executives pinned the demise of Fortis squarely on its involvement in a bid for ABN AMRO. Fortis paid €24 billion as part of the consortium that took over ABN AMRO, and will now sell its part of that bank, a Dutch retail business, to recapitalize itself.
Filip Dierckx, who recently became chief executive at Fortis, pinned cruel turn of events Monday squarely on the borrowing Fortis did to be part of that record-breaking deal.
"If you look at some of the decisions that were taken in the past, then you can say that probably they were done at the wrong moment," Dierckx said. "If you want me to say that some of the decisions were not the best, I will indeed confirm that."
But growing doubts about Europe's macroeconomic direction amplified a rising sense of unease on a Continent accustomed to regarding the financial crisis as a primarily U.S. problem.
A survey published by the European Commission showed business and consumer confidence in September - even before the latest financial turmoil - dipped almost to the level it registered after the Sept. 11, 2001, terrorist attacks.
Many economists now expect the economy of the 15-nation euro area to contract in the third quarter, the second three-month period in a row, which is a common definition of recession.
That would also be a setback for the optimists, the ECB among them, who forecast the economy would bounce back strongly and shrug off rising credit market turmoil.
"The problem now is that the recovery looks like it's going to be very slow," said Aurelio Maccario, chief euro zone economist at UniCredit in Milan. "The financial crisis is taking a huge toll on that process in Europe."
The ECB is expected to leave its key interest rate on hold at 4.25 percent when it meets Thursday, and most analysts are still leery about predicting a quick cut in borrowing costs. The bank is still focused strongly on inflation, which is running near double its target of 2 percent.
Hedge funds are bracing for investors to cash out
First, the money rushed into hedge funds. Now, some fear, it could rush out.
Even as Washington reached a tentative agreement on Sunday over what may become the largest financial bailout in American history, new worries were building inside the nearly $2 trillion world of hedge funds. After years of explosive growth, losses are mounting and so are concerns that some investors will head for the exits.
No one expects a wholesale flight from hedge funds. But even a modest outflow could reverberate through the financial markets. To pay back investors, some funds may be forced to dump investments at a time when the markets are already shaky.
The big worry is that a spate of hurried sales could unleash a vicious circle within the hedge fund industry, with the sales leading to more losses, and those losses leading to more withdrawals, and so on. A big test will come on Tuesday, when many funds are scheduled to accept withdrawal requests for the end of the year.
"Everybody's watching for redemptions," said James McKee, director of hedge fund research at Callan Associates, a consulting firm in San Francisco. "And there could be a cascading effect, where redemptions cause other redemptions."
What happens at hedge funds, those loosely regulated private investment vehicles, matters to just about every investor in America. Hedge funds are not just for the rich anymore. Since 2002, the industry has roughly tripled in size, as pension funds, endowments and foundations piled in, hoping for market-beating returns.
Now, the heady returns of the industry's glory days are over, at least for now. This is shaping up to be the industry's worst year on record, with the average fund down nearly 10 percent so far, according to Hedge Fund Research. Famous traders like Steven Cohen, who runs SAC Capital Advisors, are losing money, and even Kenneth Griffin, the head of Citadel Investment Group, is down in one of his funds.
And they are the lucky ones. A growing number of hedge funds are closing down. About 350 were liquidated in the first half of the year. While hedge funds come and go all the time, if the trend continues, the number of closures would be up 24 percent this year from 2007.
Many funds are bracing for trouble. The industry has set aside $600 billion in cash, according to Citigroup analysts, partly because of the uncertainty hanging over the markets but also because of possible redemptions. If redemptions do pour in, hedge funds can freeze the process by not paying investors for a certain period of time, slowing the pace of withdrawals.
One little-known hedge fund barometer is pointing to trouble, however. The alphabet soup of complex investments that Wall Street created in recent years RMBS's, CDO's and the like includes CFO's, short for collateralized fund obligations. Virtually unknown outside the industry, these investments are the hedge fund equivalent of mortgage-backed securities: securities backed by hedge funds.
But last week, credit ratings agencies warned that they might lower the ratings of several CFO's, in part because of the concern that investors would withdraw money from the funds backing the investments. Standard & Poor's downgraded parts of nine CFO deals, Fitch placed five on a negative rating watch, and Moody's put one on a downgrade review.
"The concern is over the redemptions that are happening," said Jenny Story, an analyst with Fitch Ratings. "The gates are being closed."
While few in number, CFO's represent a broad swath of the industry. The vehicles were created by funds of funds, which invest in hedge funds. Each CFO includes stakes in dozens and sometimes hundreds of hedge funds with a variety of investment strategies.
Coast Asset Management, a $5.6 billion fund of funds in Santa Monica, California, created three CFO's in the last few years. The three vehicles raised a total of $1.85 billion, according to Dealogic, and they have a seven-year lock-up on the money. It was that lock-up that appealed to David Smith, the firm's chief executive, who ran into trouble borrowing in 1998, after the collapse of the giant hedge fund Long Term Capital Management.
Coast executives said they were not particularly concerned about the CFO's, because they had not seen many hedge funds putting limits on redemptions, or "closing the gates," as the industry calls it.
"It's clearly been a very tough year for investors in general," Smith said. "But I think hedge funds have done a good job of navigating very tough markets and don't get the type of recognition that they should."
Two of the CFO's put on watch or downgraded by the ratings agencies are run by two units of the British hedge fund Man Group. One is run by Glenwood Capital in Chicago, which saw its multi-strategy fund lose more than 4 percent through July, according to an investor. A spokesman for the funds declined to comment.
Returns are not in yet for September, but hedge fund managers say this month is even worse than the summer. Some funds were hurt by new rules from the Securities and Exchange Commission on short-selling, a tactic for betting against stock prices. The commission made it more difficult to short all stocks and temporarily banned the strategy in more than 800 financial stocks. In particular, this hurt convertible-bond managers, who often buy bonds that can be converted into shares and short the underlying stocks.
The short-selling ban lasts until Thursday evening, but it is widely expected to be extended.
John Rigas, the chief executive of Sciens Capital Management, knows firsthand how difficult it can be to get money out of troubled hedge funds. He spotted problems at Amaranth Advisors a year before that fund collapsed because of wrong-way bets in the energy markets, but it took him eight months to retrieve all of his fund of funds' investment. Rigas' firm runs a CFO that is invested in 41 hedge funds, but he said he had put more than 25 percent of his funds' capital into cash to weather the storm.
He predicts further liquidations in the industry.
"How can I say that the environment is not bad?" Rigas said. "It's difficult with hedge funds because they are very fragile. By their nature they're fragile instruments because investors can ask for their money."
Philip Bowring: Lessons from Asia's crash
HONG KONG: Asian markets have been so transfixed by the bailout saga in Washington that the issue of what regional governments can do jointly and severally to help themselves has been mostly neglected. Stock markets in Asia have fallen faster than in the West, despite relatively good economic conditions, and currencies have fallen despite strong external balances.
In short, Asia badly needs to gain some self-confidence and stop staring motionless like a rabbit caught in America's headlights.
The $700 billion package should alleviate short-term conditions in financial markets, but the long-term impact for the United States now seems likely to resemble the long, drawn out Japanese recovery from its asset price bust in the early 1990s than the very dramatic but quite short downturn that most of East Asia experienced in 1997-99. Back then, depositors were protected but public money bailouts for equity investors and bankers were scarce.
America's $700 billion bailout may simply be pushing a drowning man into shallower water. Or it may just be a swap of private debt for U.S. public debt. Either way, the U.S. situation presents an open, trade-dependent Asia with challenges that will test its ability to cooperate in providing the same sort of counter to current Western weakness that Western strength provided to the global economy at the time of the Asian crisis.
But Asia needs to beware of confusing economic liberalism with the kind of casino gambling indulged in by U.S. investment banks such as Goldman Sachs under Henry Paulson's leadership. In the West there is already a rising tide of opinion that fails to distinguish between anything-goes financial activity and sound liberal economics based on free trade and private ownership.
Because the United States, both in trade talks and through its once powerful financial companies, pushed the two without much distinction, there is now a danger of reaction against both.
A decade ago, Asia accomplished a return to financial sector discipline after the excesses that led to the crisis without turning its back on freer trade and generally light regulation of capital flows.
However, it might now turn against global free trade if policies prove inadequate to offset the sharp and perhaps prolonged falls in demand from the United States that are inevitable as consumption and asset values fall after years of excess.
The present crisis in the United States has been long in the making, so Asians must think in terms of years as they adapt to U.S. re-balancing. That means those countries with large current account surpluses - China, Japan, Malaysia and Taiwan - as well as those with large reserves and an ability to borrow - South Korea, Thailand and others - need to stimulate their domestic economies.
Asia must discard the mindset created by the Asian crisis - the obsession with trade surpluses and ever-increasing reserves of dollars.
Since that crisis, regional central banks have established cooperative swap arrangements to defend their currencies against speculative attack. Those now need to be seen not as a defensive weapon but a way to encourage economic growth by mutual acceptance of one anothers' local currency government bonds. That could help both offset the decline in global liquidity growth that will follow from falling U.S. demand, and encourage the smaller countries in particular to follow less-restrictive fiscal policies.
Claims of East Asian cooperation should be treated as empty rhetoric if, faced with the sudden ending of the U.S. import bonanza, Asean plus China, Japan and Korea do not even try to take coordinated steps to stimulate regional demand.
These countries, all with large reserves, should also use this opportunity to demand a bigger say at the IMF in preparation for the day in the not-too-distant future when there will be a shortage of global liquidity, as measured by foreign exchange reserves, rather than the excess created by U.S. deficits in recent years.
Asians should show also show more forceful backing for revival of the Doha Round of World Trade Organization talks. Asia can be sure that neither the United States nor the European Union will be carrying the global free trade banner in the immediate future. Asia, which has benefited so much from liberal trade, should seize it.
Yet there is a real danger that the WTO will be neglected and Asia will focus on bilateral agreements that at best are meaningless and at worst create complex preferential systems which are new barriers to trade.
In short, though the financial sector disaster in the United States has large and immediate global impact, it need not be fatal for liberal economic policies. Asia may well hold the key to whether this is merely the correction of an over-extended Western-based financial sector, or a turning point away from globalization in general
Bob Herbert: Palin's words raise red flags
NEW YORK: America is understandably focused on the financial crisis. But there is another serious issue in front of us that is not getting nearly enough attention, and that's whether Sarah Palin is qualified to be vice president - or, if the situation were to arise, president of the United States.
History has shown again and again that a vice president must be ready to assume command of the ship of state on a moment's notice. But Palin has given no indication yet that she is capable of handling the monumental responsibilities of the presidency if she were called upon to do so.
In fact, the opposite is the case. We know that there are some parts of Alaska from which, if the day is clear and your eyesight is good, you can actually see Russia. But the infantile repetition of this bit of trivia as some kind of foreign policy bona fide for a vice presidential candidate should give us pause.
The McCain campaign has done its bizarre best to shield Palin from any sustained media examination of her readiness for the highest offices in the land, and no wonder. She has been an embarrassment in interviews.
But the idea that the voters of the United States might install someone in the vice president's office who is too unprepared or too intellectually insecure to appear on, say, "Meet the Press" or "Face the Nation" is mind-boggling.
The alarm bells should be clanging and warning lights flashing. You wouldn't put an unqualified pilot in the cockpit of a jetliner. The potential for catastrophe is far, far greater with an unqualified president.
The United States has been lucky in terms of the qualifications of the vice presidents who have had to step in over the last several decades for presidents who either died or, in Richard Nixon's case, were forced to leave office. Harry Truman and Lyndon Johnson became extraordinary presidents in their own right. Gerald Ford successfully guided the nation through the immediate aftermath of one of the most traumatic political crises in its history.
