Redrawn map makes Pakistan uneasy
By Jane Perlez
Sunday, November 23, 2008
ISLAMABAD: A redrawn map of South Asia has been making the rounds among Pakistani elites. It shows their country truncated, reduced to an elongated sliver of land with the big bulk of India to the east, and an enlarged Afghanistan to the west.
That the map was first circulated as a theoretical exercise in some U.S. neoconservative circles matters little here. It has fueled a belief among Pakistanis, including members of the armed forces, that what the United States really wants is the breakup of Pakistan, the only Muslim country with nuclear arms.
"One of the biggest fears of the Pakistani military planners is the collaboration between India and Afghanistan to destroy Pakistan," said a senior Pakistani government official involved in strategic planning who insisted on anonymity in accordance with diplomatic rules. "Some people feel the United States is colluding in this."
That notion may strike Americans as strange coming from an ally of 50 years. But as the incoming Obama administration tries to coax greater cooperation from Pakistan in the fight against militancy, it can hardly be ignored.
This is a country where years of weak governance have left ample room for conspiracy theories of every kind. But like such thinking anywhere, what is suspected frequently reveals the tender spots of the national psyche. Educated Pakistanis sometimes acknowledge they are paranoid, but add that they believe they have good reason.
Pakistan, a 61-year-old country marbled with intertwining and often conflictual ethnic groups, is a collection of four provinces, which can seem to have little in common. Virtually every one of its borders, drawn almost arbitrarily in the last gasps of the British Empire, is disputed with its neighbors, not least Pakistan's bitter and much larger rival, India.
These facts and the insecurities that spring from them inform many of Pakistan's disagreements with the United States, including differences over the need to rein in militancy in the form of Al Qaeda and the Taliban.
The new democratically elected president, Asif Ali Zardari, has visited the United States twice since assuming power three months ago.
He has been generous in his praise of the Bush administration. But that stance is criticized at home as fawning and wins him little popularity among a steadfastly anti-U.S. public.
So how will the promise by President-elect Barack Obama for a new start between the United States and Pakistan be received here? How can it be begun?
One possibility could be some effort to ease Pakistani anxieties, even as the United States demands more from Pakistan. That will probably mean a regional approach to what, it is increasingly apparent, are regional problems. There, Pakistani and U.S. interests may coincide.
U.S. military commanders like General David Petraeus have started to argue forcefully that the solution to the conflict in Afghanistan, where the U.S. war effort looks increasingly uncertain, must involve a wide array of neighbors.
Obama has said much the same. Several times in his campaign, he laid out the crux of his thinking. Reducing tensions between Pakistan and India would allow Pakistan to focus on the real threat - the Qaeda and Taliban militants who are tearing at the very fabric of the country.
"If Pakistan can look towards the east with confidence, it will be less likely to believe its interests are best advanced through cooperation with the Taliban," Obama wrote in Foreign Affairs magazine last year.
But such an approach faces sizable obstacles, the biggest being the conflict over Kashmir. The Himalayan border area has been disputed since the partition of India and Pakistan in 1947 and remains divided between them.
The Pakistani Army and intelligence agencies have long fought a proxy war with India by sponsoring militant groups to terrorize the Indian-administered part of the territory.
After the attacks of Sept. 11, 2001, Pakistan reined in those militants for a time, but this year they have renewed their incursions. Talks between the sides made some progress in recent years but have petered out.
Pakistanis warn that the United States should not appear too eager to mediate. First, they caution, India has always regarded Kashmir as a bilateral question. India, they note, also faces a general election early next year, an inappropriate moment to push such an explosive issue.
Second, some Pakistanis are concerned about the reliability of the United States as a fair mediator. "Given the United States' record on the Palestinian issue, where the Palestinians had to move 10 times backwards and the Israelis moved the goal posts, the same could happen here," said Zubair Khan, a former commerce minister who has watched Kashmir closely.
It was discouraging, Khan said, that the United States ignored the importance of the huge nonviolent protests by Muslims in Kashmir against Indian rule this summer. "Anywhere else, and they would have been hailed as an Orange Revolution," he said, referring to the wave of protests that led to a change in the Ukrainian government in 2004.
Such distrust has been exacerbated by what Pakistanis see as the Bush administration's tilt toward India.
Exhibit A for the Pakistanis is its rival's nuclear deal with the United States, which allows India to engage in nuclear trade even though it never joined the global Nuclear Nonproliferation Treaty.
Pakistan, with its recent history of spreading nuclear technology, received no comparable bargain.
The nuclear deal was devised in Washington to position India as a strategic counterbalance to China. That is how it is seen in Pakistan, too, but with no enthusiasm.
"The United States has changed the whole nuclear order by this deal, and in doing so is containing China, the only friend Pakistan has in the region," said Talat Masood, a retired general from the Pakistani Army.
Further, Pakistan is upset about the advances India is making in Afghanistan, with no checks from the United States, Masood said.
India has recently made big investments in Afghanistan, where Pakistan has been competing for influence. These include a road to the Iranian border that will eventually give India access to the Iranian port of Chabahar, circumventing Pakistan.
India has offered training for the Afghan military, given assistance for a new Parliament building in Kabul and reopened consulates along the border with Pakistan.
The consulates, the Pakistanis charge, are used by India as cover to lend support to a long-running separatist movement in Baluchistan Province. (Baluchistan was even made an independent state on the theoretical map, which accompanied an article by Ralph Peters titled "Blood Borders: How a Better Middle East Would Look," originally published in Armed Forces Journal.)
Both India and Pakistan in fact have a long and destructive history of, gently or not, putting in the knife. Exhibit A for the Indians is the bombing in July of their embassy in Afghanistan, which U.S. and Indian officials say can be traced to groups linked to the Pakistani spy agency.
