Daily Archives: December 5, 2011
By Mohamed El-Erian
The opinions expressed are his own.
With the European crisis continuing to dominate the news, many people now realize that today’s global economy faces an unusually uncertain outlook. Indeed, Europe’s turmoil is but one of the multiple global re-alignments in play today. What may be less well recognized is the extent to which specific sectors are already changing in a consequential and permanent manner.
This is particularly true for global finance where volatility has increased, liquidity is evaporating, and the role of government is pronounced but inconsistent. This is a sector where the functioning of markets is changing, along with the outlook for institutions. The implications are relevant for both economic growth and jobs.
The recent volatility in financial markets – be it the dizzying swings in equities around the world or the fragmentation of European sovereign bonds – far exceeds what is warranted by the ongoing global re-alignments. We are also seeing the impact of a consequential shift in underlying liquidity conditions – or the oil that lubricates the flow of the credit and the related ability of savers and borrowers to find each other and interact efficiently.
Facing a range of internal and external pressures, banks seem to be limiting the amount of capital that they devote to market making. Combine this with the natural inclination of many market participants to retreat to the sidelines when volatility and uncertainty increase, and what you get is a disruptive combination of higher transaction costs, reduced trading volumes, and abrupt moves in valuations.
We are also witnessing a loss of trust in instruments that many market participants – from corporations to individual investors and institutional ones – use to manage their balance sheet risks. The reduced ability to hedge current and future exposures is even forcing some to transition from using markets to manage their “net” exposures to simply reducing gross footings.
Meanwhile western banks, whether they like it or not (and most do not), are now embarked on a journey – away from what some have called “casino banking” to what others label as the “utility model.” Whether in America or in Europe, banks are under enormous pressure from both the private and public sectors to become less complex, less levered, less risky and more boring.
By withholding new credit, private creditors are forcing certain banks to de-lever – a process that is amplified by the sharp decline in bank stocks and the accompanying erosion in capital cushions. At the same time, the banks’ traditional global dominance is under growing competitive pressures from rivals headquartered in healthy emerging economies.
The result of all this is a further, across-the-board shrinkage in the balance sheet of the western banking system. This is led by Europe where some institutions (e.g., in Greece) are also experiencing meaningful deposit outflows.
After the 2008-09 debacle of the global financial crisis, governments also want their banks to be better capitalized and more disciplined. And while implementation has been both far from consistent and less than fully effective, the intention is clear: Much tighter guardrails and better enforcement to preclude any repeat of the wild west experience of over-leverage, bad lending practices, and inappropriate compensation approaches.
The influence of central banks and governments are also being felt in other ways that impact the functioning and efficiency of markets. Some of the implications are visible and largely knowable while others, by their very nature, are unprecedented and therefore less predictable.
For three years now, central banks have been pursuing a range of “unconventional policies,” particularly in America and Europe. The goal has been to reduce the probability of prolonged recessions and severe financial dislocations.
In doing so, central banks have gone well beyond their prudential supervisory and regulatory roles. They have become important direct participants in markets – essentially using their printing presses to buy selective securities, and doing so not on the basis of the usual commercial criteria that anchor the normal functioning of markets.
Market predictability is also being impacted by the erosion in the standing of sovereign risk in the western world. The cause is the twin problem of way too little economic growth and way too much debt. The effect is a less stable global financial system now that there are fewer genuine “AAA” anchoring its core.
All this will translate into a very different financial landscape. The change will be most pronounced for banks.
Look for western banks to be less complex, less global, somewhat less inter-connected and, therefore, less systemic. With some banks teetering on the edge, certain European governments (e.g., Greece) will have no choice but to nationalize part of their financial system.
Also, with the western banking system shrinking in scope and scale, look for new credit pipes to be built around those that are now clogged. With the aim of supporting growth and jobs, particularly in longer-term investments such as infrastructure, some of these pipes will be directed or enabled by governments.