For those who think Palin is in that league, there is no problem. But her unscripted public appearances would lead most honest observers to think otherwise. When asked again last week about her puerile linkage of foreign policy proficiency and Alaska's proximity to Russia, this time by Katie Couric of CBS News, here is what Palin said she meant:
"That Alaska has a very narrow maritime border between a foreign country, Russia, and on our other side, the land - boundary that we have with - Canada."
She went on, but lost her way midsentence: "It's funny that a comment like that was kind of made to - cari - I don't know, you know? Reporters ..."
Couric said, "Mocked?"
"Yeah, mocked," said Palin. "I guess that's the word. Yeah."
It is not just painful, but frightening to watch someone who could become the vice president of the United States stumbling around like this in an interview.
Couric asked Palin to explain how Alaska's proximity to Russia "enhances your foreign policy credentials."
"Well, it certainly does," Palin replied, "because our, our next-door neighbors are foreign countries, there in the state that I am the executive of. And there-"
Gently interrupting, Couric asked, "Have you ever been involved in any negotiations, for example, with the Russians?"
"We have trade missions back and forth," said Palin. "We do. It's very important when you consider even national security issues with Russia. As Putin rears his head and comes into the airspace of the United States of America, where do they go? It's Alaska. It's just right over the border. It is from Alaska that we send those out to make sure that an eye is being kept on this very powerful nation, Russia, because they are right there. They are right next to our state."
It was surreal, the kind of performance that would generate a hearty laugh if it were part of a Monty Python sketch. But this is real life, and the stakes couldn't be higher. As Palin was fumbling her way through the Couric interview, the largest bank failure in the history of the United States, the collapse of Washington Mutual, was occurring.
The press has an obligation to hammer away at Palin's qualifications. If it turns out that she has just had a few bad interviews because she was nervous or whatever, additional scrutiny will serve her well.
If, on the other hand, it becomes clear that her performance, so far, is an accurate reflection of her qualifications, it would behoove John McCain and the Republican Party to put the country first - as McCain loves to say - and find a replacement for Palin on the ticket.
William Kristol: How McCain wins
John McCain is on course to lose the presidential election to Barack Obama. Can he turn it around, and surge to victory?
He has a chance. But only if he overrules those of his aides who are trapped by conventional wisdom, huddled in a defensive crouch and overcome by ideological timidity.
The conventional wisdom is that it was a mistake for McCain to come back to Washington last week to engage in the attempt to craft the financial rescue legislation, and that McCain has to move on to a new topic as quickly as possible. As one McCain adviser told The Washington Post, "you've got to get it [the financial crisis] over with and start having a normal campaign." Wrong.
McCain's impetuous decision to go to Washington last week was right. The agreement announced early Sunday morning is better than Treasury secretary Henry Paulson's original proposal, and better than the deal the Democrats claimed was close on Thursday. Assuming the legislation passes soon, and assuming it reassures financial markets, McCain will be able to take some credit.
But the goal shouldn't be to return to "a normal campaign." For these aren't normal times.
We Americans face a real financial crisis. Usually the candidate of the incumbent's party minimizes the severity of the nation's problems. McCain should break the mold and acknowledge, even emphasize the crisis. He can explain that dealing with it requires candor and leadership of the sort he's shown in his career. McCain can tell voters we're almost certainly in a recession, and things will likely get worse before they get better.
And McCain can note that the financial crisis isn't going to be solved by any one piece of legislation. There are serious economists, for example, who think we could be on the verge of a huge bank run. Congress may have to act to authorize the FDIC to provide far greater deposit insurance, and the secretary of the Treasury to protect money market funds. McCain can call for Congress to stand ready to pass such legislation. He can say more generally that in the tough times ahead, we'll need a tough president willing to make tough decisions.
With respect to his campaign, McCain needs to liberate his running mate from the former Bush aides brought in to handle her - aides who seem to have succeeded in importing to the Palin campaign the trademark defensive crouch of the Bush White House. McCain picked Sarah Palin in part because she's a talented politician and communicator. He needs to free her to use her political talents and to communicate in her own voice.
I'm told McCain recently expressed unhappiness with his staff's handling of Palin. On Sunday he dispatched his top aides Steve Schmidt and Rick Davis to join Palin in Philadelphia. They're supposed to liberate Palin to go on the offensive as a combative conservative in the vice-presidential debate on Thursday.
That debate is important. McCain took a risk in choosing Palin. If she does poorly, it will reflect badly on his judgment. If she does well, it will be a shot in the arm for his campaign.
In the debate, Palin has to dispatch quickly any queries about herself, and confidently assert that of course she's qualified to be vice president. She should spend her time making the case for McCain and, more important, the case against Obama. As one shrewd McCain supporter told me, "Every minute she spends not telling the American people something that makes them less well disposed to Obama is a minute wasted."
The core case against Obama is pretty simple: He's too liberal. A few months ago I asked one of McCain's aides what aspect of Obama's liberalism they thought they could most effectively exploit. He looked at me as if I were a simpleton, and patiently explained that talking about "conservatism" and "liberalism" was so old-fashioned.
Maybe. But the fact is the only Democrats to win the presidency in the past 40 years - Jimmy Carter and Bill Clinton - distanced themselves from liberal orthodoxy. Obama is, by contrast, a garden-variety liberal. He also has radical associates in his past.
The most famous of these is the Reverend Jeremiah Wright, and I wonder if Obama may have inadvertently set the stage for the McCain team to reintroduce him to the American public. On Saturday, Obama criticized McCain for never using in the debate Friday night the words "middle class." The Obama campaign even released an advertisement trumpeting McCain's omission.
The McCain campaign might consider responding by calling attention to Chapter 14 of Obama's eloquent memoir, "Dreams From My Father." There Obama quotes from the brochure of Wright's church - a passage entitled, "A Disavowal of the Pursuit of Middleclassness."
So when Biden goes on about the middle class on Thursday, Palin might ask Biden when Obama flip-flopped on Middleclassness.
THE LOST TYCOONS
Wall Street's slow demise
By Ron Chernow
With breathtaking speed, the world of large Wall Street investment banks has vanished. Fabled firms, some more than a century old, have been merged out of existence (Bear Stearns, Merrill Lynch), gone bankrupt (Lehman Brothers), or sought asylum as commercial bank holding companies (Goldman Sachs, Morgan Stanley). Why on earth did this happen?
The death of Wall Street has been a long-running, slow-motion crisis, barely discernible to participants who had still booked huge profits in recent years. Beneath the razzle-dazzle of trading desks and the wizardry of esoteric finance lay the inescapable fact that these firms had shed their original reason for being: providing capital to U.S. business.
The dynastic power exercised by Wall Street tycoons in the late 19th and early 20th centuries was premised on scarce capital. Only a handful of European countries and their private bankers had surplus capital to finance overseas development. In this cash-poor world, J. Pierpont Morgan and other grandees exerted godlike powers over U.S. railroads and manufacturers because they straddled the indispensable capital flows from Europe. With their top hats and thick cigars, these portly tycoons scarcely qualified as altruists. As Morgan liked to warn sentimental souls, "I am not in Wall Street for my health." Yet he and his ilk rendered America an invaluable service by reassuring European investors that they would receive an adequate return on their investments, securing an uninterrupted flow of capital.
To safeguard those returns, old-line investment bankers became all-powerful overlords of their exclusive clients. When they issued company shares, they retained a large block for themselves. Some clients chafed at these gilded shackles, while others gloried in their servitude. As the head of the New Haven railroad, a Morgan client, boasted to reporters, "I wear the Morgan collar, but I am proud of it. If Mr. Morgan were to order me tomorrow to China or Siberia in his interests, I would pack up and go."
In the sunless maze of Lower Manhattan, the old Wall Street houses were miniature temples of finance. Elite, all-male and lily-white, rife with snobbery and bigotry, they didn't bother to hang a shingle outside, and the tacit message to pedestrians was clear: Keep on walking. This reflected the banks' patented formula of serving only the most creditworthy clients: industrialized nations, blue-chip corporations and wealthy individuals.
In London, these small partnerships were called "issuing houses" because they issued stocks and bonds but didn't trade or distribute them. In their risk-averse culture, J.P. Morgan and his breed considered the stock market a faintly vulgar place, better left to Jews and assorted ethnic groups outside the top ranks of investment houses. This bias would later give predominantly Jewish firms like Lehman Brothers and Goldman Sachs a marked competitive edge. Even in the 1920s, patrician Wall Street firms stayed somewhat aloof from the stock market mania.
Laws during the New Deal, mandating fuller disclosure of corporate accounting, eroded the Wall Street moguls' power. The new transparency reduced the need of many companies for a banker's imprimatur to certify their soundness. The Glass-Steagall Act of 1933, which forced full-service banks to choose between commercial and investment banking, further shrank the investment houses' influence.
After World War II, as capital markets revived, investment banks remained tiny partnerships with outsize power. Morgan Stanley demanded exclusive banking relations with the cream of corporate America: AT&T, General Motors, U.S. Steel, General Electric, DuPont, IBM and Standard Oil of New Jersey. The essence of the business was still the traditional underwriting of stocks and bonds. The era's emblem was the solemn, rectangular "tombstone" ad in newspapers for share offerings, listing the dozens of firms involved, with Wall Street's rulers in the top tier.
Underwriting bred a sociable culture of "relationship" banking in which a smooth golf swing, Ivy League credentials, glib patter over a martini and family connections counted for more than financial ingenuity. Firms didn't advertise, and paid publicists to keep them out of the press. They disdained hostile takeovers, stock trading and other activities that might threaten their coveted underwriting business. And they enforced more rules of etiquette than a debutante's ball. It was considered bad form to poach an employee or raid another firm's client. Whatever their flaws, these elite firms still played a vital role in the economy, floating stocks and bonds to create new factories and businesses.
The old Wall Street began to die a lingering death in 1979 when IBM told Morgan Stanley that it wanted to have Salomon Brothers co-manage a $1 billion debt issue. Fearing that its stable of captive clients would likewise revolt, Morgan partners insisted on sole management of the issue. They were flabbergasted when IBM sent back word that Salomon Brothers would be lead manager for the issue.
What accounted for this startling shift? For the first time since the heyday of J.P. Morgan, traditional corporate clients had outgrown their bankers. With Europe and Japan devastated by World War II, U.S. companies had enjoyed unrivaled supremacy in world markets.
They had grown big enough to finance expansion from retained earnings and had many more borrowing options than before. Many had developed their own financial subsidiaries with triple-A credit ratings and scarcely needed Wall Street bankers to vouch for their solvency.
Trading firms like Salomon Brothers and Goldman Sachs were using their prowess to cultivate relations with powerful institutional investors like pension funds and insurance companies, eating into the profits of white-shoe houses. Underwriting deteriorated into a low-margin business as traders trumped blue-blooded bankers in the Darwinian struggle.
The demise of traditional underwriting would create in the coming decades a vacuum filled by a host of volatile, risky businesses. The cozy world of relationship banking yielded to the brutal world of "transactional" banking. Stock, commodity and derivatives trading, hostile takeovers, leveraged buyouts and prime brokerage for hedge funds required ever-larger balance sheets, forcing investment houses to become huge, publicly traded companies. Firms that once remained distant from the stock market were now its storm-tossed creatures, as investors demanded ever-higher profits amid cutthroat competition, forcing bankers to take risks that would have horrified their Wall Street ancestors.
