Monday, July 23, 2007

Mortgages, Pakistan: Are These Crises Containable?

The editors of the L.A. Times still haven't moved the critical sub-prime mortgage crisis to Page 1, but at least in Sunday's newspaper, there was an excellent, and foreboding, analysis, of its consequences by Tom Petruno in the Business section. It was long overdue.

It raises a question, I want to write about today: When is a crisis containable, and if it is, how difficult will it be to contain? This arises not only now with the mortgage crisis, but also in the unfolding events in Pakistan, where Al Qaeda and the Taliban threaten to take over. And it even arises with Tribune Co. CEO Dennis FitzSimons? Is his incompetence containable, or will the whole Tribune Co. collapse on account of it?

Petruno's article does not mince words about the sub-prime mortgage crisis. He writes it is very serious and it shows signing of getting worse, reaching out to impact not only better-quality mortgages, but the stock market and the whole economy.

Under a headline that declares, "Wall Street can't cage its mortgage monster," Petruno observes that "Wall Street's standard line" has been that the problem is "manageable."

But, he goes on, this isn't so. "The line went, the trouble would be 'contained'--meaning it would be limited to the highest risk loans and wouldn't spread up to better-quality mortgages or to better-quality mortgage-backed bonds.

"Those assertions were all but blown away last week, after brokerage Bear Stearns Cos. on Tuesday disclosed that investors in two of its hedge funds that owned mortgage-backed securities had lost virtually all of their money."

Petruno's analysis of what has been happening is compelling. He notes that there is ample evidence that fraud is involved, that many people obtained mortgages based on incorrect evaluations of their properties and/or their incomes. In short, the lenders should have known that when the adjustible provisions of their loans kicked in, many would not be able to afford to make payments. So not only the mortgages, but those speculators who had invested in backing them would go belly-up.

I will give only Petruno's conclusion here: "The fire sale in mortgage securities has yet to begin. But it's coming. The implications for the rest of financial markets aren't clear, but when confidence is shaken in one market there usually is collateral damage. Once again, Wall Street's rocket scientists (its gurus) have created a monster they can no longer control."

Ben Bernanke, head of the Federal Reserve Board, warned last week that the total mortgage losses could hit $100 billion. Neither the L.A. Times nor the New York Times did much more than mention the warning in obscurely-played shorts.

But the bottom line of the crisis is that it may not be easily containable at all, that it may end up affecting all of us who own property or securities, and that, because it is so serious, it belongs on Page 1 of the newspapers, not back in the Business sections.

Now, let's go on to Pakistan. Its troubles have not been so much of a secret. Following the crushing of Islamic extremists at the Red Mosque in the Pakistani capital of Islamabad, including the killing of its imam, both Al Qaeda and the Taliban have begun a series of suicide bombings that has already taken more than 150 lives. Regular Pakistani army units have, we are told, entered the border areas that these two terrorist organizations have come to control, but the Army's effectiveness and willingness to fight is very much in question. And, meanwhile, the dictatorship of Pervez Musharraf, who the United States has supported with billions of dollars in funds and arms, seems to be under tremendous pressure. All this is having an impact already on the conflict in neighboring Afghanistan, where U.S. and NATO forces are striving to contain a Taliban resurgence. The Taliban is the lowest example of the ills of humanity, and its threat today to kill 23 innocent South Korean hostages in Afghanistan by tomorrow night unless Taliban prisoners are released is just another example of its utter depravity.

In Pakistan, Musharraf may fall, and if he does, who will replace him? Will it be democratic, secular forces, or will it be the terrorists? And if the terrorists were to take over, would they also take over Pakistan's estimated 40 nuclear weapons? And if that were to happen, what would we, or India, or Israel do about it? All three countries have a tremendous stake in seeing to it that an atomic arsenal does not fall into the hands of the terrorists.

All this is not fanciful. There is a crisis already in Pakistan, and we have to ask, how big will it grow? Is it containable?

This is something the American and British news media is properly paying attention to. Last week, Bryan Williams on the NBC Nightly News had a comparatively long interview (for network news) with Richard Haass, the head of the Council on Foreign Relations. Like Petruno on the mortgage crisis, Haass did not mince words. He said that what is happening in Pakistan is more important at this moment than what is happening in Iraq, and he called it the number one foreign policy problem for the United States.

Finally, I mentioned Dennis FitzSimons, the Tribune Co. CEO. Nearly everything that FitzSimons has tried to do to stem the hemorrhaging of the resources of the Tribune Co. has only compounded the problem. Advertising is sliding, revenue is sliding, layoffs are increasing, debt is reaching exhorbitant levels, the editorial product at the 10 Tribune newspapers, including the L.A. Times, is deteriorating, readers have been leaving in droves.

Is this a containable crisis? I'm afraid that the answer is, not any more than the mortgage crisis or Pakistan?

We see in the case of Roman Catholic Cardinal Roger Mahony in Los Angeles, defender of pedophile priests, how difficult it is to get rid of incompetents and worse. The L.A. Times, which has yet to call for Mahony's resignation, had an article in its Opinion section Sunday calling him the "teflon" cardinal and speculating he will be hard to remove. But in this case, there is an answer to the crisis: Mahony must step down.

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