I only got back on my feet after being ill since the weekend, hence no recent updates. It couldn’t have been a worse week to get sick: so much is happening!
Some stories and related links must suffice.
1. Cash-strapped gov’t to expand lifestyle check to private citizens. And this: Optimism among elites waning. No connection between the two stories, though.
2. The worldwide market jitters (note that concern had already been widely-discussed in the media; the whole thing, if you recall my March 2 and March 15 and then July 31 entries, that unravelled over the past weeks had begun unravelling then): a string of Financial Times stories telegraphs what’s going on: World’s investors scramble for safety; Banks in dark over cost of credit turmoil; Bank shares rebound but Asian markets fall; Crunch set to prolong US housing slump. End result? Leaders Urge Calm Amid Fresh Market Turmoil even as central banks around the world pumped billions into the markets.
The Economist explains it this way: The game is up: Credit markets and the crisis of confidence in global finance:
The doubts burst into the open on August 9th when central banks were forced to inject liquidity into the overnight money markets because banks were charging punitive rates to lend to each other. At first, the problems appeared more serious among European banks. The pain in America was concentrated in the largest hedge funds, including those run by Wall Street’s biggest name, Goldman Sachs. Increasingly, however, analysts worry about the exposure of American, Canadian and Asian banks.
On Wednesday August 15th shares in Countrywide Financial, a large American mortgage lender, fell 13% after an analyst gave warning of possible funding difficulties. Despite liquidity injections by the Federal Reserve on August 15th, the S&P 500 index fell 1.4%. The heavy selling spread to Asian and European stocks on August 16th.
Every crisis begets finger-pointing, and the blame now is falling on the rating agencies that helped structure these exotic instruments. Currently, they are guided by a voluntary code that aims to tackle potential conflicts of interest. The biggest is that the agencies are paid by the firms they rate. Rating CDOs was a profitable business.
If these securities are now downgraded, banks could be forced to offload lots of illiquid instruments into a falling market—one of the fastest ways to lose money yet devised. But if there are no buyers, banks may have to sell something else to shore up their balance sheets.
Something like this indiscriminate selling has been affecting hedge funds over the past couple of weeks. Faced with more demanding standards from their banks and investors, some have been forced to unwind positions in order to realise cash. That has led to unusual movements in debt and equity markets, which have only got some funds deeper into trouble. Quantitative funds have been hardest hit, as investment models that had made money for ages briefly proved worse than useless.
The Financial Times editorial looks at the credit ratings agencies, which are being criticized by the EU for the jitters going on. Worth a read, because of the role these ratings agencies have played on our shores (first, a crutch for the government, then more recently, a cause of discomfort).
William Pesek of Bloomberg says the whole thing’s proof that our region’s economies are still linked at the hip to that of the USA; John Mangun points out that the only thing that’s certain is the high level of uncertainty at present.
For what the term “uncertainty means,” see this blog by an economist (who basically said the same thing Bowring’s saying, but called it a “Minsky Credit Cycle” way back in March): Current Market Turmoil: Non-Priceable Knightian “Uncertainty” Rather Than Priceable Market “Risk”:
Today, the FT cites a market economist at Lehman who said: “We are in a minefield. No one knows where the mines are planted and we are just trying to stumble through it”. A few days ago another market participant put it this way: “It is not the corpses at the surface that are scary; it is the unknown corpses below the surface that may pop up unexpectedly”.
Unknown minefield; unexpected corpses: this is “uncertainty” rather than “risk”. Risk can be measured and priced because it depends on know distributions of events to which investors can assign probabilities. Uncertainty cannot be priced by markets because it relates to “fat tail” distributions and extreme events that cannot be easily predicted or measured. A few days ago the CFO of Goldman Sachs justified the massive ” 30% plus” – losses of the two Goldman Sachs hedge funds by arguing that these were unpredictable “25 standard deviation events” that should occur only once in a million years. The same thing was said by the LTCM “masters of the universe” when their highly leveraged hedge fund went belly up in 1998.
Too bad that these fat tail events do occur more often than once in a million years: the real estate bubble and bust and S&L crisis of the late 1980s; the boom and bust of the tech stocks in 2000-2001; the 1987 stock market crash; the 1998 LTCM debacle; the variety of asset bubbles that ended up into busts from Japan (1980s) to East Asia (1997-98).
Indeed, for many reasons the current market panic has to do with unpriceable uncertainty rather than measurable risk.