If the Obama administration is indeed to convince Pakistanis that militancy, not the Indian Army, presents the gravest threat, it will not be easy.
The commander of U.S. forces in Afghanistan, General David McKiernan, got a taste of the challenge this month, when he visited Islamabad and sat down with about 70 members of the Pakistan Parliament at the residence of the U.S. ambassador, Anne Patterson.
Their attitude showed an almost total incomprehension of the reasons for U.S. behavior in the region after Sept. 11.
"A couple of the questions I got were, 'Why did you Americans come to Afghanistan when it was so peaceful before you got there?"' McKiernan recalled during an appearance at the Atlantic Council in Washington last week.
"Another one," he said, "was, 'We understand that you've invited a thousand Indian soldiers to serve in Afghanistan by Christmas."'
There was no truth to the claim, he told the Pakistanis. "We have a lot of work to do," he told his audience in Washington.
Indeed, among ordinary Pakistanis, many still regard Al Qaeda more positively than the United States, polls find. Talk shows here often include arguments that the suicide bombings in Pakistan are payback for the Pakistani Army fighting an U.S. war.
Some commentators suggest that the United States is actually financing the Taliban. The point is to tie down the Pakistani Army, they say, leaving the way open for the United States to grab Pakistani nuclear weapons.
Recently, in the officer's mess in Bajaur, the northern tribal region where the Pakistani Army is tied down fighting the militants, one officer offered his own theory: Osama bin Laden did not exist, he told a visiting journalist.
Rather, he was a creation of the United States, who needed an excuse to invade Afghanistan and encroach on Pakistan.
Kristof: The Pakistan test
Sunday, November 23, 2008
ISLAMABAD, Pakistan: Barack Obama's most difficult international test in the next year will very likely be here in Pakistan. A country with 170 million people and up to 60 nuclear weapons may be collapsing.
Reporting in Pakistan is scarier than it has ever been. The major city of Peshawar is now controlled in part by the Taliban, and this month alone in the area an American aid worker was shot dead, an Iranian diplomat kidnapped, a Japanese journalist shot and American humvees stolen from a NATO convoy to Afghanistan.
I've been coming to Pakistan for 26 years, ever since I hid on the tops of buses to sneak into tribal areas as a backpacking university student, and I've never found Pakistanis so gloomy. Some worry that militants, nurtured by illiteracy and a failed education system, will overrun the country or that the nation will break apart. I'm not quite that pessimistic, but it's very likely that the next major terror attack in the West is being planned by extremists here in Pakistan.
"There is real fear about the future," notes Ahmed Rashid, whose excellent new book on Pakistan and Afghanistan is appropriately titled "Descent Into Chaos."
The United States has squandered more than $10 billion on Pakistan since 9/11, and Pakistani intelligence agencies seem to have rerouted some of that to Taliban extremists. American forces periodically strike militants in the tribal areas, but people from those areas overwhelmingly tell me that these strikes just antagonize tribal leaders and make them more supportive of the Taliban. One man described seeing Pashtuns in tribal areas throwing rocks in helpless frustration at the American aircraft flying overhead.
President Asif Ali Zardari seems overwhelmed by the challenges and locked in the past. Incredibly, he has just chosen for his new cabinet two men who would fit fine in a Taliban government.
One new cabinet member, Israr Ullah Zehri, defended the torture-murder of five women and girls who were buried alive (three girls wanted to choose their own husbands, and two women tried to protect them). "These are centuries-old traditions, and I will continue to defend them," Zehri said of the practice of burying independent-minded girls alive.
Then there is Pakistan's new education minister, Mir Hazar Khan Bijarani. Last year, the Supreme Court ordered him arrested for allegedly heading a local council that decided to solve a feud by taking five little girls and marrying them to men in an enemy clan. The girls were between the ages of 2 and 5, according to Samar Minallah, a Pakistani anthropologist who investigated the case (Bijarani has denied involvement).
While there are no easy solutions for the interlinked catastrophes unfolding in Pakistan and Afghanistan, there are several useful steps that we in the West can take to reduce the risk of the region turning into the next Somalia.
First, we should slow the financial flow to Pakistan's government and military. If the government wants to stop the Talibanization of Pakistan, its greatest need isn't money but the political will to stop sheltering Taliban leaders in the city of Quetta.
Second, we should cut tariffs on Pakistani agricultural and manufactured products to boost the economy and provide jobs. We should also support China on its planned export-processing zone to create manufacturing jobs in Pakistan.
Third, we should push much harder for a peace deal in Kashmir - including far more pressure on India - because Kashmir grievances empower Pakistani militants.
Fourth, let's focus on education. One reason the country is such a mess today is that half of all Pakistanis are illiterate.
In the southern Punjab a couple of days ago, I dropped in on a rural elementary school where only one teacher had bothered to show up that day. He was teaching the entire student body under a tree, in part because the school doesn't have desks for the first three grades.
One happy note: I visited a school run by a California-based aid group, Developments in Literacy, which represents a successful American effort to fight extremism. DIL is financed largely by Pakistani-Americans trying to "give back," and it runs 150 schools in rural Pakistan, teaching girls in particular.
Tauseef Hyat, the Islamabad-based executive director of DIL, notes that originally the plan was to operate just primary schools, but then a group of 11-year-old girls threatened to go on hunger strike unless DIL helped them continue their education in high school. Hyat caved, and some of those girls are now studying to become doctors.
Obama should make his first presidential trip to Pakistan - and stop at a DIL school to remind Pakistan's army and elites that their greatest enemy isn't India but illiteracy.