Where the old Wall Street stuck to the most prestigious clients, the new Wall Street engaged in an unseemly rush to the bottom. Investment houses that once dealt only in grade-A bonds became swept up in junk bond mania in the 1980s. Firms that once snubbed companies beyond the Fortune 500 flocked to Silicon Valley in the 1990s, eager to take fly-by-night companies public. And, in the final reductio ad absurdum, Wall Street during the past decade gorged on mortgage-backed securities, tying its fate to America's least creditworthy borrowers. Addicted to colossal amounts of leverage, the onetime arbiter of scarce capital had become the most profligate borrower.
The large investment banks that once allocated precious capital now exist in a world awash with money, crisscrossed by capital flows from many continents, with financial markets deep and liquid as never before. Once the current crisis is past, investment banking services will eventually flourish again inside diversified financial conglomerates. Stripped of excess leverage and more tightly supervised by regulators, investment bankers may even rediscover the old-fashioned virtues of corporate finance. And small boutique firms will continue to offer trusted advice as of old. But the storied investment houses of Wall Street, trailing their glorious past, have now earned tombstone ads of a very different sort.
Ron Chernow is the author of "The House of Morgan" and "Alexander Hamilton."
U.S. authorities investigating Fannie and Freddie
WASHINGTON: Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the U.S. government, said Monday they have received federal grand jury subpoenas and said they are the subject of an inquiry by the Securities and Exchange Commission.
The subpoenas request documents related to accounting, disclosure and corporate governance, Fannie and Freddie said in separate statements. Freddie said the investigation seeks papers dating back to Jan. 1, 2007.
Fannie and Freddie are among 26 companies being investigated by the Federal Bureau of Investigation for possible accounting misstatements in a probe of the subprime-mortgage market collapse, a senior law-enforcement official said this month. Federal agencies have come under pressure by lawmakers to hold companies responsible for the loan crisis that rocked Wall Street and led to the biggest housing slump since the 1930s.
The Treasury Department and Federal Housing Finance Agency on Sept. 7 put the government-sponsored enterprises back under federal control for the first time in about 40 years after their $14.9 billion in net losses threatened to further disrupt the housing market.
Fannie and Freddie said they were notified on Sept. 26 that the U.S. Attorney for the Southern District of New York and SEC were seeking documents. Both companies said they will cooperate.
Rebekah Carmichael, a spokeswoman for U.S. Attorney Michael Garcia in New York, declined to comment. FBI spokesman Jim Margolin didn't immediately return a call. SEC spokesman John Nester declined to comment.
Fannie and Freddie, created by Congress to raise homeownership, own or guarantee at least 42 percent of the $12 trillion in U.S. residential-mortgage debt outstanding. They make money by buying home loans and mortgage securities, profiting on the difference between their cost of borrowing and the yield on the debt. They also guarantee and package loans as securities.
The companies are operating under a conservatorship in which the Treasury committed to invest as much as $200 billion in preferred stock and extend credit through 2009 to prevent a collapse of Fannie and Freddie, protecting investors owning more than $5 trillion of their debt and mortgage-backed securities.
Wall Street seeks signs of response in markets
Washington hopes its sweeping bailout plan will get credit flowing again.
But will it work on Wall Street?
That is the $700 billion question swirling around the biggest financial bailout in American history. The first answer will come on Monday from the credit markets, where this crisis has unfolded for more than a year now.
As details of the plan trickled out on Sunday, few economists saw the rescue as a quick fix. Even if the frozen credit markets thaw a bit and many analysts say they will the good old days of easy money are over for now. The stock market, which has lost about 17 percent this year, is bound to remain volatile. To many, a recession seems unavoidable.
The first big question, however, is whether some semblance of calm will return to the credit markets. If the plan works as hoped, market interest rates that have been stuck at unusually high levels should start to ease.
If that happens, banks and corporations would be able to borrow money at lower rates than they have in recent weeks, said Mark Zandi, chief economist and founder of Moody's Economy.com. Since Lehman Brothers sank into bankruptcy, rates on short-term corporate i.o.u.'s have shot up. Investors have shunned all but the safest of investments, like Treasury bills and notes. Last week, prices of two-year Treasury notes rose for a fifth straight week, a run that has reduced their yield by about a third of a percentage point.
"The most important thing is to see money markets normalize," said Zandi, who has advised the presidential campaign of Senator John McCain, Republican of Arizona. "If banks start lending to each other that would be a very positive sign and that would be key."
Many borrowers are being penalized in the bond markets, if they can borrow money at all. Credit spreads the premium investors demand to lend money to everybody but the U.S. government need to fall, said Jerry Webman, chief economist and senior investment officer for OppenheimerFunds. Last week, in a rare reversal that occurs only in times of extreme stress in the credit markets, tax-free municipal bonds were yielding more than Treasuries, which are not tax exempt.
Many municipal and corporate borrowers were unable to borrow money in the credit markets last week. Webman said the economy could suffer if those tight conditions persist.
"Credit is man's confidence in man," Webman said. "That confidence in the financial system needs to increase."
Analysts said the market would be watching closely how the Treasury Department structured its planned purchases of troubled assets from financial firms. The government has suggested it might use auctions to establish prices for the securities and loans it plans to acquire. Zandi said the Treasury should disclose more details in the next several weeks and conduct its first auctions soon after the presidential elections.
Once investors have a better sense of what the troubled assets are worth, they will become more willing to invest in ailing financial firms that have not been able to raise capital because analysts fear they have not fully disclosed the quality of their assets.
"We need to get clarity with respects to which institutions need to write down their assets and which institutions are well-capitalized," Zandi said. "That would provide solace to investors who would then provide capital to the system."
Furthermore, once financial firms have raised more capital, a crucial test will be whether they plow that new money back into the market through loans and investments in businesses, said Webman. If banks remain fearful and hoard cash instead, as they have done in recent months, the rescue effort will only have a modest impact on the economy and financial system.
"We need more capital coming into the market and actual investor money coming through the banks into economic activity," Webman said. "That's what I would really like to see happen."
But even if the government intervention is successful, economists and investors said it would not restore the days of easy credit that prevailed during the recent housing boom. Mortgage rates should come down, but they are unlikely to return to the levels seen in 2003 and 2004. Also banks are unlikely to make many adjustable-rate loans without verifying the incomes and assets of borrowers.
Furthermore, the rescue might not forestall a recession, said G. David MacEwen, chief investment officer for the bond department at American Century Investments. Though he thinks the rescue efforts will help the economy, MacEwen expects bankruptcies to spread, home prices to fall and unemployment to rise.
"Having this plan contains the damage to some extent," MacEwen said. But, he added, "I think we are going to see slowing in economic activity. This is like steering a battleship, you make course adjustment but they take time to take effect."
The end of a Wall Street era, even at Goldman Sachs
Wall Street. Two simple words that - like Hollywood and Washington - conjure up a world.
A world of big egos. A world where people love to roll the dice with borrowed money. A world of high-wire trading, propelled by computers.
In search of ever-higher returns - and larger yachts, faster cars and pricier art collections for their top executives - Wall Street firms bulked up their trading desks and hired quantum physicists to develop foolproof programs.
That world is largely coming to an end.
The huge bailout package being debated in Congress may succeed in stabilizing the financial markets. But it is too late to help companies like Bear Stearns and Lehman Brothers, which have already disappeared.
Merrill Lynch, whose trademark bull symbolized Wall Street to many Americans, is being folded into Bank of America, located hundreds of miles from New York, in Charlotte, North Carolina.
For most of the financiers who remain, with the exception of a few superstars, the days of easy money and supersize bonuses are behind them. The credit boom that drove Wall Street's explosive growth has dried up. Regulators who sat on the sidelines for too long are now eager to rein in Wall Street's bad boys and the practices that proliferated in recent years.
"The swashbuckling days of Wall Street firms' trading, essentially turning themselves into giant hedge funds, are over. Turns out they weren't that good," said Andrew Kessler, a former hedge fund manager. "You're no longer going to see middle-level folks pulling in seven- and multiple-seven-dollar figures that no one can figure out exactly what they did for that."
The beginning of the end is felt even in the halls of the white-shoe firm Goldman Sachs, which, among its Wall Street peers, epitomized and defined a high-risk, high-return culture.
Goldman is the firm that other Wall Street firms love to hate. It houses some of the world's biggest private equity and hedge funds. Its investment bankers are the smartest. Its traders, the best. They make the most money on Wall Street, earning the firm the nickname Goldmine Sachs. (Its 30,522 employees earned an average of $600,000 last year - an average that considers secretaries as well as traders.)
Although executives at other companies secretly hoped that Goldman would once - just once - make a big mistake, at the same time, they tried their darnedest to emulate it.
While Goldman remains top-notch in providing merger advice and underwriting public offerings, what it does better than any other firm on Wall Street is proprietary trading. That involves using its own funds, as well as a heap of borrowed money, to make big, smart global bets.
Other firms tried to follow its lead, heaping risk on top of risk, all trying to capture just a touch of Goldman's magic dust and its stellar quarter after quarter returns. Not one ever came close.
While the credit crisis swamped Wall Street over the past year, causing Merrill, Citigroup and Lehman Brothers to sustain heavy losses on big bets in mortgage-related securities, Goldman sailed through with relatively minor bumps.
In 2007, the same year that Citigroup and Merrill cast out their chief executives, Goldman booked record revenue and earnings and paid its chief, Lloyd Blankfein, $68.7 million - the most ever for a Wall Street CEO.
Even Wall Street's golden child, Goldman, however, could not withstand the turmoil that rocked the financial system in recent weeks. After Lehman and American International Group were upended, and Merrill jumped into its hastily arranged engagement with Bank of America two weeks ago, Goldman's stock hit a wall.
The AIG debacle was particularly troubling. Goldman was AIG's largest trading partner, according to several people close to AIG who requested anonymity because of confidentiality agreements. Goldman assured investors that its exposure to AIG was immaterial, but jittery investors and clients pulled out of the firm, worried that stand-alone investment banks - even one as esteemed as Goldman - might not survive.
"What happened confirmed my feeling that Goldman Sachs, no matter how good it was, was not impervious to the fortunes of fate," said John Gutfreund, a former chief executive of Salomon Brothers.
So, last weekend, with few choices left, Goldman Sachs swallowed a bitter pill and turned itself into, of all things, something rather plain and pedestrian: a deposit-taking bank.
The change does not mean that Goldman is going to give away free toasters for opening a checking account at a branch in Wichita, Kansas, anytime soon. But the shift is an assault on Goldman's culture and the core of its astounding returns of recent years.
Not everyone thinks that the Goldman money machine is going to be entirely constrained. Last week, the Oracle of Omaha, Warren Buffett, made a $5 billion investment in the company, and Goldman raised another $5 billion in a separate stock offering.
Still, many people say, with such sweeping changes before it, Goldman Sachs could well be losing what made it so special. But, then again, few things on Wall Street will be the same.
Goldman's latest golden era can be traced to the rise of Blankfein, the Brooklyn-born trading genius who took the helm in June 2006, when Henry Paulson Jr., a veteran investment banker and adviser to many of the world's biggest companies, left the bank to become the Treasury secretary of the United States.
Blankfein's ascent was a significant changing of the guard at Goldman, with the vaunted investment banking division giving way to traders who had become increasingly responsible for driving a run of eye-popping profits.
Before taking over as chief executive, Blankfein led Goldman's securities division, pushing a strategy that increasingly put the bank's own capital on the line to make big trading bets and investments in businesses as varied as power plants and Japanese banks.
The shift in Goldman's revenue shows the transformation of the bank.
From 1996 to 1998, investment banking generated as much as 40 percent of the money Goldman brought in the door. In 2007, Goldman's best year, that figure was less than 16 percent, while revenue from trading and principal investing was 68 percent.
Goldman's ability to sidestep the worst of the credit crisis came mainly because of its roots as a private partnership in which senior executives stood to lose their shirts if the bank faltered. Founded in 1869, Goldman officially went public in 1999 but never lost the structure that kept lines of communication open among different divisions.