How the thing got out of hand is further explained by Roubini as follows (it helps explain The Economist’s article linked to above):
today any wealthy individual can take $1 million and go to a prime broker and leverage this amount three times; then the resulting $4 million ($1 equity and $3 debt) can be invested in a fund of funds that will in turn leverage these $4 millions three or four times and invest them in a hedge fund; then the hedge fund will take these funds and leverage them three or four times and buy some very junior tranche of a CDO that is itself levered nine or ten times. At the end of this credit chain, the initial $1 million of equity becomes a $100 million investment out of which $99 million is debt (leverage) and only $1 million is equity. So we got an overall leverage ratio of 100 to 1. Then, even a small 1% fall in the price of the final investment (CDO) wipes out the initial capital and creates a chain of margin calls that unravel this debt house of cards. This unraveling of a Minskian Ponzi credit scheme is exactly what is happening right now in financial markets.
With a pretty discouraging prognosis:
So combine an opaque and unregulated global financial system where moderate levels of leverage by individual investors pile up into leverage ratios of 100 plus; and add to this toxic mix investments in the most uncertain, obscure, misrated, mispriced, complex, esoteric credit derivatives (CDOs of CDOs of CDOs and the entire other alphabet of credit instruments) that no investor can properly price; then you have created a financial monster that eventually leads to uncertainty, panic, market seizure, liquidity crunch, credit crunch, systemic risk and economic hard landing. The last two asset and credit bubbles in the US — the S&L real estate bubble and bust of the late 1980s and the tech stock bubble of the late 1990s — ended up in painful recessions. The latest credit and asset bubble was much bigger: housing, mortgages, credit, private equity and LBOs, credit derivatives, corporate re-leveraging. So, the current bust and de-leveraging of the financial system is likely to lead to another painful economic hard landing.
For the Philippine stock market, Key index’s gain wiped out (easy come, easy go: Net “hot money” inflow hits $3.6B). another cause for concern is that the market jitters affect the currency markets: Peso weakens further to 46.43 to $1 (also: Asian currencies slide continues, BSP steps in).
On the home front, politically, Ricky Carandang, after taking a look at Manuel Villar, Jr.’s presidential prospects, looks at the prospects for Manuel Roxas II.
4. Earthquakes! Peru! Los Angeles! Indonesia! Ring of Fire active indeed! And here’s a new thing to learn: Moment magnitude: the way to measure really large quakes.
5. Now, on to Mindanao.
First, some readings. From Miriam Coronel Ferrer, Knotty questions on Basilan:
…let’s start with the facts of the case.
On July 10, an eight-vehicle convoy of more than 100 Marine officers and enlisted men purportedly searching for the kidnapped priest was ambushed in Ginanta. Fourteen Marines were killed, and nine injured. Ten of the dead were stripped naked and gruesomely beheaded. Some of the corpses also lost fingers or legs, thighs were sliced, bones fractured, two penises cut off.
We are told the battle began at 10 a.m. and lasted until 5:30 p.m. Around 11 p.m., Al-Barka mayor Karam Jakilan sent some of his men to secure the area. He, Basilan Governor Jum Akbar and the police chief, followed around midnight and retrieved some of the mutilated bodies.
From the accounts, we can surmise that the beheadings took place from around 6 p.m. when the Marines had pulled out of the area, and before midnight when the first official party found the bodies. So who could have been responsible?
The MILF admitted their forces were involved in the battle. Ginanta is known as an MILF-controlled area. Apparently, local MILF forces were threatened by the convoy that stopped by the roadside and the truckloads of Marines that disembarked to secure the troops while one truck was being extricated from the mud. The Marines’ arrival was not coordinated with the ceasefire committee. So, without further ado, the local MILF secured the offensive. In their website (www.luwaran.com), the MILF confirmed five of their own died. They also claimed that 23, not 14 Marines were killed in the encounter and that 17 (the Marines say 18) firearms were seized. But they denied involvement in the mutilation.
From Newsbreak: Poor Planning, Troop Burnout Caused Twin Tragedy in Mindanao:
The AFP has seen better days. In 2003, for example, soldiers captured Abu Sayyaf leaders Mujib Susukan and Galib Andang aka Kumander Robot in Sulu. A resident, Fatmawati Salapuddin, remembers it well: “It was very laudable as the AFP then conducted the operation quietly, they didn’t employ thousands of troops and they didn’t use high-powered artilleries and bombs and no one was displaced.”