One surge does not fit all
By Donald H. Rumsfeld
Sunday, November 23, 2008
The surge in Iraq has been one of the most impressive military accomplishments in recent years. It has been so successful that the emerging consensus is that what may now be needed in Afghanistan is a similar surge of American forces. President-elect Barack Obama campaigned on his intention to do so, as did his former opponent, John McCain.
As one who is occasionally - and incorrectly - portrayed as an opponent of the surge in Iraq, I believe that while the surge has been effective in Iraq, we must also recognize the conditions that made it successful. President Bush's bold decision to deploy additional troops to support a broader counterinsurgency strategy of securing and protecting the Iraqi people was clearly the right decision. More important, though, it was the right decision at the right time.
By early 2007, several years of struggle had created the new conditions for a tipping point:
Al Qaeda in Iraq's campaign of terrorism and intimidation had turned its Sunni base of support against it. The result was the so-called Anbar Awakening in the late summer of 2006, followed by similar awakening movements across Iraq.
From 2003 through 2006, U.S. military forces, under the leadership of General John Abizaid and General George Casey, inflicted huge losses on the Baathist and Qaeda leadership. Many thousands of insurgents, including the Qaeda chief in Iraq, Abu Musab al-Zarqawi, were captured or killed and proved difficult to replace.
The Iraqi Security Forces had achieved cohesion, improved operational effectiveness and critical mass. By December 2006, some 320,000 Iraqis had been trained, equipped and deployed, producing the forces necessary to help hold difficult neighborhoods against the enemy. By 2007, the surge, for most Iraqis, could have an Iraqi face.
And the political scene in Iraq had shifted. Moktada al-Sadr, the firebrand cleric, declared a cease-fire in February 2007. The government of Prime Minister Nuri Kamal al-Maliki, seated in May 2006, moved against militias and Iranian-backed militias and has imperfectly rejected narrow sectarian policies.
The best indication that timing is everything may be that there had been earlier surges without the same effect as the 2007 surge. In 2005, troop levels in Iraq were increased to numbers nearly equal to the 2007 surge - twice. But the effects were not as durable because large segments of the Sunni population were still providing sanctuary to insurgents, and Iraq's security forces were not sufficiently capable or large enough.
The decision to conduct a surge came out of an interagency review in the fall of 2006. By mid-December, as I was leaving the Pentagon, there was a rough consensus in the Defense Department that deploying additional combat brigades to Iraq was the right step. Some military leaders raised reasonable questions about the potential effectiveness of a surge, in part because of a correct concern that military power alone could not solve Iraq's problems. I agreed, and emphasized that a military surge would need to be accompanied by effective diplomatic and economic "surges" from other departments and agencies of the U.S. government, and by considerably greater progress from Iraq's elected leaders.
During my last weeks in office, I recommended to Bush that he consider General David Petraeus as commander of coalition forces in Iraq, as Casey's tour was coming to an end. Petraeus and his deputy, General Ray Odierno, had the experience and skill to recognize and exploit the seismic shifts that were taking place in Iraq's political landscape. And U.S. troops had the courage to win the alliance of Iraq's people against a common enemy.
At the critical moment - a moment when the Iraqis were able and willing to be part of the surge with the American forces - the U.S. surged into Iraq with the right commanders, additional forces and a fresh operational approach rooted in years of on-the-ground experience. Americans can be proud of what has been accomplished in Iraq over the last five-plus years. They should also be impressed by the results of the surge, which has outstripped expectations, including mine.
Bush's decision to increase troop levels in Iraq in January 2007 sent a clear message that he was determined not to abandon a people to terrorists. We will need the same commitment to helping the people of Afghanistan succeed, but that does not mean we will achieve it with the same tactics or strategies.
The way forward in Afghanistan will need to reflect the current circumstances there - not the circumstances in Iraq two years ago. Additional troops in Afghanistan may be necessary, but they will not, by themselves, be sufficient to lead to the results we saw in Iraq. A similar confluence of events that contributed to success in Iraq does not appear to exist in Afghanistan. What's needed in Afghanistan is an Afghan solution, just as Iraqi solutions have contributed so fundamentally to progress in Iraq. And a surge, if it is to be successful, will need to be an Afghan surge.
Left unanswered in the current debate is the critical question of how thousands of additional American troops might actually bring long-term stability to Afghanistan - a country 80,000 square miles larger than Iraq yet with security forces just one-fourth the size of Iraq's. Afghanistan also lacks Iraq's oil and other economic advantages. It is plagued by the narcotics trade. Its borders are threatened by terrorist sanctuaries in Pakistan. Fractured groups of Pashtun tribesmen on both sides of the Afghanistan-Pakistan border do not yet appear willing to unite and take on the insurgents in their midst, as Arab tribes did in Iraq.
Further, Afghanistan has a long history of defeating foreign armies that sought strength in numbers. More U.S. troops could raise tensions, particularly in Afghanistan's Pashtun south, where the insurgency is strongest.
Only capable indigenous forces can ultimately win an insurgency. Afghan forces, backed by coalition troops, will need to move into the most violent areas to secure and protect the local population, enabling Afghans to cooperate with their government without losing their lives.
To do this, the size of the Afghan National Army will need to be increased well beyond its 70,000 or so troops and its training accelerated. More American forces will need to undertake the unglamorous work of embedding with Afghan soldiers as advisers, living and fighting together. Kingpins and senior facilitators in the thriving poppy industry that helps to fuel the insurgency will need to be treated as military targets, as Qaeda and Taliban leaders are. Reconstruction projects should be focused on provinces and towns that are cooperating with the Afghan government, instead of making blanket commitments to increase foreign assistance across Afghanistan and possibly fostering a culture of dependence.