In late 2006, when losses began showing up in one of Goldman's mortgage trading accounts, the bank held a top-level meeting where executives including David Viniar, the chief financial officer, concluded that the housing market was headed for a significant downturn.
Hedging strategies were put in place that essentially amounted to a bet that housing prices would fall. When they did, Goldman limited its losses while rivals posted ever bigger write-downs on mortgages and securities tied to them.
In 2007, Goldman generated $11.6 billion in profit, the most money an investment bank has ever made in a year, and avoided most of the big mortgage-related losses that began slamming other banks late in that year. Goldman's share price soared to a record of $247.92 on Oct. 31.
Goldman continued to outpace its rivals into this year, though profits declined significantly as the credit crisis worsened and trading conditions became treacherous. Still, even as Bear Stearns collapsed in March over bad mortgage bets and Lehman was battered, few thought that the untouchable Goldman could ever falter.
Blankfein, an inveterate worrier, beefed up his books in part by stashing more than $100 billion in cash and short-term, highly liquid securities in an account at the Bank of New York. The Bony Box, as Blankfein calls it, was created to make sure that Goldman could keep doing business even in the face of market eruptions. That strong balance sheet, and Goldman's ability to avoid losses during the crisis, appeared to leave the bank in a strong position to move through the industry upheaval with its trading-heavy business model intact, if temporarily dormant.
All of that changed two weeks ago, when shares of Goldman and its chief rival, Morgan Stanley, went into free fall. A national panic over the mortgage crisis deepened and investors became increasingly convinced that no stand-alone investment bank would survive, even with the government's plan to buy up toxic assets.
Some hedge funds, burned by losing big money when Lehman went bust, began moving some of their balances away from Goldman to banks like JPMorgan Chase and Deutsche Bank.
By the weekend, it was clear that Goldman's options were to either merge with another company or transform itself into a deposit-taking bank holding company. So Goldman did what it has always done in the face of rapidly changing events: It turned on a dime.
"They change to fit their environment. When it was good to go public, they went public," said Michael Mayo, an analyst at Deutsche Bank. "When it was good to get big in fixed income, they got big in fixed income. When it was good to get into emerging markets, they got into emerging markets. Now that it's good to be a bank, they became a bank."
The moment it changed its status, Goldman became the fourth-largest bank holding company in the United States. Goldman had $20 billion in customer deposits spread between a bank subsidiary it already owned in Utah and its European bank, and the company said it would quickly move more assets, including its existing loan business, to give the bank $150 billion in deposits.
Even if the bailout stabilizes the markets, Wall Street won't go back to its freewheeling, profit-spinning ways of old. After years of lax regulation, Wall Street firms will face much stronger oversight by regulators who are looking to tighten the reins on many practices that allowed the Street to flourish. For Goldman and Morgan Stanley, which are converting themselves into bank holding companies, that means their primary regulators become the Federal Reserve and the Office of the Comptroller of the Currency, which oversee banking institutions.
Rather than periodic audits by the Securities and Exchange Commission, Goldman will have regulators on site and looking over their shoulders all the time.
The banking giant JPMorgan Chase, for instance, has 70 regulators from the Federal Reserve and the comptroller's agency in its offices every day. Those regulators have open access to its books, trading floors and back-office operations. As a bank, Goldman will also face tougher requirements about the size of the financial cushion it maintains.
More important, a stiffened regulatory regime across Wall Street following the crisis is likely to reduce the use and abuse of its favorite addictive drug: leverage.
The low-interest-rate environment of the past decade offered buckets of cheap credit. Just as consumers maxed out their credit cards to live beyond their means, Wall Street firms bolstered their returns by pumping that cheap credit into their own trading operations and lending money to hedge funds and private equity firms so they could do the same. When things went wrong, however, all of that debt turned into a nightmare. When Bear Stearns was on the verge of collapse, it had borrowed $33 for every $1 of equity it held. When trading partners that had lent Bear the money began demanding it back, the firm's coffers ran dangerously low.
Earlier this year, Goldman had borrowed about $28 for every $1 in equity. In the ensuing credit crisis, Wall Street firms have reined in their borrowing significantly and have lent less money to hedge funds and private equity firms. Today, Goldman's borrowings stand at about $20 to $1, but even that is likely to come down. Banks like JPMorgan and Citigroup typically borrow about $10 to $1, analysts say.
As leverage dries up across Wall Street, so will the outsize returns at many private equity firms and hedge funds. Returns at many hedge funds are expected to be awful this year because of a combination of bad bets and an inability to borrow. One result could be a landslide of hedge funds' closing shop. At Goldman, the reduced use of borrowed money for its own trading operations means that its earnings will also decrease, analysts warn.
Brad Hintz, an analyst at Sanford C. Bernstein, predicts that Goldman's return on equity, a common measure of how efficiently capital is invested, will fall to 13 percent this year, from 33 percent in 2007, and hover around 14 percent or 15 percent for the next few years.
Goldman says its returns are primarily driven by economic growth, its market share and pricing power, not by leverage. It adds that it does not expect changes in its business strategies and expects a 20 percent return on equity in the future.
If Hintz is right, and Goldman's legendary returns decline, so will its paychecks. Without those multimillion-dollar paydays, those top-notch investment bankers, elite traders and private-equity superstars may well stroll out the door and try their luck at starting small, boutique investment-banking firms or hedge funds - if they can.
"Over time, the smart people will migrate out of the firm because commercial banks don't pay out 50 percent of their revenues as compensation," said Christopher Whalen, a managing partner at Institutional Risk Analytics. "Banks simply aren't that profitable."
As the game of musical chairs continues on Wall Street, with banks like JPMorgan scooping up troubled competitors like Washington Mutual, some analysts are wondering what Goldman's next move will be.
Goldman is unlikely to join with a commercial bank with a broad retail network, because a plain-vanilla consumer business is costly to operate and is the polar opposite of Goldman's rarefied culture.
"If they go too far afield or get too large in terms of personnel, then they become Citigroup, with the corporate bureaucracy and slowness and the inability to make consensus-type decisions that come with that," Hintz said.
A better fit for Goldman would be a bank that caters to corporations and other institutions, like Northern Trust or State Street Bank, he said.
"I don't think they're going to move too fast, no matter what the environment on Wall Street is," Hintz said. "They're going to take some time and consider what exactly the new Goldman Sachs is going to be."
By Tom Wolfe
Be aware that your correspondent is merely bringing you the news when he reports how many people have besieged the author of "The Bonfire of the Vanities" over the past week with the question, "Where does this leave the Masters of the Universe now?"
"This" refers to the current credit panic. The Masters of the Universe is a phrase from that book referring to ambitious young men (there were no women) who, starting with the 1980s, began racking up millions every year - millions! - in performance bonuses at investment banks like Salomon Brothers, Lehman Brothers, Bear Stearns, Merrill Lynch, Morgan Stanley and Goldman Sachs. The first three no longer exist. The fourth is about to be absorbed by Bank of America. The last two are being converted into plain-vanilla Our Town banks with ATMs in the lobby and, instead of Masters of the Universe, marginally adult female cashiers with wages in the mid-three figures per week, stocked with bags of exploding dye to hand the robbers along with the cash. American investment banking, the entire industry, sank without a trace in the last few days.
So where does this leave the Masters of the Universe? In Greenwich, Connecticut, mainly. The hottest, brightest, most ambitious young men began abandoning investment banking in favor of hedge funds six years ago. Your correspondent can describe scenes of raging carotid-aneurytic anger as the young hotshots resigned. Security goons seized them by the elbow and marched them off the floor at 6 miles an hour. They couldn't touch anything in or on their desks - not even the framed picture of Mom and Buddy and Sis - so furious were their superiors. Their biggest producers and future leaders were walking out on them.
Greenwich is the center of the Masters' hedge-fund world, replacing Wall Street. For five years, the heart of Wall Street, the fabled Floor of the New York Stock Exchange, has been gradually emptying out. A hundred years ago, the Floor was a club for gentlemen oligarchs. Only men with social credentials could have one of the insider "seats" on the Floor. By last year, when your correspondent paid his one and only visit to the Floor, one member came up to another and informed him that he, like so many others recently, was leaving the Exchange for good.
"What will you be doing?"
"I'm joining the Fire Department."
"The Fire Department? In what capacity?"
"I'll be a firefighter. The pension plan is awesome."
Incidentally, there are no seats on the Floor, none that this correspondent ever saw. The Exchange is already an anachronism, like Broadway. Everything is done by computer today. Hanging out on the Floor of the Exchange is like hanging out at Off-Track Betting. Broadway and the Exchange are like the first thing you see when you enter Disneyland in California. You find yourself in a turn-of-the-last-century town with a trolley and an apothecary and a barber shop. That's Broadway and Wall Street today.
It may dash your hopes for that nice warm feeling called Schadenfreude, but the Masters of the Universe are smarter than the people they left behind at the investment banks. Their hedge funds have blown up here and there, but unlike the investment banks, they are still very much in business. They have hurriedly pulled themselves into defensive positions inside their shells, like turtles. Their Armageddon, if any, will come on Tuesday, Sept. 30.
Most hedge funds open up a crack on Sept. 30, Dec. 31, March 31 and June 30 to give investors the chance to "redeem" their investments, meaning take their money out. These moments are called gates, like a series of gates in a prison. The gate is the limit, the fixed percentage of your money, that the fund will allow you to take out at one time. Even with these strict caps on withdrawals, some funds may end up nothing but shells.
Shed no tears for the Masters of the Universe, however, not that your correspondent actually thought you might. Most of the young Masters already have their own personal nut free and clear. "Nut" is the term for the amount of money you need salted away in weather-proof investments in order to generate enough interest to live comfortably in Greenwich on Round Hill Road, Pecksland Road or Field Point Road in a house built before the First World War in an enchanting European style, preferably made of stone featuring the odd turret, with a minimum of 5 acres around it and big enough to be called a manor. Every Master of the Universe knows the number.
Tom Wolfe, the author of "The Bonfire of the Vanities," is at work on a novel about immigration in Miami.
Six killed in landslide in western Georgia
TBILISI: Six members of the same family were killed in a landslide caused by days of heavy rain in western Georgia, the region's political leader said on Monday.
The landslide late on Sunday swept away the family's home in the village of Khala in the Black Sea region of Ajara. Dozens of other homes in the village were reported to be under threat.
"For the past week the rain has not stopped," Ajara administrative leader Levan Varshalomidze told Reuters.
A sweltering summer in the Caucasus country has given way to cooler temperatures and heavy rains since mid-September. Hailstorms in eastern Georgia have damaged vineyards and heavy flooding has hit the Poti region on the Black Sea coast.
Five killed by bombs in western India
At least five people were killed and dozens injured in two separate bomb explosions in western India Monday, officials and doctors told Reuters.
One of the blasts killed four people and wounded 20 to 25
in the communally sensitive town of Malegaon in Maharashtra state, police and doctors said.
"Among the victims is a 10-year-old child," said Bharat Wagh, a doctor at a Malegaon hospital treating the casualties.
Most of those wounded have splinter injuries which can be caused by a bomb," Wagh told Reuters from the textile town, which has a history of violence between Hindus and Muslims.
More than 35 people were killed there in coordinated bomb attacks in and around a mosque in 2006.
The other bomb, which appeared to have been set off by a timer, killed one person and injured several at a market in the town of Modasa in the western state of Gujarat, officials said.
"I have news of one person dead and seven injured," Gujarat Home Minister Amit Shah told reporters. Local television said two people had died in the attack, but police denied this.