In Basilan last year, the military launched successful operations against the Abu Sayyaf, making them flee to the nearby island of Sulu.
Today, the AFP has sent more than 6,000 troops to pursue less then 500 armed elements in Sulu and Basilan.
And now, on to some observations:
1. Late last year I had the chance to talk to Sec. Dureza, head of the peace process. Eventually, we discussed Mindanao and he seemed quite optimistic about the prospects of peace talks. What I found most interesting is that the government takes very seriously indeed, proposals to grant Commonwealth status (with its own Organic Act or a constitution) to Muslim Mindanao. From what I recall, Dureza said there were two major obstacles: first, the Constitution makes no provisions for anything more than its present provisions for regional autonomy; second, there is the desire of Muslim leaders to expand the territory that would comprise Muslim Mindanao beyond the present ARMM. On the other hand, he felt the ancestral domain issue (which would mean compensation for Muslims for territory and resources now settled by Christians) was not far off from being settled amicably.
2. Just a few hours before I finally had to take to my sickbed, I had a very interesting talk with a former official who has an intimate knowledge of both the peace process and the Department of National Defense. Here are some observations made by the official:
a. Conflict in Mindanao is “self-containing,” a curious term which I understand works along these lines: the military undertakes an offensive; the leadership of whatever Muslim group the military is targeting melts away, seeking safe havens in Palawan and Sabah; Muslim families in the affected areas immediately send their families to evacuation centers; the evacuation centers are overwhelmed; the UN begins to speak of a “humanitarian crisis”; foreign media arrives, to cover the humanitarian crisis; foreign and public scrutiny become so intense, military offensives must cease; peace, for the time being, is restored. It is a tired, old, predictable, and tragic, script but one that serves to prevent violence from spiraling out of hand.
b. What happened in Basilan was this. The government has an agreement to respect MILF enclaves, and military operations are told to avoid entering these enclaves, and if they must, it is done with the permission of the MILF. As the Marines were conducting operations to look for Fr. Bossi, it rained and the Marines decided to take a shortcut (it’s unclear to me whether, at this point, permission from the MILF was sought, or not); still, as the Marines proceeded to take their shortcut, it was proceeding without incident until an APC broke down. When it broke down, the Marines instinctively fanned out in formation to secure the APC as it was being repaired. At this point, it seems the MILF got jittery and the firefight broke out. Things got further complicated when, for one reason or another, the AFP was unable to assist the Marines. And yet, even in the case of incidents of violence such as these, there is an SOP followed. The MILF, after the firefight, contacted the Governor and gave a full body count. It’s between the time the fighting ended, and the surviving Marines returned to recover the body of their comrades, that the beheadings took place.
c. The MILF, according to the official, retains formidable formations on the ground. Therefore, they have the capacity to make a mess of things in their areas, which discourages aggressive AFP operations. The official gave an example involving the last time fighting broke out between the MILF and the AFP. The MILF embarked on systematically blowing up and tearing down electric poles over a large swathe of territory: so while the fighting could be sorted out, and peace restored relatively quickly, the damage to infrastructure -and thus, the damage to the local economy- took months to repair.
d. The MILF, the official said, also has something the Abu Sayyaf lacks: it can engage in reprisals if conflict escalates. If an offensive were launched against the MILF, the immediate result would be bombings in Davao, the Visayas or the ferries, and Metro Manila: the MILF has the network and the means. The Abu Sayyaf, on the other hand, has been heavily hit (but not knocked out) and so cannot retaliate. While there may be individual fighters or groups of fighters, who may be MILF, MNLF, or Abu Sayyaf, or all three, depending on the circumstances, in general, there are two issues and it isn’t helpful to blur the two: handling the MILF with kid gloves (the OIC and neighboring countries are also involved, after all) can’t be imperiled by going after the Abu Sayyaf, and vice versa.