The current suggestion of "opening negotiations" with the Taliban may well win over some low- and mid-level supporters, but if history is any guide, offering the hand of peace to hardened fanatics is not likely to prove successful. Aggressive action against Taliban and Qaeda sanctuaries in Pakistan will need to continue. Pakistani officials will have to isolate any factions in their military and intelligence services that are sympathetic to the Taliban.
In a few weeks, the new commander in chief, Barack Obama, will assume the responsibility of leading a nation at a time of war. Time and flexibility are the two constants of military success. In a struggle with an adaptable, thinking enemy, there is no single template for success. More is not always better. One size does not fit all.
The singular trait of the American way of war is the remarkable ability of our military to advance, absorb setbacks, adapt and ultimately triumph based upon the unique circumstances of a given campaign. Thus it has been throughout our history. And thus it will be in Iraq and Afghanistan, if we have the patience and wisdom to learn from our successes, and if our leaders have the wherewithal to persevere even when it is not popular to do so.
Donald H. Rumsfeld was the secretary of defense from 2001 to 2006.
Friedman: We found the WMD
By Thomas L. Friedman
Sunday, November 23, 2008
So, I have a confession and a suggestion. The confession: I go into restaurants these days, look around at the tables often still crowded with young people, and I have this urge to go from table to table and say: "You don't know me, but I have to tell you that you shouldn't be here. You should be saving your money. You should be home eating tuna fish. This financial crisis is so far from over. We are just at the end of the beginning. Please, wrap up that steak in a doggy bag and go home."
Now you know why I don't get invited out for dinner much these days. If I had my druthers right now we Americans would convene a special session of Congress, amend the Constitution and move up the inauguration from Jan. 20 to Thanksgiving Day. Forget the inaugural balls; we can't afford them. Forget the grandstands; we don't need them. Just get me a Supreme Court justice and a Bible, and let's swear in Barack Obama right now - by choice - with the same haste we did - by necessity - with LBJ in the back of Air Force One.
Unfortunately, it would take too long for a majority of states to ratify such an amendment. What we can do now, though, said the congressional scholar Norman Ornstein, co-author of "The Broken Branch," is "ask President Bush to appoint Tim Geithner, Barack Obama's proposed Treasury secretary, immediately." Make him a Bush appointment and let him take over next week. This is not a knock on Hank Paulson. It's simply that we can't afford two months of transition where the markets don't know who is in charge or where we're going. At the same time, Congress should remain in permanent session to pass any needed legislation.
This is the real "Code Red." As one banker remarked to me: "We finally found the WMD." They were buried in our own backyard - subprime mortgages and all the derivatives attached to them.
Yet, it is obvious that President Bush can't mobilize the tools to defuse them - a massive stimulus program to improve infrastructure and create jobs, a broad-based homeowner initiative to limit foreclosures and stabilize housing prices, and therefore mortgage assets, more capital for bank balance sheets and, most importantly, a huge injection of optimism and confidence that we can and will pull out of this with a new economic team at the helm.
The last point is something only a new President Obama can inject. What ails us right now is as much a loss of confidence - in our financial system and our leadership - as anything else. I have no illusions that Obama's arrival on the scene will be a magic wand, but it would help.
Right now there is something deeply dysfunctional, bordering on scandalously irresponsible, in the fractious way our political elite are behaving - with business as usual in the most unusual economic moment of our lifetimes. They don't seem to understand: Our financial system is imperiled.
"The unity seems to be gone. The emergency looks to be a little less pressing," Bill Frenzel, the former 10-term Republican congressman who is now with the Brookings Institution, was quoted by CNBC.com on Friday.
I don't want to see Detroit's auto industry wiped out, but what are we supposed to do with auto executives who fly to Washington in three separate private jets, ask for a taxpayer bailout and offer no detailed plan for their own transformation?
The stock and credit markets haven't been fooled. They have started to price financial stocks at Great Depression levels, not just recession levels. With $5, you can now buy one share of Citigroup and have enough left over for a bite at McDonalds.
As a result, Barack Obama is possibly going to have to make the biggest call of his presidency - before it even starts.
"A great judgment has to be made now as to just how big and bad the situation is," says Jeffrey Garten, the Yale School of Management professor of international finance. "This is a crucial judgment. Do we think that a couple of hundred billion more and couple of bad quarters will take care of this problem, or do we think that despite everything that we have done so far - despite the $700 billion fund to rescue banks, the lowering of interest rates and the way the Fed has stepped in directly to shore up certain markets - the bottom is nowhere in sight and we are staring at a deep hole that the entire world could fall into?"
If it's the latter, then we need a huge catalyst of confidence and capital to turn this thing around. Only the new president and his team, synchronizing with the world's other big economies, can provide it.
"The biggest mistake Obama could make," added Garten, "is thinking this problem is smaller than it is. On the other hand, there is far less danger in overestimating what will be necessary to solve it."
Conventional wisdom says it's good for a new president to start at the bottom. The only way to go is up. That's true - unless the bottom falls out before he starts.
Citigroup pays for a rush to risk
By Eric Dash and Julie Creswell
Sunday, November 23, 2008 (IN PAPER MONDAY 24TH)
"Our job is to set a tone at the top to incent people to do the right thing and to set up safety nets to catch people who make mistakes or do the wrong thing and correct those as quickly as possible. And it is working. It is working."
- Charles Prince 3rd, Citigroup's chief executive, in 2006
In September 2007, with Wall Street confronting a crisis caused by too many souring mortgages, Citigroup executives gathered in a wood-paneled library to assess their own well-being.
There, Citigroup's chief executive, Charles Prince 3rd, learned for the first time that the bank owned about $43 billion in mortgage-related assets. He asked Thomas Maheras, who oversaw trading at the bank, whether everything was O.K.