Gujarat police official R.B. Brahmabhatt told reporters the bomb was placed on a motorcycle and, according to preliminary reports, it was probably detonated using a timer device.
Television images showed local people crowding round the blackened shell of a burnt motorcycle said to have carried the bomb.
In Malegaon, about 70 percent of whose 700,000 population are Muslim, about 20,000 people clashed with police after the blast, angry that the authorities had failed to protect them.
"Police had difficulty controlling the crowds. Many policemen were injured," Maharashtra Deputy Chief Minister R.R. Patil told Zee News channel. Media reports said that here too, the bomb had been placed on a motorcycle.
Maoist blast kills two during India president visit
RAIPUR, India: Suspected Maoist insurgents killed two policemen with a landmine blast on Monday in central India where the country's president Pratibha Patil was holidaying, police said.
Patil, who was near a waterfall in Bastar about 27 km (15 miles) from the blast site, was safe, police officer Girdhari Nayak said.
Bastar is in the central state of Chhattisgarh, one of several where Maoist rebels say they are fighting for the rights of poor farmers and landless labourers.
Five policemen were wounded in the latest explosion which took place in the forests of Bastar, Nayak said.
Thousands of people have been killed in the insurgency, which began in the late 1960s and stretches through the countryside across a swathe of eastern and central India.
Resigned, bitter, Iraqis shop after Baghdad bomb
Baghdad shopkeepers washed away blood and shoppers buying gifts returned to the streets on Monday after bombers struck ahead of a major holiday marking the end of Ramadan.
Four bombs in busy districts of Baghdad on Sunday evening killed at least 32 people and wounded scores as Iraqis shopped and broke their fast for the Muslim holy month of Ramadan.
"Yes, there was an explosion yesterday, but I still came today: I have stuff to buy, clothes for my children, sweets," said Um Mays, 45, shrugging off a bombing close to where she was browsing for gifts.
"Explosions have become part of our daily life. The lucky survive, the unlucky die," she added.
In the worst incident, a car bomb was quickly followed by a suicide bombing in central Baghdad's Karrada district on Sunday evening. The area was packed with shoppers buying clothes and gifts before the Eid al-Fitr holiday.
The six-day public holiday begins on Tuesday to celebrate the end of the fasting month.
U.S. military officials say violence in Iraq is at four-year lows but some militant groups have stepped up attacks for the holy month of Ramadan, when Muslims observe a daytime fast.
"They should have prevented this disaster before it took place," said Leith Naji, a medical doctor, shopping with his 2-year-old son. "They should make the situation more secure. But what can we do? life goes on."
The spokesman for Iraqi security forces in Baghdad, Major-General Qassim Moussawi, vowed on Monday to hunt down the planners of the bombing and to prevent future attacks.
Abu Jassim, the owner of a clothes shop, was visibly upset, as he spoke: "We were expecting this would happen. People were crowded together, buying stuff for Eid. What shall I say? The subject has almost become boring. So many people I know have been killed in explosions."
Chechen government intensifies scare tactics, rebels' families say
SHALI, Russia: The men who set fire to Valentina Basargina's house arrived in the stillness of 3 a.m. There were three of them. Each wore a camouflage uniform and carried a rifle. One held a can of gasoline. They wore masks.
They led Basargina and her son outside and splashed gasoline in their two rooms, she and her relatives said. One man produced a T-shirt, knotted onto a stick. It was damp with gasoline.
"This is for the one who is gone," he said in thickly accented Russian. Basargina's nephew had recently disappeared; the police had said he joined the small but smoldering insurgency fighting for Chechnya's independence from Russia.
The man lighted the torch and tossed it inside. The air whooshed. Flames shot through the house.
The attack, late last month, was part of what Chechens described as an intensified government effort to stamp out the remnants of a war that has continued, at varying levels of ferocity, for nearly 15 years.
In a campaign to punish families with sons suspected of supporting the insurgency, at least a dozen homes have been set ablaze since midsummer, residents and a local human rights organization said.
The burnings have been accompanied by a program, embraced by Ramzan Kadyrov, Chechnya's president, that has forced visibly frightened parents of insurgents to appear on television and beg their sons to return home.
"If you do not come back I will never forgive you," one father, Ruslan Bachalov, said to his son on a recent broadcast. "I will forgive the man who will kill you."
"I have no other way out," he added. "The authorities and the president demand that I bring my son back."
In the arson cases, each attack has followed the same pattern. The families have been awakened by men in uniforms and black ski masks who have herded residents outside and then torched their homes. Many of the attacks have been accompanied by stern declarations that the homes were being destroyed as punishment.
The burnings have occurred in several districts or towns - including Alleroi, Geldagan, Khidi-Khutor, Kurchaloi, Samashki, Shali, Shatoi, Nikikhita and Tsenteroi - suggesting that the arsonists have been operating with precise information and with a degree of impunity in a republic that is crowded with police and military units.
Residents and the human rights organization said that the impunity was unsurprising, because the arsonists appeared to be members of the police.
The pro-Kremlin Chechen government said it knew nothing about the burnings. "We have no information about what you are talking about, so we cannot help," a spokesman for Kadyrov said to a query from a journalist.
In a series of state-run news programs this summer in Chechnya, senior officials spoke openly of the collective responsibility of people whose relatives have joined the insurgency, and of collective punishment.
The broadcasts are in Chechen, a language spoken in a tiny portion of Russia and understood by scarcely any of the Russian officials in the region who work with Kadyrov's government.
On one, Kadyrov spoke bluntly about households whose young men "go to the forest," the local idiom for joining the rebels.
"The families whose relatives are in the forests, they are accomplices in the crime," he said.
Muslim Khuchiyev, a confidant of Kadyrov's and the mayor of Grozny, Chechnya's capital, went further. "We are not now holding dialogue with you on the basis of the laws of this state," he said. "We will act according to Chechen traditions.
"The evil which is done by your relatives in the forest will return to you and your homes," he added. "Each of you soon will feel it on your skin."
Toward the end of his televised remarks, Khuchiyev said the government would not allow relatives to bury insurgents who had been killed. "If we find out that someone buries them, we will take tough and cruel measures on this person," he said.
Violence by all sides in and near Chechnya has been one of the darkest chapters of post-Soviet Russian life.
Since war erupted in 1994, Russia and its local proxies have been implicated in bombings and aerial attacks on civilian areas, armed and indiscriminate sweeps of neighborhoods, and patterns of illegal detention, torture and killings. Tens of thousands of Chechens have been killed. Thousands of others have disappeared.
The violence has occurred in what human rights groups have called a culture of official indifference to criticism and enduring impunity, which has been documented by human rights researchers and independent journalists.
Last week, in the latest finding against Russia, the European Court of Human Rights ruled that the Russian army had indiscriminately shelled the village of Znamenskoye in 1999, killing at least five civilians. Russia never conducted a serious inquiry into the shelling, the court found.
A hint of tension as Jewish and Muslim holy seasons coincide
JERUSALEM: Jews are not quiet in prayer. Even when focused on the most personal of quests, as they are this season - asking God for forgiveness for dark thoughts and unkind deeds in the past year - they take comfort in community, chanting and swaying and dancing in circles, blowing the trumpet-like shofar, a ram's horn.
These are the days of the Jewish month of Elul, leading up to Rosh Hashana and Yom Kippur, when tradition says that God determines who will live and die in the coming year, and the Western Wall plaza in Jerusalem's Old City is a festival of piety that runs from midnight till dawn. Tens of thousands roll in and out during the night, reciting the special penitential prayers called Slihot.
Coincidentally - the Muslim calendar shifts every year - it is also Ramadan, the month when the faithful believe that God gave the Koran to the Prophet Muhammad, a time of fasting, self-reflection and extra prayer, when being at Al Aksa Mosque here is even more important than usual.
At night, when the fasting is over, celebrating begins. The ancient stone alleyways of the Old City are lit up with strings of colored lights, special foods are prepared and Palestinian Muslims come and go by the thousands.
The result has been a kind of monotheistic traffic jam in September along the paths of the tiny walled Old City, especially as dawn approaches each day. The Muslims and Jews walk past one another, often intersecting just at the Via Dolorosa of Christian sanctity, as they hurry to their separate prayer sessions: the Muslims above at the Dome of the Rock, the Jews just below at the Western Wall.
It would be wrong to call these tense encounters, because there are essentially no encounters at all. Words are not exchanged. Religious women in both groups - head, arms and legs covered in subtly distinct fashion - look past one another as if they take no notice. Like parallel universes with different names for every place and moment they both claim as their own, the groups pass in the night.
But there is palpable tension. Israeli soldiers walk in small packs to ward off trouble. Security cameras bristle from most walls and intersections. Commemorative stone plaques mark past acts of terrorism ("On this spot Elhanan Aharon was killed. From his blood we will live and build Jerusalem.")
Meanwhile, Palestinians complain that they are losing the competition for control of these ancient byways and that those in the occupied West Bank are barred from coming without special permission.
"I don't believe the Jews and Muslims can ever have peace here," Said Abed remarked on his way to dawn prayers at Al Aksa when asked his view of the unusual intersection of Slihot and Ramadan.
"The Jews are trying to control Jerusalem by deciding who can stay here."
Some Muslims defy archaeology and history by saying that Jews have no link to the site and that it is purely Muslim sacred territory. The same problem exists on the other side as well; some Jews believe that the holiness here is theirs alone.
Inside a closed-off area of the Western Wall plaza a few hours earlier, four young men were studying the Talmud, reading to one another rabbinic commentary about a prayer for rain that is said as the new year starts.
What did they think of the coincidence of Jewish and Muslim prayers during these days?
"The Muslims shouldn't even be there," offered Haim Ben Dalak, 18, of Petah Tikvah, who just started a year at a Jerusalem religious seminary before his army service. "There should be a Jewish temple there. That's what we believe."
Thirty years ago, the Israeli poet Yehuda Amichai, who knew this city as few others have, wrote: "The air over Jerusalem is saturated with prayers and dreams like the air over industrial cities. It's hard to breathe."
The Hebrew name for the city, Yerushalayim, ends with "ayim," a grammatical construction used for pairs of things. The device, known as a dual, exists in Hebrew and Arabic but few other languages.
Which duality is being invoked has been lost to history, but it would not be hard to imagine that it is the one of heaven and earth, of holy and profane, and the difficulty of their coexisting. But of course everyone tends to focus on the holy.
Called Al Quds (the Holy One) in Arabic, Jerusalem is the city that Muhammad visited on his night journey to heaven. Just as Jews pray facing Jerusalem from anywhere in the world, Muslims did so originally as well, until the holiest site was moved to Mecca. Jerusalem remains for Muslims the third holiest city, after Mecca and Medina.
Shmuel Rabinowitz, rabbi of the Western Wall for the past 12 years, goes every midnight during this period to Slihot at the wall.
"Night is a special time for spiritual reflection, and this wall makes even those with hearts of stone shed a tear," Rabinowitz said after his half-hour Slihot prayer next to the wall, its crevices revealing the imploring notes to God stuffed there by visitors.
Above his voice can be heard scores of groups - some large, some small, all of slightly different tradition - praying in a mix of Hebrew and Aramaic, acknowledging sin, seeking redemption.
Most are devout, but some are secular Jews who come here for Slihot season, a growing trend.
"We love coming to Jerusalem at this time of year," said Ada Lugati, a hairdresser from the northern city of Afula who was dressed in distinctly nonobservant manner, in slacks, with an uncovered head and bare midriff.
"It feels here as if the heavens are open to our prayer," she said as she looked at the clear night sky.
Avi Kenig, 17, starting a year of religious study at an institute just across from the wall, put it this way: "We have been taught that here we are at the center of the world. These are the gates to heaven."