Have no doubt, the financial landscape is rapidly evolving. Some of the changes are deliberately designed and implemented. Others are being imposed by the quickly changing reality on the ground.
The ultimate destination is a smaller and safer financial services sector. When we get there, a better balance will be struck between private gains and the common good. Banks will be in a better position to serve the real economy without exposing it to catastrophic risk and harmful abuses.
The next few months will shed light on the extent to which governments and, to a lesser extent, business leaders are able to properly orchestrate the process. The more they fall short, the less growth and fewer jobs there will be.
Photo: A money exchanger speaks on the telephone in his shop in Sanaa January 5, 2011. REUTERS/Khaled Abdullah
- Graham Summers’ FREE Weekly Market Forecast (Fade the Fed? Edition) (zerohedge.com)
- Dodd Frank and EMIR Unlikely to Reduce Systemic Risk, Says Industry (prnewswire.com)
By Sean D. Naylor – Staff writer
Posted : Monday Dec 5, 2011 11:36:03 EST
There was clearly something suspicious about the two western-looking “civilians” and their interpreter who the Ethiopian security forces were questioning.
For a start, they were in Ethiopia’s bandit country — near the town of Fiq in the Ogaden region that borders Somalia. Secondly, they claimed to be working for the Red Cross, but a quick check of their persons turned up sidearms, which the Red Cross forbids its personnel from carrying. By the time the “civilians” admitted they were U.S. military personnel, the damage had been done. They were on their way to an Ethiopian jail, and an international incident was brewing.
The Ogaden incident, which occurred between March 2007 and March 2008 (sources were unable or unwilling to be more specific), infuriated not only the Ethiopian government but also U.S. intelligence, military and diplomatic leaders in the region.
The Secret War
The episode was one of several irritants in U.S.-Ethiopian relations after Ethiopia’s December 2006 invasion of Somalia. Others included revelations in the U.S. press about AC-130 gunship missions being flown out of Ethiopia and a general reluctance on the Ethiopians’ part to cooperate too closely with U.S. forces in Somalia. Nonetheless, U.S. and Ethiopian special operations forces continued to work together in very small numbers until Ethiopia withdrew from Somalia in January 2009.
The U.S. military personnel whom the Ethiopians took prisoner in the Ogaden were human intelligence soldiers working for Combined Joint Task Force-Horn of Africa’s intelligence directorate. They were authorized “to go out beyond the wire,” said retired Marine Maj. Gen. Timothy Ghormley, the U.S. Central Command chief of staff at the time, who had previously commanded CJTF-HOA, based in Djibouti.
They were not supposed to be undercover, according to Ghormley.
“They’re completely overt,” he said. “They’re supposed to identify themselves as U.S. service members.”
But a senior intelligence official, also familiar with the episode, used different terminology.
“It was a clandestine operation,” the official said. The troops weren’t in uniform, “but … if they were detained they would be able to say, ‘We’re members of the U.S. military,’ so somebody could get them the hell out of there.”
The soldiers’ first mistake was venturing into an area they’d been expressly forbidden from entering, Ghormley said. “They went where they’re not supposed to, they went up near Fiq, and going up into the Fiq area was probably not the brightest thing in the world to do,” he said.
“We said, ‘Don’t go into those regions until we can verify the security and safety,’” said a State Department official. “And they ignored it completely. They put themselves at risk.”
The soldiers risked capture by ethnic Somali guerrillas who “don’t like Americans,” the official said. “They would have killed them.”
But the soldiers’ biggest error was to tell Ethiopian troops who confronted them they were members of a Red Cross team, Ghormley said.
“The colossal mistake they made — the final mistake they made — was concocting a cover story,” he said. “It was a spur-of-the-moment thing, from what I understand.”
The pretense didn’t last long.
“The Ethiopians found pistols on them,” instantly invalidating the cover story, Ghormley said. “With that, they were determined to be hostile, and when they finally did tell the Ethiopians who they were and what they were, the Ethiopians were just kind of ticked off. So they decided they would bring them in.”