e. There is the question of military procurement. An offensive justifies emergency appropriations and sooner or later it has to be asked whether the emergency release of funds benefitted the troops or not. Say a mortar round, fresh from the factory and thus at its prime, costs 30,000 pesos. That will be its listed price. But the same mortar round, close to its expiration date, can be found on the open market for, say, 1,500 pesos (put up for sale by foreign militaries updating their inventory). Therefore, in an emergency situation, a clever arms purchaser for the AFP can source mortar rounds for a fraction of their listed price. The official explained that the military being what it is, you can be sure that every single mortar round purchased during an emergency procurement will be used up, even if the military has nothing left to shell except the forests. A conscientious military command would only purchase fresh mortar rounds and not send about-to-expire rounds to the troops; but that is presuming the command is conscientious; an unscrupulous military command, on the other hand, would be poised to make a fortune from buying cheap ammunition.
f. There is the question of whether the AFP is providing the soldiers on the ground the best leadership. An effective military has systems in place to constantly evaluate the effectivity of commanders, and to demand accountability of officers whether at the front or at HQ. At the very least, as soon as the firing stops, if it’s shown that soldiers died because of a communications or other snafu, someone needs to get the axe. Combat is as Darwinian as a situation can get: only the fittest survive, and only the fittest should remain in command. A lot of finger-pointing is going on, which excuses everyone, in the end, and results in zero accountability. This can lead to false bravado on one hand, or sagging morale on the other.
g. Because of point “a,” and “e” and “f”, there is a limit to the effectiveness of combat operations. Since war is the pursuit of politics by other means, whoever is President sets the overall strategy, with which the armed forces has to comply: its responsibility is direct the tactical side of things. Strategy can be arrived at through a process of wargames, or brainstorming, involving both civilian and military officials. A President who talks more to the generals than to prudent civilian leaders, is much more susceptible to errors in judgment arising from lapses of judgment down the line, among the officers. We often hear of administrations divided between “hawks” and “doves,” with Presidents refereeing the two: often this is how the way out of a rapidly-unraveling situations gets to be identified. If the “hawks” dominate an administration, however, then it’s very easy for any President to succumb to the temptation to give in -even when an escalation of the conflict can have grave consequences.
h. A President beholden to the military is in a weak position to apply the brakes, or determine the political framework under which military operations will take place.
A military high command which is not held in high regard by the soldiers on the ground will be ignorant of the soldiers’ real needs, or lacking in the capacity to give effective orders -not least, because fellow officers at the front and GHQ, or at both, won’t feel the pressure to perform. They can’t even be sacked, which is the ultimate trump card the President or the chief of staff should possess over subordinate officers. If the military high command feels it can act with impunity, because it can bully a President, or ignore their commander-in-chief, if the the commander-in-chief, in turn, lacks the means (usually, people) to get an accurate reading of the pulse of the officers and enlisted men, then you have a rudderless war.
i. If, further, you have an officer corps more interested in making a fortune out of a conflict, and in lining its pockets and not doing its work, and which therefore sees financial and political opportunity in a conflict: it can make money from emergency appropriations; it can increase its strength, politically, by telling the commander-in-chief things are worse than they are, and require more extreme measures than necessary; and which likes the fact the enlisted men, who are in the line of fire and are eager to avenge their fallen comrades; and so, for the duration, will want to pursue the enemy, never mind their outstanding grievances about the causes of woefully bad command-and-control and lousy equipment: then you have a recipe, if not for disaster (things are self-limiting, after all), but for the debasement of the armed forces.
j. Jolo, militarily, is a “black hole.” Nothing is gained by pouring in troops in an area where the martial culture is so ingrained, and the AFP so hated, men, women, and children all engage in taking pot shots at the soldiers. Pouring in troops only turns the entire population against the government. Putting a lid on outbreaks of violence, and engaging in more stealthy tactics (smaller groups of highly-trained soldiers, with lots of cash to pay for information), or getting local leaders to sort things out, is more effective.
Points to ponder. If the official is right, then so long as hostilities against the MILF don’t ensue, things will settle down once CNN starts showing footage of a humanitarian crisis in Mindanao. By then, a lot of lives and treasure will have been wasted, and at the end of the day, those being buried will be the enlisted men, with no senior officers any the worse for wear, and possibly, much richer and more politically powerful than before.
A final thought. See Patricio Diaz‘s latest column. There contending forces and political frameworks in the area. There are the traditional notions of Muslim identity, based on royalty and local allegiances to ruling families; the more secular notion of a Bangsamoro; and the more fundamentalist idea of a larger pan-Islamic cause, to set up a regional fundamentalist state or which aims to restore the Islamic Caliphate; and the warlords and gangsters simply interested in loot. Against them is arrayed the idea of a secular, multi-ethnic, multi-religious Republic.