Olmert says Israel should pull out of West Bank
JERUSALEM: Prime Minister Ehud Olmert said in an interview published Monday that Israel must withdraw from nearly all of the West Bank and East Jerusalem to attain peace with the Palestinians and that any occupied land it held onto would have to be exchanged for the same quantity of Israeli territory.
He also dismissed as "megalomania" any thought that Israel should attack Iran on its own to stop it from developing nuclear weapons, saying the international community and not Israel alone was charged with handling the issue.
In an unusually frank and soul-searching interview granted after he resigned to fight corruption charges - he remains interim prime minister until a new government is sworn in - Olmert discarded longstanding Israeli defense doctrine and called for radical new thinking in words that are sure to stir controversy as his expected successor, Foreign Minister Tzipi Livni, tries to build a coalition.
"What I am saying to you now has not been said by any Israeli leader before me," Olmert told the newspaper Yediot Aharonot in an interview to mark the Jewish new year that runs from Monday night until Wednesday night. "The time has come to say these things."
He said traditional Israeli defense strategists had learned nothing from past experiences and seemed stuck in the considerations of the 1948 Independence War.
"With them, it is all about tanks and land and controlling territories and controlled territories and this hilltop and that hilltop," he said. "All these things are worthless."
He added, "Who thinks seriously that if we sit on another hilltop, on another hundred meters, that this is what will make the difference for the state of Israel's basic security?"
Over the last year, Olmert has publicly castigated himself for his earlier rightist views and he did so again in this interview. On Jerusalem, for example, he said, "I am the first who wanted to enforce Israeli sovereignty on the entire city. I admit it. I am not trying to justify retroactively what I did for 35 years. For a large portion of these years, I was unwilling to look at reality in all its depth."
He said that maintaining sovereignty over an undivided Jerusalem, Israel's official policy, would involve bringing 270,000 Palestinians inside Israel's security barrier. It would mean a continuing risk of terrorist attacks against civilians like those carried out this year by Palestinian residents of Jerusalem with a bulldozer and earth mover.
"A decision has to be made," he said. "This decision is difficult, terrible, a decision that contradicts our natural instincts, our innermost desires, our collective memories, the prayers of the Jewish people for 2,000 years."
The government's public stand on Jerusalem until now has been to assert that the status of the city was not under discussion. But Olmert made clear that the eastern, predominantly Arab sector had to be yielded "with special solutions" for the holy sites.
Elsewhere in the interview, when discussing a land swap with the Palestinians, he said the exchange would have to be "more or less one to one."
Olmert also addressed the question of Syria, saying that Israel had to be prepared to give up the Golan Heights but that in turn Damascus knew it had to change the nature of its relationship with Iran and its support for Hezbollah, the Lebanese militia.
On Iran, Olmert said Israel would act within the international system, adding, "Part of our megalomania and our loss of proportions is the things that are said here about Iran. We are a country that has lost a sense of proportion about itself."
Reaction from the Israeli right was swift. Avigdor Lieberman, who heads the Yisrael Beiteinu party, said in a radio interview that Olmert was "endangering the existence of the state of Israel irresponsibly."
As they reacted to Olmert's remarks, Palestinian negotiators said that it was satisfying to hear Olmert's words but that the words did not match what he had offered them so far. Yasser Abed Rabbo, a senior Palestinian official, said on Palestinian Radio that it would have been better if Olmert had taken this position while in office rather than while leaving it and that Olmert had not yet presented a detailed plan for a border between Israel and a Palestinian state.
In theory, Olmert will continue peace negotiations while awaiting the new government. But most analysts believe that, having been forced to resign his post, he will not be able to close a deal.
Little holiday joy in Gaza but tunnellers thrive
There was little joy in the Gaza Strip on Monday as the Muslim fasting month of Ramadan drew to a close and 1.5 million Palestinians scraped together their meagre resources to celebrate the feast of Eid al-Fitr.
Sealed off by Israel since it pulled out troops and Jewish settlers three years ago, and now run by the Islamist group Hamas, Gaza displays classic symptoms of a land under siege.
Border crossings to Israel and Egypt are as good as closed. No freighters anchor off the Mediterranean shore. Israel controls, and has shut down, air and sea approaches. Goods are scarce, prices high, and smuggling thrives no matter the danger.
At least 43 people have been killed this year in the collapse of secret tunnels to Egypt that provide a precarious lifeline for traders and intrepid travellers with cash to spare.
"The crossings have been closed and the siege has been tightened and there is no other way," said Sami Bashir, foreman of a tunnelling crew.
"Without the tunnels we would have been strangled by the Israeli siege," said clothing merchant Khaled Adna.
Tunnelling has flourished since Hamas took over in Gaza in a week-long Palestinian civil war last year and the Israeli blockade hardened. There are hundreds of makeshift earthworks barely concealed behind tents along the border.
A six-month cease-fire agreed in June by Hamas and Israel permits limited trade of mostly food and tiny amounts of construction materials. Hamas and its allies have largely held off firing rockets into Israel. Israel has held off its raids.
Gaza markets were crowded ahead of Eid but demand was weak and choice very limited, merchants and buyers agreed.
"Faced with a choice between buying new clothes or food for their children, people buy food," said Ehab Qassem, a 25-year-old university student selling clothes in Palestine Square. "The mood is not joyful, it is sad and tragic."
As with other dates in the Muslim lunar calendar, the end of the Ramadan fast and start of the Eid feast is timed according to sightings of the moon. It may be as early as Monday evening.
Residents of Gaza blame their predicament in part on the deep split in Palestinian ranks, between Hamas and the secular Fatah movement of Palestinian President Mahmoud Abbas. He runs the Israeli-occupied West Bank, about an hour's drive to the west of Gaza -- if such a drive were possible for local people.
"The two sides should be ashamed of themselves," said Ibrahim Abu Amra, an employee of the Health Ministry.
"They should sit together and form a unity government. Unless they do that, we will get lost, the Palestinian people will get lost," said Abu Amra, a father of seven.
Israel tightened the blockade after Hamas, which wants to destroy the Jewish state and had led a government after winning an election in 2006, routed Fatah forces in June 2007. Political and social divisions have since worsened. Failing a breakthrough in unity talks sponsored by Cairo there may be further violence.
Egyptian intelligence chief Omar Suleiman conducted separate talks with the two sides throughout September. He met Fatah last week and will see Hamas officials on October 8. A Fatah official said on Monday that all factions may convene in Cairo on November 4.
"Either Hamas and Fatah are reconciled this time or we may be going to hell," commented Gaza taxi driver Ali Hassan.
Meanwhile, the tunnellers get rich. It costs about $250 (139 pounds) to traverse approximately 1,000 metres (3,300 feet) underground from Gaza to the Sinai border zone, or $1,000 for the VIP tunnel fare which includes electric lighting and a mobile phone signal.
"The typical caller is probably saying: 'I'm half-way through and I'm still alive'" joked one Gaza resident.
Gaza's border with Egypt is only 14 km long (9 miles), coming inland from the sea, and the tunnel builders make no great effort to conceal their diggings. Gazans say Egyptian officials take their cut of the underground trade in bribes.
As with its conventional border crossing at Rafah, Egypt has come under pressure from Israel also to close the tunnels down, and Hamas has accused Egypt of causing the deaths of several Palestinians by pumping gas into the tunnels or blowing them up.
Bashir, supervising diggings at a tunnel, said his crew knows the risks: "They have no choice," he said.
"There is no work in Gaza and death is a destiny and it will not happen until someone's time is up."
NEW YORK: Asif Ali Zardari, Pakistan's new president and the widower of Benazir Bhutto, does not mince words in his determination to defeat a growing Taliban insurgency.
"It is my decision that we will go after them, we will free this country," he told me in an interview. "Yes, this is my first priority because I will have no country otherwise. I will be president of what?"
After the massive bomb attack on the Marriott Hotel in Islamabad, that's a fair question. Its finances in a free fall, its security crumbling, nuclear-armed Pakistan stands at the brink just as a civilian takes charge after the futile zigzagging of General Pervez Musharraf's U.S.-supported rule.
I asked Zardari, who took office this month, if the assassination of his wife last year motivated him to confront Islamic militancy. "Of course," he said, "It's my revenge. I take it every day."
He continued: "I will fight them because they are a cancer to my society, not because of my wife only, but because they are a cancer, yes, and they did kill the mother of my children, so their way of life is what I want to kill. I will suck the oxygen out of their system so there will be no Talibs."
Are you afraid for your life? "I am concerned, I am not afraid," Zardari, 53, told me. "Because I don't want to die so soon, I have a job to do."
What a job it is. If Pakistan is the most dangerous country on earth, a phrase no less true for being a commonplace, its presidency is one of the world's least enviable and most critical posts.
Billions of dollars in U.S. aid to the Muslim country's former military government have not stopped the northwestern tribal areas from becoming the new Al Qaeda-Taliban central.
The menace from there has been measured in a rising death toll for NATO forces in Afghanistan, 2,000 pounds of explosives at Pakistan's heart, and far-flung terrorist threats. No wonder ministers from across the world gathered under a "Friends of Pakistan" banner at the United Nations last week with promises of aid.
But money is worthless, as the seven years since 9/11 have demonstrated, unless some basic things change in democratic Pakistan. One is the double game that's been played by the nation's spy agency, the Inter-Services Intelligence (ISI), in an apparent effort to ensure Afghanistan remains weak.
"The ISI will be handled, that is our problem," Zardari told me. "We don't hunt with the hound and run with the hare, which is what Musharraf was doing."
Aside from Zardari's official meetings here with the likes of President Bush, I was told he held an unpublicized one with Michael Hayden, the director of the CIA. I also learned that the heads of three directorates within the ISI have already been replaced.
"We've changed a lot of things and a lot more will happen, and anyone not conforming with my government's policy will be thrown out," Zardari said of the ISI, without mentioning specifics or his meeting with Hayden.
Zardari also indicated that he wants to cooperate with the United States in training specialized counterinsurgency army units for use in the tribal areas. "I mean business," he said. "We will train ourselves with the U.S. present as trainers to raise the quality of certain forces."
But he warned against U.S. military incursions inside Pakistan, the object of tension since a commando raid on Sept. 3. "It is counterproductive and a political price is paid," he said, especially if no high-level target is found.
Zardari said his "new medicine" for the tribal areas would include industrial investment, incentives for alternative crops to poppy, like corn, and a firm message that "we are hitting the Taliban" so make sure "your space is not being used by them." A businessman, he noted that historically, "Nobody traveled through these mountains without either paying them or hiring them or sharing the booty of India with them."
But Pakistan is short of cash to strike Anbar-province-like deals in tribal areas. Zardari made an impassioned appeal for the Saudis and others to slash his annual oil bill by $15 billion by selling "a democratic Pakistan oil at their base price." He asked the French for helicopters and the U.S. for "blanket support" in persuading every country to buttress Pakistan "according to its strengths."
My impression? This guy's very smart, a wheeler-dealer in an area full of them, secular, pro-American, committed to democracy, determined and brave. I never heard Musharraf frame Pakistan's fight against terrorism with such candor.
I believe he wants genuine conciliation with India and Afghanistan, essential to the region's stability. I care much less right now about his checkered past than about getting behind him for the sake of civilization and democracy.
After he talked of revenge for Benazir's death, Zadari added this: "I am not a warmonger. I am not interested in physical might, which is not the expression of my strength. I have many strengths, and one of them is that I can take pain, not give pain. I don't consider anyone who can give pain brave, I consider anyone who can take pain brave. That is why I consider a woman a stronger gender because she can take much more pain than a man."
From a Muslim leader, and one so bereaved, I salute that, without reserve.