The soldiers were detained for “roughly” 10 days, the senior intelligence official said.
“They were probably held 48 hours, maybe, not much longer than that,” he said.
Nevertheless, high-level diplomatic and military pressure was required to get the men released, sources said.
“It took the ambassador, it took the CENTCOM commander [Adm. William Fallon], it took the State Department to get involved,” the intelligence official said.
“An incident occurred in which a couple of guys were detained,” said Fallon, who retired in 2008. “They were using poor judgment to go to a place they shouldn’t have been, [which was] not authorized and not sanctioned and not smart.”
“The Ethiopians were good about it,” but the fiasco had long-term consequences, the intelligence official said.
The soldiers had been carrying a lot of information about U.S. intelligence operations in the region that was instantly compromised.
“All their documentation, papers, notepads, military stuff were collected [by the Ethiopians],” the State Department official said.
“It was like amateur hour, this team that got rolled up,” the intelligence official said. “There was information that they had that they should not have been carrying … It gave away techniques and procedures that we couldn’t afford to do, because we knew at that time that al-Qaida was building up its capability in Somalia and that was why we were trying damn hard to get into Somalia with really sensitive collection.”
The incident “put a spotlight on everything” U.S. intelligence was doing in the Horn, the official said. “It became a big deal and it actually hurt us, I would say, for a couple of years … around the region.”
Military intelligence operations now had to be coordinated through the CIA.
“That coordination just dried up,” the official said.
Fallon disputed that interpretation.
“It was certainly not helpful, and it caused a lot of anxiety. But at the end of the day, there was no major damage done,” he said.
(Hilary Renner, spokeswoman for the State Department’s Bureau of African Affairs, and Simon Schorno, a spokesman for the International Committee of the Red Cross, each declined to comment on the episode. The Ethiopian Embassy in Wash
ington, D.C., did not respond to a request for comment by deadline.)
Ethiopia’s withdrawal from Somalia ended neither the war in that country nor the U.S.’s role in it.
Although the Ethiopian invasion had quickly ousted the Islamic Courts Union from Mogadishu, a hard-line Islamist faction called al-Shabaab (the Youth) soon emerged to battle the Ethiopians, Somalia’s Transitional Federal Government and the African Union peacekeeping force that replaced the Ethiopians.
Since then, and particularly during the past six months, the pace of U.S. operations appears, if anything, to have accelerated as an increasing number of actors are drawn into the war in Somalia.
• On Sept. 14, 2009, a U.S. special operations helicopter raid killed Saleh Ali Saleh Nabhan, a senior al-Qaida in East Africa figure.
• On April 19, 2011, the U.S. captured Somali national and al-Shabaab member Ahmed Abdulkadir Warsame, 25, as he crossed the Gulf of Aden on a ship to Yemen from Somalia. The U.S. held Warsame, who allegedly has links to Yemen’s al-Qaida branch, for two months on a Navy ship before flying him to the U.S.
• On June 7, TFG forces killed Harun Fazul, the most-wanted al-Qaida figure in East Africa, when he mistook their roadblock in Mogadishu for an al-Shabaab position.
• On June 23, U.S. drones struck al-Shabaab targets near Kismayo.
• On July 6, there were reports of airstrikes in Lower Juba, the southernmost region of Somalia, according to the website SomaliaReport.com.
• In early August, under increasing military pressure from the TFG forces backed up by 9,000 African Union peacekeepers from Uganda and Burundi, al-Shabaab announced its withdrawal from Mogadishu.
• On Sept. 15, there were more airstrikes on an al-Shabaab training camp in Taabta in Lower Juba, according to SomaliaReport.com.
• On Sept. 21, The Washington Post and The Wall Street Journal reported that the U.S. is building a “ring of secret drone bases” including facilities in Ethiopia, the Seychelles and “the Arabian Peninsula.”
• On Sept. 23, airstrikes hit al-Shabaab’s main camp at the Kismayo airport.
• On Oct. 4, an al-Shabaab truck bomb killed an estimated 65 people in Mogadishu.