Maheras told his boss that no big losses were looming, according to people briefed on the meeting who would speak only on the condition that they not be named.
For months, Maheras's reassurances to others at Citigroup had quieted internal concerns about the bank's vulnerabilities. But this time, a risk-management team was dispatched to more rigorously examine Citigroup's huge mortgage-related holdings. They were too late, however: within several weeks, Citigroup would announce billions of dollars in losses.
Normally, a big bank would never allow the word of just one executive to carry so much weight. Instead, it would have its risk managers aggressively look over any shoulder and guard against trading or lending excesses.
But many Citigroup insiders say the bank's risk managers never investigated deeply enough. Because of longstanding ties that clouded their judgment, the very people charged with overseeing deal makers eager to increase short-term earnings and executives' multimillion-dollar bonuses failed to rein them in, these insiders say.
Today, Citigroup, once the largest and mightiest financial institution, has been brought to its knees by more than $65 billion in losses, write-downs for troubled assets and charges to account for future losses. More than half of that amount stems from mortgage-related securities created by Maheras's team the same products Prince was briefed on during that 2007 meeting.
Citigroup's stock has plummeted to its lowest price in more than a decade, closing Friday at $3.77. At that price the company is worth just $20.5 billion, down from $244 billion two years ago. Waves of layoffs have accompanied that slide, with about 75,000 jobs already gone or set to disappear from a work force that numbered about 375,000 a year ago.
Burdened by the losses and a crisis of confidence, Citigroup's future is so uncertain that regulators in New York and Washington held a series of emergency meetings late last week to discuss ways to help the bank right itself.
And as the credit crisis appears to be entering another treacherous phase despite a $700 billion U.S. government bailout, Citigroup's woes are emblematic of the haphazard management and rush to riches that enveloped all of Wall Street. All across the banking business, easy profits and a booming housing market led many prominent financiers to overlook the dangers they courted.
While much of the damage inflicted on Citigroup and the broader economy was caused by errant, high-octane trading and lax oversight, critics say, blame also reaches into the highest levels at the bank. Earlier this year, the U.S. Federal Reserve took the bank to task for poor oversight and risk controls in a report it sent to Citigroup.
The bank's downfall was years in the making and involved many in its hierarchy, particularly Prince and Robert Rubin, an influential director and senior adviser.
Citigroup insiders and analysts say that Prince and Rubin played pivotal roles in the bank's current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits. Prince and Rubin both declined to comment for this article.
When Rubin was Treasury secretary during the Clinton administration, he helped loosen Depression-era banking regulations that made the creation of Citigroup possible by allowing banks to expand far beyond their traditional role as lenders and permitting them to profit from a variety of financial activities. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.
And since joining Citigroup in 1999 as a trusted adviser to the bank's senior executives, Rubin, who is an economic adviser on the transition team of President-elect Barack Obama, has sat atop a bank that has been roiled by one financial miscue after another.
Citigroup was ensnared in murky financial dealings with the defunct energy company Enron, which drew the attention of U.S. investigators; it was criticized by law enforcement officials for the role one of its prominent research analysts played during the telecom bubble several years ago; and it found itself in the middle of regulatory violations in Britain and Japan.
For a time, Citigroup's megabank model paid off handsomely, as it rang up billions in earnings each quarter from credit cards, mortgages, merger advice and trading.
But when Citigroup's trading machine began churning out billions of dollars in mortgage-related securities, it courted disaster. As it built up that business, it used accounting maneuvers to move billions of dollars of the troubled assets off its books, freeing capital so the bank could grow even larger. Because of pending accounting changes, Citigroup and other banks have been bringing those assets back in-house, raising concerns about a new round of potential losses.
To some, the misery at Citigroup is no surprise. Lynn Turner, a former chief accountant with the Securities and Exchange Commission, said the bank's balkanized culture and pell-mell management made problems inevitable.
"If you're an entity of this size," he said, "if you don't have controls, if you don't have the right culture and you don't have people accountable for the risks that they are taking, you're Citigroup."
Questions on oversight
Though they carry less prestige and are paid less than Wall Street traders and bankers, risk managers can wield significant clout. Their job is to monitor trading floors and inquire about how a bank's money is being invested, so they can head off potential problems before blow-ups occur. Though risk managers and traders work side by side, they can have an uncomfortable coexistence because the monitors can put a brake on trading.
That is the way it works in theory. But at Citigroup, many say, it was a bit different.
David Bushnell was the senior risk officer who, with help from his staff, was supposed to keep an eye on the bank's bond trading business and its multibillion-dollar portfolio of mortgage-backed securities. Those activities were part of what the bank called its fixed-income business, which Maheras supervised.
One of Maheras's trusted deputies, Randolph Barker, helped oversee the huge build-up in mortgage-related securities at Citigroup. But Bushnell, Maheras and Barker were all old friends, having climbed the bank's corporate ladder together.
It was common in the bank to see Bushnell waiting patiently sometimes as long as 45 minutes outside Barker's office so he could drive him home to Short Hills, New Jersey, where both of their families lived. The two men took occasional fly-fishing trips together; one expedition left them stuck on a lake after their boat ran out of gas.
Because Bushnell had to monitor traders working for Barker's bond desk, their friendship raised eyebrows inside the company among those concerned about its controls.
After all, traders' livelihoods depended on finding new ways to make money, sometimes using methods that might not be in the bank's long-term interests. But insufficient boundaries were established in the bank's fixed-income unit to limit potential conflicts of interest involving Bushnell and Barker, people inside the bank say.
Some at Citigroup say that if traders or bankers wanted to complete a potentially profitable deal, they could sometimes rely on Barker to convince Bushnell that it was a risk worth taking.