Petraeus said Pakistani officials, including new President Asif Ali Zardari, increasingly recognised the importance of the threat posed by militants.
"This is a threat to Pakistan's very existence and it is one with which they must deal. Now, they can deal with it in a comprehensive manner," he said after talks in London with Prime Minister Gordon Brown.
Relations between the United States and Pakistan have been strained after American forces launched a series of raids against militants inside Pakistani territory.
U.S. officials say Taliban and al Qaeda-linked fighters use the tribal regions on the Pakistan-Afghan border as an operating base to launch attacks into Afghanistan.
Last week Pakistani troops fired on U.S. helicopters. Days earlier, militants blew up the Marriott hotel in Islamabad, killing 53 people.
Petraeus, who takes over as head of the U.S. Central Command next month after running American operations in Iraq, said he would turn his attention to helping Pakistan make a sustained commitment to dealing with the militants.
Petraeus, who also met British Defence Secretary Des Browne and defence chief Air Chief Marshal Jock Stirrup, said he had discussed the need for more coalition troops in Afghanistan.
"What we talked about is the general need for more coalition forces, noting that the UK has actually doubled the size of its force over the course of the last two years," he said.
"I think it is up to the coalition to determine how to source the forces ... This is a job for the NATO authorities, the greater coalition, for national authorities."
He said he expected fighting with Taliban guerrillas in Afghanistan to continue through the harsh winter "perhaps a bit more than we have seen in the past."
"We are going to endeavour to continue a higher level of operational tempo throughout, so that there is not the lull in the fighting season, but that we continue in fact to take the fight to the enemy," he said.
The Pakistani military launched an offensive in August for control over the strategically key region of Bajaur and have been involved in heavy fighting since then.
"More than 3,900 families, or around 20,000 individuals, have fled fighting in Bajaur ... into Kunar province in eastern Afghanistan," said the United Nations High Commission for Refugees (UNHCR) in Afghanistan.
"In the last two weeks alone, over 600 Pakistani families have fled into Afghanistan," it said.
Bajaur is the smallest of Pakistan's seven so-called tribal agencies, semi-autonomous ethnic Pashtun regions along the Afghan border, with a population of one million people.
U.S. officials say Taliban and al Qaeda-linked fighters, financed by drug money, use the tribal regions as an operating base to launch attacks inside Afghanistan, where Western forces are struggling to stem a growing insurgency.
Around 9,000 Pakistani soldiers are deployed in Bajaur and up to 1,000 militants have been killed in clashes this month, according to the Pakistani army.
Several hundred thousand people have fled their homes because of fighting, seeking refuge in other parts of the country or in neighbouring Afghanistan.
"They have mainly been provided accommodation by relatives and friends," UNHCR spokesman Nadir Farhad told reporters. But some 200 families are already living without shelter, he said.
UNHCR has been coordinating aid efforts and hopes the refugees will be able to return soon but said it was prepared for the winter.
"It's very difficult to predict the security situation on the other side of the border but what we hope is that the security gets better and people will be able to go back," he said.
"But if it continues, we will definitely provide them with ... assistance ... so we can get them through the winter months."
Around 70 percent of the families are Pakistani, said Farhad, the remainder being Afghan.
In the past, refugees crossed the other way, to escape from violence in Afghanistan. Some four million Afghans escaped civil war in the 1980's and 1990's seeking refuge in Pakistan. More than half have now returned.
While Pakistani refugees have crossed into Afghanistan to escape tribal or sectarian violence in previous years, this recent influx is biggest yet.
The Taliban leadership on Monday denied a report they were negotiating with the Afghan government to end the war and the insurgents repeated their pledge to keep fighting till foreign troops were expelled from the country.
Britain's Observer newspaper said on Sunday the "unprecedented talks" involved a senior ex-Taliban member travelling between Kabul, the bases of the Taliban senior leadership in Pakistan, Saudi Arabia and European capitals.
Afghanistan's Foreign Minister Rangeen Dadfar Spanta on Sunday declined to confirm the report which said the talks were being mediated by Saudi Arabia and backed by Britain.
The Taliban leadership said the report was part of a plan aimed at creating concern and mistrust between the Taliban and its supporters abroad.
It said the al Qaeda-backed Taliban would not resort to covert talks and would only negotiate in the interests of Islam and Afghanistan.
"Our struggle will continue until the withdrawal of foreign forces and the establishment of an independent Islamic government," said the statement sent to Reuters on Monday.
Despite the denial of talks and the hard-line rhetoric, the statement appeared to maintain a softening of the Taliban line on the Afghan government begun this year in that it did not call for the toppling of President Hamid Karzai's administration.
Karzai has led Afghanistan since U.S.-led and Afghan forces overthrew the Islamist Taliban government after it refused to hand over al Qaeda leaders behind the September 11, 2001 attacks.
Driven from power, the Taliban retreated to hideouts along the Afghan-Pakistan border, but regrouped and launched a virulent insurgency in 2005, benefiting from frustration with the presence of foreign troops and the slow pace of economic change.
This year has been the bloodiest so far with 2,500 people killed in the first six months alone, 1,000 of them civilians.
Despite the presence of some 71,000 foreign troops and more than 130,000 Afghan security forces, the Taliban have extended the scale and scope of their insurgency. Western diplomats admit there is no purely military solution to the conflict.
But talks with the Afghan Taliban have proven problematic.
"They keep changing what they are asking for. One day it is one thing, the next another," the Observer quoted one Afghan government adviser with knowledge of the negotiations as saying.
One aim of the initiative is to drive a wedge between Osama bin Laden's al-Qaeda and the Taliban, the paper said.
KABUL: An attack on a high-profile female police officer is the latest in a wave of attacks on women across Afghanistan for which the Taliban have claimed responsibility.
After scattering in the wake of the 2001 offensive by a U.S.-led coalition, the Islamic militants have regrouped over the past two years. Attacks on women, girls' schools and organizations working for women's advancement have become increasingly common.
On Sunday, in an attack claimed by the Taliban, two gunmen on a motorcycle shot and killed the police officer, Malalai Kakar, as she prepared to leave for work in the southern city of Kandahar. The police in the city said she had died instantly from gunshot wounds to her head. Her 18-year-old son, driving her car, was seriously wounded.
Kakar, who was in her mid-40s with six children, was an iconic figure among women's groups in Afghanistan and abroad. She was one of the leading totems for the wider freedoms gained by women when the Taliban, with their repressive policies toward women, were ousted from power by a U.S.-led coalition in 2001.
Kakar, with the rank of captain, was head of Kandahar's department of crimes against women, leading about 10 female officers, and spent her working life tackling theft, domestic violence and murder. She joined the city's police force in 1982, following in the footsteps of her father and brothers, but was forced out after the Taliban captured Kandahar in the mid-1990s and banned all women from working.
She was the first female police officer in the country to return to work after the Taliban were ousted. Her commitment was particularly notable for the fact that it took place in Kandahar, which became the headquarters for the Taliban soon after the movement was formed in the early 1990s.
Kakar's killing prompted a wave of tributes. President Hamid Karzai, on a trip to the United States, issued a statement calling the attack "an act of cowardice" committed by "enemies of peace and welfare and reconstruction of Afghanistan."
The Interior Ministry in Kabul, responsible for the country's 80,000-member police force, about 700 of them women, called Kakar "a brave hero among women and loyal to her profession," and said she had been "cowardly martyred."
The police commander in Kandahar, General Matiullah Qati, said Kakar had continued working despite repeated death threats. "She took a big risk by continuing to work in the current serious situation, and her death will undoubtedly have a negative impact on other women who may have wanted to join the police but now may not dare to," he said.
The European Union's mission in Kabul said: "Any murder of a police officer is to be condemned, but the killing of a female officer whose service was not only to her country, but to Afghan women, to whom Kakar served as an example, is particularly abhorrent."
Kakar is not the first female official of prominence in Kandahar to be killed. Two years ago, the head of the province's women's affairs department was killed in a similar attack. In June, a female police officer was shot and killed by gunmen in the western province of Herat.
Abdul Waheed Wafa and Sangar Rahimi contributed reporting from Kabul, and Taimoor Shah from Kandahar, Afghanistan.
By Gary Milhollin
The coverage of the latest bombastic tour of Manhattan by President Mahmoud Ahmadinejad of Iran may have obscured the news, but the International Atomic Energy Agency has released its latest report on Tehran's nuclear program, and it contains an unpleasant truth: By the time we inaugurate our next president, Iran is likely to achieve "virtual" nuclear weapon status. This means that it will be able to produce, within a few months of deciding to do so, enough weapons-grade uranium to fuel a bomb.
But how is that possible? After all, about the only thing the Bush administration and our European allies seem to agree on regarding Iran is that there is a lot more time for diplomacy and sanctions to work before the ayatollahs can cross the nuclear line. Unfortunately, that's no longer the situation.
Since last December, Iran has been feeding uranium into its bank of rapidly spinning centrifuges at an increasing clip. Out has come a growing stockpile of what scientists call "low-enriched" uranium, which is ideal for fueling a reactor. However, if you re-circulate this material through the centrifuges, it becomes highly enriched bomb fuel. By Aug. 30, according to the atomic agency's Sept. 15 report, Iran's stockpile had reached 1,060 pounds of low-enriched uranium hexafluoride, and it was producing a little more than 100 pounds a month.
At this rate, Iran will have produced at least 1,500 pounds by mid-January. Re-circulated, this could produce 35 pounds of weapon-grade uranium, enough for a bomb. (In fact, this was about the amount called for in the implosion device that Saddam Hussein's scientists were trying to perfect in the 1980s; according to intelligence sources, the Iraqi design has circulated on the nuclear black market and could well be in Iranian hands.) It would take about two to three months to raise the enrichment level to weapons-grade - meaning Iran could potentially present the world with a bomb by Easter.
There is a ray of sunshine here. Experts and diplomats have long assumed that no country would want just one bomb. It would want a first bomb to test (proving its nuclear capacity) and three or four more to deter attack. If Iran follows to this line of thinking, it pushes the magic date farther down the road, but not much. Iran is adding centrifuges, so it could probably produce enough highly enriched uranium for a second bomb within a year from now. By February 2010, it should have enough for a third, and the rate will only increase as the number of centrifuges goes up.
Nonetheless, simply having enough material on hand to make a single bomb is bound to make a difference in how Iran sees the world. Our new president and his allies will be trying to negotiate with a country that could decide at any time to escalate its nuclear threat. In effect, Iran can say, "If you don't like what we're doing now, how would you like it if we kicked out the international inspectors and made a few bombs' worth of weapons-grade material?" This threat alone would put the West into a diplomatic corner.
This holds true even though no one knows for sure whether Iran has the rest of the components needed for a bomb, or whether the bomb would work. Making these components is far easier than making the fuel, and there is a lot of evidence that Iran has been working on them. It would be dangerous to assume that the other components would not be yet available by the time enough fuel for a bomb had been produced.
The best time to stop the Iranian nuclear program was from 2002 to 2006, after its illicit nature was discovered but before it gained its present momentum. But the Bush administration, paralyzed by the war in Iraq, mounted only a haphazard and absent-minded policy. At first, it refused to back Europe's negotiations with Iran, without offering any viable alternative. Then, when the administration finally joined Europe's effort, it was too late.
Now, it will be necessary to perform a diplomatic miracle. Just as Iran is about to reap the fruits of its nuclear program, America and its allies must convince the mullahs that they would be better off without it. This will require more than the weak sanctions achieved so far. No less than a credible threat of international economic and diplomatic isolation - of making Iran a pariah state - will cause Iran to blink. It's still worth a try, but time is shorter than we thought.
Gary Milhollin is the director of the Wisconsin Project on Nuclear Arms Control and the executive editor of the Web site Iran Watch.