In mid-October, Kenya’s military began a substantial incursion into southern Somalia, which has since bogged down short of the port of Kismayo. By late November, there were reports that Ethiopia had again sent forces into Somalia in support of the Kenyan invasion. The New York Times quoted U.S. officials Oct. 21 saying the Kenyan action had taken them by surprise and there were no U.S. military advisers with the Kenyan force. Even if that is the case, U.S. officials say the secret war in the Horn of Africa is by no means over.
Looking back, U.S. officials are divided over what they achieved in the Horn in the years following the Sept. 11 terrorist attacks.
Successes were rare in the early years of the campaign against al-Qaida in East Africa. The only al-Qaida fighters known to have been killed between 2001 and 2005 were a bodyguard who blew himself up to enable Harun Fazul to escape Kenyan security forces in 2003 and another “minor player” who died of wounds received when Kenyan police seized him, said an intelligence source with long experience in the Horn.
During that period, warlords paid by the CIA helped render “seven or eight” al-Qaida figures out of Somalia, the source said. But although the U.S. focus was on rendering, rather than killing, members of al-Qaida in East Africa, this presented its own challenges.
“The big problem was, what do you do with one of these guys” once he had been captured, a senior military official said. That was “the $100,000 question.”
The U.S. was reluctant to put its captives on trial.
“All the evidence [against the al-Qaida figures] is intelligence,” the official said. “So unless you want to give it up … we have a problem with [that] based on sources and methods.”
Normal procedure was for the warlords to capture the targets, who were then transferred to Djibouti, processed and sent on from there, according to the intelligence source. As for their ultimate destinations, “the only ones I knew were sent to the ‘Salt Pit’ in Afghanistan,” the source said. The “Salt Pit” is the name of a CIA clandestine prison — sometimes referred to as a “black site” — north of Kabul.
Most sources Army Times interviewed said Operation Black Hawk — the CIA-led campaign against al-Qaida in East Africa — had a direct impact on the terrorist network’s efforts in the Horn. Black Hawk was a success, said the intelligence source with long experience in the Horn, because the al-Qaida cell “was certainly degraded, perhaps eviscerated.” In addition, the source said, “we believed we were able to foil several [al-Qaida] operations” along the lines of another embassy bombing or a plane attack.
However, even as he focused tightly on the manhunt and the renditions, John Bennett, the CIA’s station chief in Nairobi in the 2002-03 time frame and now the head of the Agency’s National Clandestine Service, had his doubts about that approach, the intelligence source said.
“Bennett always felt that [by focusing on rendition] you weren’t getting at the larger problem,” the source said.
Always interested in getting at how al-Qaida was targeting U.S. interests in the region, Bennett wanted to go after al-Qaida’s network and finances, the source added. (Bennett declined an interview request.)
“We rarely stepped back to ask, ‘What does this thing really look like, and so what?’” the source said. “Not because we didn’t think about it but because we went after what we knew.”
U.S. efforts were complicated by the fact that there were “two proponent agencies” for the war on al-Qaida in the Horn — U.S. Special Operations Command (higher headquarters for Joint Special Operations Command, whose elite operators were heavily involved in the Horn) and the CIA — according to the intelligence source. This created friction between the CIA and JSOC during the early years of the campaign, the source said. The Horn was what the source described as “a Title 50 environment,” meaning it was not considered a combat theater. (Title 50 is the section of the U.S. Code dealing with covert intelligence issues, while Title 10 deals with the armed services, including clandestine military operations.)
Operating out of a sovereign nation — Kenya — in a Title 50 environment meant “we had to let the Kenyans in on anything short of a covert operation,” leaving some JSOC “shooters” eager for more aggressive action “very frustrated,” the source said.