Risk management "has to be independent, and it wasn't independent at Citigroup, at least when it came to fixed income," said one former executive in Barker's group who, like many other people interviewed for this article, insisted on anonymity because of pending litigation against the bank or to retain close ties to their colleagues. "We used to say that if we wanted to get a deal done, we needed to convince Randy first because he could get it through."
Others say that Bushnell's friendship with Maheras may have presented a similar blind spot.
"Because he has such trust and faith in these guys he has worked with for years, he didn't ask the right questions," a former senior Citigroup executive said, referring to Bushnell.
Bushnell and Barker did not return repeated phone calls seeking comment. Maheras declined to comment.
For some time after Sanford Weill, an architect of the merger that created Citigroup a decade ago, took control of Citigroup, he toned down the bank's bond trading. But in late 2002, Prince, who had been Weill's longtime legal counsel, was put in charge of Citigroup's corporate and investment bank.
According to a former Citigroup executive, Prince started putting pressure on Maheras and others to increase earnings in the bank's trading operations, particularly in the creation of collateralized debt obligations, or CDO's securities that packaged mortgages and other forms of debt into bundles for resale to investors.
Because CDO's included so many forms of bundled debt, gauging their risk was particularly tricky; some parts of the bundle could be sound, while others were vulnerable to default.
"Chuck Prince going down to the corporate investment bank in late 2002 was the start of that process," a former Citigroup executive said of the bank's big CDO push. "Chuck was totally new to the job. He didn't know a CDO from a grocery list, so he looked for someone for advice and support. That person was Rubin. And Rubin had always been an advocate of being more aggressive in the capital markets arena. He would say, 'You have to take more risk if you want to earn more.' "
It appeared to be a good time for building up Citigroup's CDO business. As the housing market around the United States took flight, the CDO market also grew apace as more and more mortgages were pooled together into newfangled securities.
From 2003 to 2005, Citigroup more than tripled its issuing of CDO's, to more than $20 billion from $6.28 billion, and Maheras, Barker and others on the CDO team helped transform Citigroup into one of the industry's biggest players. Firms issuing the CDO's generated fees of 0.4 percent to 2.5 percent of the amount sold meaning Citigroup made up to $500 million in fees from the business in 2005 alone.
Even as Citigroup's CDO stake was expanding, its top executives wanted more profits from that business. Yet they were not running a bank that was up to all the challenges it faced, including properly overseeing billions of dollars' worth of exotic products, according to Citigroup insiders and regulators who later criticized the bank.
When Prince was put in charge in 2003, he presided over a mess of warring business units and operational holes, particularly in critical areas like risk-management and controls.
"He inherited a gobbledygook of companies that were never integrated, and it was never a priority of the company to invest," said Meredith Whitney, a banking analyst who was one of the company's early critics. "The businesses didn't communicate with each other. There were dozens of technology systems and dozens of financial ledgers."
Problems with trading and banking oversight at Citigroup became so dire that the Federal Reserve took the unusual step of telling the bank it could make no more acquisitions until it put its house in order.
In 2005, stung by regulatory rebukes and unable to follow Weill's penchant for expanding Citigroup's holdings through rapid-fire takeovers, Prince and his board of directors decided to push even more aggressively into trading and other business that would allow Citigroup to continue expanding the bank internally.
One person who helped push Citigroup along this new path was Rubin.
Robert Rubin has moved seamlessly between Wall Street and Washington. After making his millions as a trader and an executive at Goldman Sachs, he joined the Clinton administration.
Weill, as Citigroup's chief, wooed Rubin to join the bank after Rubin left Washington. Weill had been involved in the financial services industry's lobbying to persuade Washington to loosen its regulatory hold on Wall Street.
As chairman of Citigroup's executive committee, Rubin was the bank's resident sage, advising top executives and serving on the board while, he insisted repeatedly, steering clear of daily management issues.
"By the time I finished at Treasury, I decided I never wanted operating responsibility again," he said in an interview in April. Asked then whether he had made any mistakes during his tenure at Citigroup, he offered a tentative response.
"I've thought a lot about that," he said. "I honestly don't know. In hindsight, there are a lot of things we'd do differently. But in the context of the facts as I knew them and my role, I'm inclined to think probably not."
Besides, he said, it was impossible to get a complete handle on Citigroup's vulnerabilities unless you dealt with the trades daily.
"There is no way you would know what was going on with a risk book unless you're directly involved with the trading arena," he said. "We had highly experienced, highly qualified people running the operation."
But while Rubin certainly did not have direct responsibility for a Citigroup unit, he was an architect of the bank's strategy.
In 2005, as Citigroup began its effort to expand from within, Rubin peppered his colleagues with questions as they formulated the plan. According to current and former colleagues, he believed that Citigroup was falling behind rivals like Morgan Stanley and Goldman, and he pushed to bulk up the bank's high-growth fixed-income trading, including the CDO business.
Former colleagues said Rubin also encouraged Prince to broaden the bank's appetite for risk, provided that it also upgraded oversight though the Federal Reserve later would conclude that the bank's oversight remained inadequate.
Once the strategy was outlined, Rubin helped Prince gain the board's confidence that it would work.
After that, the bank moved even more aggressively into CDO's. It added to its trading operations and snagged crucial people from competitors. Bonuses doubled and tripled for CDO traders. Barker drew pay totaling $15 million to $20 million a year, according to former colleagues, and Maheras became one of Citigroup's most highly compensated employees, earning as much as $30 million at the peak far more than top executives like Bushnell in the risk-management department.
In December 2005, with Citigroup diving into the CDO business, Prince assured analysts that all was well at his bank.