TEHRAN: Iran said on Monday it would not halt sensitive nuclear work as demanded by the U.N. Security Council in its latest resolution on Tehran's atomic programme that the West believes is aimed at making warheads.
The U.N. Security Council passed a resolution on Saturday ordering the Islamic Republic to halt uranium enrichment, the part of the nuclear programme that most worries the West because it has both civilian and military uses.
Iran, which insists its plans are peaceful, has already dismissed the resolution that did not add further sanctions to the three sets of penalties already imposed since 2006.
Foreign Ministry spokesman Hassan Qashqavi, in a news conference, made clear Iran would not accept the main demand.
"Enrichment is our obvious right. Demanding that Iran suspend its uranium enrichment activities is beyond their legal right and we are continuing our natural path," he said.
Iran, the world's fourth biggest oil producer which sits on huge gas reserves, says it wants nuclear technology to make electricity so it can export more of its hydrocarbons.
It has brushed off previous rounds of sanctions, saying it has a big cash cushion from windfall oil revenues to cope. But analysts say the economy is being hurt by higher trade costs and increasing wariness of investors, particularly Western firms.
Russia, one of the five permanent members of the security council with veto powers, opposed further sanctions at this stage despite a U.S.-led effort to impose new penalties.
The United States and Israel have refused to rule out military action if diplomacy fails to end the nuclear row.
Iran says neither country are in a position to attack the Islamic Republic but has warned that U.S. interests, Israel and Gulf oil shipping lanes would be targets if Tehran is pushed.
There are so many stories about the life and times of Steve Dunleavy, the longtime New York Post columnist and even longer-time Rupert Murdoch acolyte, that some, inevitably, have evolved over the years.
Many of the tales involve copious amounts of alcohol. But not this one. It goes like this: As a young copy boy in Australia about 55 years ago, Dunleavy was so hungry for a story that he popped the tires of his father's car at a murder scene. His father, a photographer at a rival newspaper, could not get to the post office to transmit his photographs, and Dunleavy, then about 15, earned his newspaper a big scoop.
That is how Murdoch remembers it.
Dunleavy tells a different version. Yes, he punctured the tires of a car, but it was owned by his father's newspaper and he didn't know his father was there. And it wasn't a murder, but the story of a group of missing hikers.
"That story gets told and told, and each time it gets a little bit more whiskers on it," Dunleavy said.
After 55 years in journalism, and 41 working for Murdoch, the curtain is coming down on Dunleavy's career. An unabashed friend to police officers, firefighters, civil servants and the occasional mobster, and scourge of polite society and liberals, in his heyday Dunleavy was the personification of Murdoch's brand of tabloid journalism, both in print and, for 10 years beginning in the mid-1980s, on television as a host of "A Current Affair," a sensationalized mix of crime and celebrity.
"Steve was very much involved in educating America about the joys and pleasures of tabloid journalism," said Col Allan, editor in chief of The New York Post. "In many ways Steve has represented the News Corp. culture - that is, hard work, hard play, laughing."
Dunleavy also tweaked the political landscape of New York City, proving that populism could come from the right, not just from the cadre of well-known left-leaning columnists of the time like Pete Hamill, Jimmy Breslin, Murray Kempton and Jack Newfield.
"Politically, the notion that there could be a populist, right wing columnist in New York seemed almost inconceivable at the time, but that's exactly what he was," said Jonathan Mahler, a contributor to The New York Times Magazine who is author of "The Bronx is Burning," a chronicle of New York City's turbulent times in 1977. "All of the iconic New York columnists were liberal, and Dunleavy was like the party crasher."
But Murdoch has always liked party crashers, being one himself. Long before News Corp., his media conglomerate, conquered the world with cable news, movies and satellite television, it was an Australian newspaper company looking for a toehold in the United States. In the mid-1960s Dunleavy was working in New York for United Press International, which had its office in the same building as the foreign correspondents for Murdoch's newspapers. It was there that Dunleavy first met Murdoch, whom he now refers to simply as "the boss."
In a nearly three-hour chat at his home in New York's eastern suburbs last week - hours that saw him drink just two cans of Budweiser - Dunleavy was uncharacteristically contemplative, melancholy even, but funny all the same. He is in frail health, and back problems prevent him from moving around easily, although he insisted on fetching his second beer himself.
"I always had dreams of dying at the desk," he said. "It's frustrating not doing what I love best, and serving, I know it sounds corny, the one who I admire the most: Murdoch, the boss."
It's a relationship that has spanned more than four decades, one that put Dunleavy, now 70, at Murdoch's side as he popularized tabloid journalism.
"He was livelier than Solomon, and he was always the most entertaining reporter," Murdoch recalled.
Of Murdoch, Dunleavy says, "even though he's done so well in TV and movies, I think if you asked him, he'd say he's first a newspaperman."
After working for several years as a correspondent in New York for Murdoch's Australian and British newspapers, Dunleavy was tapped for a Murdoch start-up in New York: The Star, a supermarket tabloid to compete with The National Enquirer. In 1976, Murdoch bought The New York Post, which was then a left-leaning newspaper.
"Murdoch took it over and Murdochized it," Mahler said. "And Dunleavy was at the center of it."
In 1977, Dunleavy's reporting on the "Son of Sam" serial murder case reinvigorated New York's newspaper culture. Before Dunleavy hopped on the story, The Post had basically conceded the story to Jimmy Breslin at The Daily News.
"They kept spiking his copy," Murdoch said, "while Breslin was leading every day. It was just killing The Post, and killing Dunleavy. So I made a change because of that." Murdoch brought in new editors, and Dunleavy began scooping Breslin - in one instance by sneaking into a hospital, dressed in clothes that looked like hospital scrubs, to interview a victim's family.
"Steve is one of the three people in America who loves Rupert Murdoch," Breslin said. "In a time of listless reporting, he climbed stairs. And he wrote simple declarative sentences that people could read, as opposed to these 52-word gems that moan: 'I went to college! I went to graduate school college! Where do I put the period?"'
In 1988, Murdoch was required by the U.S. government to sell The Post because he had bought a television station in New York. (Five years later, after the rules changed, he reacquired the newspaper out of bankruptcy.) It was around this time that Dunleavy's television career was born on "A Current Affair."
Langan's, a bar around the corner from The New York Post's newsroom, served for years as Dunleavy's office. He had a routine, normally arriving at Langan's around lunchtime for a day of reporting. "You'd always know if he was hung over from the night before because he would have a cold beer right away," said Des O'Brien, owner of Langan's. "He'd work the phone all day, and various people would come in and out. He'd put in a full workday."
If Dunleavy seems like a character out of a movie - the gruff, hard-drinking troublemaking journalist - that is because he is. Robert Downey Jr.'s role as an Australian TV reporter in Oliver Stone's "Natural Born Killers" is said to have been based on Dunleavy. He was also a character in "The Bronx is Burning."
"When I first came around, there was some very good newspapermen in New York," Dunleavy said. "But increasingly they started leaning on this Columbia School of Journalism thing. That you wanted your mom to be proud. That it was a profession.
"Journalism is a craft. Like being a master plumber. We wore white collars but we were blue-collar."
This generational clash became evident to Dunleavy when he was on the campaign plane of Robert Dole, who ran for president in 1996, and saw younger reporters heading off to health clubs at the end of the day.
"As soon as we'd stop, we'd go have a gargle," he says. "I think the younger generation is far better served going to the gym rather than the gin mill. No question about it. But we learned from our elders."
Dunleavy gets to New York infrequently nowadays, usually only when he has to see doctors at Mount Sinai Hospital, which leaves voids at Langan's, at The Post's newsroom and at Elaine's, the restaurant that was Dunleavy's other favorite hangout.
One recent night at Elaine's, Elaine Kaufman, the proprietor, recounted the time that Dunleavy left the bar with a girl during a snowstorm and got run over by a truck. "He didn't want to go the hospital," Kaufman recalled. "And then there he was on the gurney."
Dunleavy hasn't written much lately; he has been in a sort of unofficial retirement while he tends to his health. If he never writes again, his last byline will be a tribute to his friend Tim Russert of NBC News
"I laugh easily and loudly, but like so many of us, sometimes not sincerely," Dunleavy wrote in June right after Russert's sudden death. "But with Tim, you responded with more than just a belly laugh - you'd end up in hysterics with tears streaming down your face."
Probably more than a few can say the same about Dunleavy. "He's a legend in his time," Murdoch said.
For more than a decade, British politics has been dominated by the fractious personal rivalry between Tony Blair and Gordon Brown. In succeeding Blair as prime minister in June 2007, Brown presented himself almost as an anti-Blair: sober rather than populist, and stressing "the need for change."
But Brown's project has ended with a whimper. Buffeted by economic crisis, he spoke at the annual Labour Party conference in unusually personal terms. He had discovered the potency of Tony Blair's style of politics, and he won plaudits for his performance. He also protected himself against the possibility of a party coup to replace him. Yet there was a cruel paradox: In shoring up his own embattled leadership with a more effective speech than any he had previously given, Brown merely made more certain that his party and much of what he has worked for over the last decade will be overwhelmingly rejected by voters in the next election.
It all looked different 15 months ago. Having served as finance minister since Labour took office in 1997, Brown had built a reputation for successful economic management and policy expertise. He was seen as a commanding political presence of intellectual depth. But his premiership has become a torment. Staring at defeat, Labour politicians display alternately the qualities of panic and despair.
Hence the prime minister's attempt to present a more human side, while stressing his qualifications to cope with the gathering economic storm. At his conference speech he was introduced by his talented wife, Sarah, and he referred to personal hardships he had borne (he lost the sight of one eye in his youth). His most memorable line was to scorn the notion of trusting government to a "novice" - ostensibly an allusion to David Cameron, the Conservative Party leader, but clearly a warning to his own potential challengers in Labour's ranks.
It is an audacious appeal, possibly even a cynical one. Labour's defensive explanation for its unpopularity is that the economy is suffering from the global credit crisis, and the government is always an inevitable focus of voter discontent. But the economic problems include failings for which Brown bears direct responsibility. Britain faces a recession. Public finances are in a mess. Inflation is accelerating. The housing market is collapsing.
These are not the product of global forces. They are the result of the Labour government's failure to constrain the credit bubble that built up in the early years of this decade. The system of financial regulation that Brown created as finance minister has also proved inadequate; last year saw the first run on a British bank in more than a century.
As finance minister, Brown had a compulsion to micromanage. One intervention - eliminating the lowest rate of personal income tax, which pushed low-income workers into a higher bracket - came back to bite him. The change threatened the living standards of the very people whose interests Labour is supposed to champion. The government had to find additional funds to compensate them, and in terms of symbolism it was a fiasco.
In truth, Brown was never the colossus his supporters believed him to be. He has a magpie eye for intellectual ideas, but is far from being a master of them. He relies on a tight circle of advisers of highly varying quality. His capacity for bearing personal grudges - most explosively in the case of Tony Blair - is immense.
By all accounts, Blair is distraught at what has happened. If Labour fails, then his own political legacy will be eroded. Blair's popular manner eventually came to be seen by voters as superficial. In fact, he was a world-class statesman with personal qualities Brown sorely needs. But as British politics has become an arena for more "empathetic" qualities, it is the Tories who are on course for a landslide victory, having elected a leader in Cameron who is more Blair-like in manner and presentation than anything the party has seen before.
While the policy mix that Blair brought to an apparently unelectable Labour Party in the 1990s - economic growth, internationalism and social justice - retains its potency, there is scant prospect that Labour will now be able to advance it. Brown may have finally found his inner Blair, but it is far too late for him to escape electoral retribution.
Oliver Kamm is an editorial writer for The Times of London.
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