“Nairobi is a good example of JSOC wanting to come in and conduct operations — let’s say a Little Bird [helicopter] strike against a target in the tri-border area of Somalia-Ethiopia-Kenya,” the source said. “More than one [JSOC] O-6 came through Nairobi and said, ‘We can do whatever we damn please.’” The source noted that “at the time SOCOM and JSOC were accustomed to working in Title 10 environments” such as Afghanistan and Iraq, where the rules governing combat action were much looser.
Assessing the threat
No U.S. military personnel have died in combat in the Horn since 9/11, which the senior intelligence official described as “amazing.” But despite the low cost in American blood, some special operators question whether the U.S. effort there has been worth the risk.
“I never thought any of the African targets were important,” said a special operations officer. “They don’t show a direct threat to the homeland. They don’t have the ability to project.”
He dismissed the argument that Somali immigrants to the U.S. who have returned to fight for al-Shabaab represent a threat to the homeland.
“Can you show me intelligence that shows that that network is posing a direct threat to the United States or its allies?” he asked, emphasizing that he was referring to a current threat, not past attacks such as al-Qaida’s 1998 bomb attacks on two U.S. embassies in East Africa.
The senior intelligence official’s take was very different.
“The scale of the problem in Somalia was huge,” the official said. “We’re talking a large number of al-Qaida, a couple of training camps over the years that have trained, in the case of two examples, a couple of hundred people who are now out there. Some probably left the continent and returned to Europe, some may have returned to Afghanistan and some may have returned to Iraq, and some may just still be in Somalia fighting.”
Although there are terrorist training camps in Somalia, the special ops officer acknowledged, “there are training camps all over the place. But what was the threat tied to our homeland or our allies?”
“Somalia definitely has a cell [of al-Qaida] but the connectivity to the rest of al-Qaida is really specious, it’s very frail,” said a special mission unit veteran.
The diaries of senior Arab al-Qaida members such as Ramzy Binalshib and Abu Zubaydah express clear racism toward black people that would complicate any attempt at close cooperation between the Arab-dominated group and its African franchise, he said.
“What they [i.e. the targets in Africa] did enable us to do was see the network, because they had to communicate, so that’s always good,” the special ops officer said. “It made us understand the network, that’s the biggest success story. And it’s another example of how we can work quietly with others.”
“We managed to strengthen bilateral relations in the region with numerous countries,” agreed the intel source with long experience in the Horn.
But the recent flurry of airstrikes in Somalia, combined with senior leader comments, suggests that there is much work yet to do.
In a March 1 hearing, Marine Gen. James Mattis, head of U.S. Central Command, told the Senate Armed Services Committee: “…we see [al-Qaida] links going down into Somalia with al-Shabaab.”
“There’s been a lot of very challenging things done there and, sadly, we’re going to have to do,” said the senior intelligence official. But although the CIA and JSOC continue to be active in Somalia — a recent article in The Nation outlined close links between CIA and the TFG’s intelligence agency — the military has no permanent presence in the country, the intelligence official said.
After expanding for most of the past seven years, JSOC’s presence in the Horn “is steady — it’s definitely plateaued,” the senior intelligence official said. In fact, the official said, it’s probably dropped a bit” because a couple of “the key targets” have been killed.
There are no JSOC personnel in Somaliland, Sudan or Eritrea and only a very small intelligence team in Ethiopia, the official said. “On a given day in Kenya, you probably have a couple of dozen guys — that’s about it,” the official said. “Enough to do, if required … a high-value capture-or-kill mission. And then we certainly have the ability to move guys pretty damn quickly to there.”
But despite JSOC’s acute interest in Somalia, there is a limit to what the command can achieve there, said a Defense Department official. “JSOC is not going to be the deciding force in whatever happens in Somalia,” the official said. “They can’t kill them all. They can’t capture them all.”
When it comes to Somalia and Yemen, “we’d like to be doing much more in both those places,” the senior military official said. “The State Department came down hard and said we don’t want a third front in an Islamic [country] … Our State Department doesn’t want us to have campaign plans in these two countries.
“It’s a tale of frustration, tears and woe — of what we wanted to do and what we thought we’d be allowed to versus what we’ve been able to do.”