"Anything based on human endeavor and certainly any business that involves risk-taking, you're going to have problems from time to time," he said. "We will run our business in a way where our credibility and our reputation as an institution with the public and with our regulators will be an asset of the company and not a liability."
Yet as the bank's CDO machine accelerated, its risk controls fell further behind, according to former Citigroup traders, and risk managers lacked clear lines of reporting. At one point, for instance, risk managers in the fixed-income division reported to both Maheras and Bushnell setting up a potential conflict because that gave Maheras influence over employees who were supposed to keep an eye on his traders.
CDO's were complex, and even experienced managers like Maheras and Barker underestimated the risks they posed, according to people with direct knowledge of Citigroup's business. Because of that, they put blind faith in the passing grades that major credit-rating agencies bestowed on the debt.
While the sheer size of Citigroup's CDO position caused concern among some around the trading desk, most say they kept their concerns to themselves.
"I just think senior managers got addicted to the revenues and arrogant about the risks they were running," said one person who worked in the CDO group. "As long as you could grow revenues, you could keep your bonus growing."
To make matters worse, Citigroup's risk models never accounted for the possibility of a housing downturn, this person said, and the prospect that millions of homeowners could default on their mortgages. Such a downturn did come, of course, with disastrous consequences for Citigroup and its rivals on Wall Street.
Even as the first shock waves of the subprime mortgage crisis hit Bear Stearns in June 2007, Citigroup's top executives expressed few concerns about their bank's exposure to mortgage-linked securities.
In fact, when examiners from the U.S. Securities and Exchange Commission began scrutinizing Citigroup's subprime mortgage holdings after Bear Stearns's problems surfaced, the bank told them that the probability of those mortgages defaulting was so tiny that they excluded them from their risk analysis, according to a person briefed on the discussion who would speak only without being named.
Later that summer, when the credit markets began seizing up and values of various CDO's began to plummet, Maheras, Barker and Bushnell participated in a meeting to review Citigroup's exposure.
The slice of mortgage-related securities held by Citigroup was "viewed by the rating agencies to have an extremely low probability of default (less than .01 percent)," according to Citigroup slides used at the meeting and reviewed by The New York Times.
Around the same time, Maheras continued to assure his colleagues that the bank "would never lose a penny," according to an executive who spoke to him.
In mid-September 2007, Prince convened the meeting in the small library outside his office to gauge Citigroup's exposure.
Maheras assured the group, which included Rubin and Bushnell, that Citigroup's CDO position was safe. Prince had never questioned the ballooning portfolio before this because no one, including Maheras and Bushnell, had warned him.
But as the subprime market plunged further, Citigroup's position became more dire even though the firm held onto the belief that its CDO's were safe.
On Oct. 1, it warned investors that it would write off $1.3 billion in subprime mortgage-related assets. But of the $43 billion in CDO's it had on its books, it wrote off only about $95 million, according to a person briefed on the situation.
Soon, however, CDO prices began to collapse. Credit-rating agencies downgraded CDO's, threatening Citigroup's stockpile. A week later, Merrill Lynch aggressively marked down similar securities, forcing other banks to face reality.
By early November, Citigroup's anticipated write-downs ballooned to $8 billion to $11 billion. Barker and Maheras lost their jobs, as Bushnell did later on. And on Nov. 4, Prince told the board that he, too, would resign.
Although Prince received no severance, he walked away with Citigroup stock valued then at $68 million along with a cash bonus of about $12.5 million for 2007.
Putting out fires
Prince was replaced last December by Vikram Pandit, a former money manager and investment banker whom Rubin had earlier recruited in a senior role. Since becoming chief executive, Pandit has been scrambling to put out fires and repair Citigroup's deficient risk-management systems.
Earlier this year, Federal Reserve examiners quietly presented the bank with a scathing review of its risk-management practices, according to people briefed on the situation.
Citigroup executives responded with a 25-page single-spaced memo outlining a sweeping overhaul of the bank's risk management.
In May, Brian Leach, Citigroup's new chief risk officer, told analysts that his bank had greatly improved oversight and installed several new risk managers. He said he wanted to ensure "that Citi takes the lessons learned from recent events and makes critical enhancements to its risk management frameworks. A change in culture is required at Citi."
Meanwhile, regulators have criticized the banking industry as a whole for relying on outsiders in particular the ratings agencies to help them gauge the risk of their investments.
"There is really no excuse for institutions that specialize in credit risk assessment, like large commercial banks, to rely solely on credit ratings in assessing credit risk," John Dugan, the head of the Office of the Comptroller of the Currency, the chief U.S. bank regulator, said in a speech earlier this year.
But he noted that what caused the largest problem for some banks was that they retained dangerously big positions in certain securities like CDO's rather than selling them off to other investors.
"What most differentiated the companies sustaining the biggest losses from the rest was their willingness to hold exceptionally large positions on their balance sheets which, in turn, led to exceptionally large losses," he said.
Dugan did not mention any specific bank by name, but Citigroup is the largest player in the CDO business of any bank the comptroller regulates.
For his part, Pandit faces the twin challenge of rebuilding investor confidence while trying to fix the company's myriad problems.
Citigroup has suffered four consecutive quarters of multibillion-dollar losses as it has written down billions of dollars of the mortgage-related assets it held on its books.
But investors worry there is still more to come, and some board members have raised doubts about Pandit's leadership, according to people briefed on the situation.
Citigroup still holds $20 billion of mortgage-linked securities on its books, the bulk of which have been marked down to between 21 cents and 41 cents on the dollar. It has billions of dollars of giant buyout and corporate loans. And it also faces a potential flood of losses on auto, mortgage and credit card loans as the global economy plunges into a recession.
Also, hundreds of billions of dollars in dubious assets that Citigroup held off its balance sheet is now starting to be moved back onto its books, setting off yet another potential problem.
The bank has already put more than $55 billion in assets back on its balance sheet. It now says an added $122 billion of assets related to credit cards and possibly billions of dollars of other assets will probably come back on the books.
Even though Citigroup executives insist that the bank can ride out its current difficulties, and that the repatriated assets pose no threat, investors have their doubts. Because analysts do not have a complete grip on the quality of those assets, they are warning that Citigroup may have to set aside billions of dollars to guard against losses.
In fact, some analysts say they believe that the $25 billion that the U.S. government invested in Citigroup this fall might not be enough to stabilize it.
Others say the fact that such huge amounts have yet to steady the bank is a reflection of the severe damage caused by Citigroup's appetites.
"They pushed to get earnings, but in doing so, they took on more risk than they probably should have if they are going to be, in the end, a bank subject to regulatory controls," said Roy Smith, a professor at the Stern School of Business at New York University. "Safe and soundness has to be no less important than growth and profits but that was subordinated by these guys."
U.S. inspector pleased at reconstruction in Iraq
By James Glanz
Sunday, November 23, 2008
RAMADI, Iraq: Cloudlets of silty dust puffed up around Colonel Matthew Dougherty's combat boots with each resolute step he took through a construction site in this provincial capital in the Anbar Desert.
If Dougherty, a battle-tested U.S. Marine reservist, at times showed flashes of nervousness, it had nothing to do with the security situation in this former cauldron of the insurgency.
Instead, it was all about his visitor: Stuart Bowen Jr., the veteran inspector whose scathing reports about Iraq reconstruction projects have provided a chronicle of widespread waste and failure, and isolated successes, in the $50 billion U.S. program.
Accompanying Bowen around the construction site for a provincial courthouse and jail complex on Tuesday, Dougherty explained that the first phase of the $21.5 million effort was behind schedule. Because of startup delays after the contract was signed in May, work that should have been finished in October instead may not be done until December, he said.
But Bowen was pleased. Wading through the dust in penny loafers and a borrowed Army Corps of Engineers hard hat, he offered some encouraging words. "On Iraq time, two months behind is ahead of schedule," he said. "That's not bad at all."
Through Bowen's eyes, the reasons for good cheer were all around.
Instead of the empty desert or piles of rubble he has found on visits to other construction sites in an expensive and floundering rebuilding program, there were actual buildings that smelled of fresh paint.
Instead of absent workers and managers visible only on payroll ledgers, there were swarms of Iraqis in blue dungarees working under the watch of Dougherty, an adviser to the State Department's Provincial Reconstruction Team, or PRT, in Anbar.
"It's good work, for the most part," said Bowen, who as head of the Office of the Special Inspector General for Iraq Reconstruction has seen hundreds of such projects - and embarrassed many a project manager with his reports - since he assumed his position in February 2004.
At last, in this relatively modest project in Ramadi and in others like it around the country, it appears that some of the lessons that Bowen and other reconstruction watchdogs have been expounding on for years are being taken to heart. The central question now is whether those epiphanies have come too late to do more than isolated good for Iraqis looking for improved services and infrastructure in their ramshackle, war-ravaged country.
The great majority of the Bush administration's reconstruction money has been spent, and more than $12 billion of it has gone to just 10 private contractors, Bowen's office determined in its most recent quarterly report. Some of the most severely criticized companies to work in Iraq, like Parsons, KBR and the joint venture called FluorAMEC, have benefited from cost-plus contracts, a format that virtually invites abuse, as it allows companies to charge the United States costs plus a fixed profit no matter how poor, even disastrous, the companies' performance was.
To make matters worse, the Westerners brought in by the companies often racked up huge administrative and security costs even though they simply hired Iraqi subcontractors to do the work and seldom ventured out of fortresslike compounds.
But in what Bowen says has become a trend, the judicial complex in Ramadi was contracted directly to an Iraqi company, called Almco, was negotiated for a fixed price and is taking shape under the daily supervision of company managers and PRT officials.
The head of the company, Namir al-Akabi, a large, urbane man, trudged around with the group during the inspection. Akabi knows his reconstruction history: He worked with some of the big Western contractors early in the effort and saw their flaws firsthand.
Akabi said the Western firms' main advantage was that they knew how to write contract proposals in a format acceptable to the U.S. government. Since Iraqis gained some of those skills, the situation has strikingly changed, and Akabi appeared momentarily sheepish when someone asked how much business his company was doing these days.
"Sir, total about $300 million a year I am turning over," Akabi said finally.
Perhaps the most remarkable thing about the judicial complex itself is that it is being built in Ramadi, which not long ago appeared so irredeemably violent that it might have been a scene from "Apocalypse Now." But during Bowen's visit, not a single explosion or burst of gunfire was heard.
Asked what the biggest factor was in carrying out reasonably successful projects these days, Dougherty did not hesitate in his answer: security.
"In the past, you couldn't get out and monitor projects," he said. "That makes a huge difference."
But if there has been one theme running throughout Bowen's stream of reports, it is that projects in Iraq have been doomed less by violence than by failures in the everyday tasks of planning, management and construction. For example, his inspection team, part of which was with him last Tuesday, seems to have a particular talent for discovering substandard concrete, nonfunctioning toilets and dangerous wiring.
With Bowen having recently survived the third major attempt with strong political overtones to shut down his office - allies of President George W. Bush's White House have never been pleased with Bowen's disclosures - it looks as if the rebuilding program will still have to pass muster with his team. The current congressional mandate essentially keeps Bowen's office open as long as there is any rebuilding money to spend. So his office, like the reconstruction itself, still has some life in it.