In the meantime, said the senior intelligence official, “Somalia remains a huge problem.”
- Catching up on Somalia and Somaliland (africommons.wordpress.com)
- Opening up a new front against the al-Shabab (thehindu.com)
- More Ethiopian troops seen in central Somalia-residents (trust.org)
- Ethiopian tanks push into Somalia to attack Islamists (smh.com.au)
Submitted by Tyler Durden
Just as Europe seems destined to tip into recession and the US growth miracle decouples its reality from perceived global slowdowns, the oil market steps in to balance the equation. With WTI breaking $102 and Brent over $111 this morning, driven by Iran and Syria tensions, it would seem tough for a nation exporting its way to success, that is so dependent on both domestic consumer and energy to grow ‘as expected’ with energy premia so high – or perhaps the justification is the energy sector will carry the S&P through the next quarter as earnings expectations are cut. Nevertheless, as Reuters points out, the risk of supply disruptions remains high.
Reuters: Oil up near $111 on Iran supply risk concerns
Oil prices rose on Monday with Brent crude futures up near $111, extending last week’s gains as rising tensions between Iran and the West increased the risk of disruption to crude shipments by the world’s fifth-largest oil exporter.
Iran warned on Sunday that any move to block its oil exports would more than double crude prices with devastating consequences for a fragile global economy.
Brent crude was up $1.14 at $111.08 a barrel by 1313 GMT, after last week posting a gain of more than 3 percent, its best weekly gain since mid-October. Earlier Brent had pushed to an intraday high of $111.22 a barrel.
U.S. crude was up 81 cents to $101.77 a barrel, having posted a gain of 4.3 percent last week.
Christopher Bellew, an oil trader with Jefferies Bache in London, said that worries about Iran and Syria were helping to buoy oil prices. “If Iranian exports were suspended that would be very significant as the market is tight already,” he said.
The European Union is considering a ban – already in place in the United States – on Iranian oil imports. The storming of the British Embassy in Tehran last week has opened the door for tougher action against Iran which is thought to be working on a nuclear bomb.
“The risk of disruptions to oil supplies remains high,” said Christophe Barret, global oil analyst at Credit Agricole CIB. An embargo on Iranian oil “would introduce severe disruption to refining in several EU countries” he said.
Barret added that speculation about possible military strikes on Iranian nuclear sites have helped to increase the risk premium on oil prices.
But on Friday, U.S. Defense Secretary Leon Panetta made one of his most extensive arguments to date against any imminent military action against Iran over its nuclear programme, saying he was convinced sanctions and diplomatic pressure were working.
Israel has called a nuclear-armed Iran a threat. Iran says it is enriching uranium for peaceful purposes.
In Syria, EU sanctions are already biting with Royal Dutch Shell shutting down its activities there.
On Monday, Gulfsands Petroleum said it was reviewing the impact of the latest EU sanctions against Syria on its production activities and its contracts with the Syrian government and the General Petroleum Corporation (GPC).
“Syria was exporting about 400,000 barrels per day at the start of the year and it is probably exporting nothing at the moment,” said Bellew.
Oil ministers from OPEC members Kuwait, Oman and Bahrain said that the market was well supplied, echoing similar comments by Qatar’s energy minister and the OPEC Secretary-General Abdullah al-Badri at the weekend.
OPEC will meet next week in Vienna, but with Iran holding the presidency of the OPEC conference until the end of the year, analysts do not expect much from the meeting. Iran is OPEC’s second-largest producer.
- Oil to hit $250 if new Iran sanctions applied: MP (dailystar.com.lb)
- Iran says oil would go over $250 if exports banned (windsorstar.com)
- Iranian Sanctions Will Push Oil Over $250 (forbes.com)
- U.S. tightens screws on Iran oil exports, banking (sfgate.com)
- Oil rises to near $102 as Iran tensions rise (seattlepi.com)
- Oil rises above $101 as Iran tensions rise (seattletimes.nwsource.com)