Latino Sexual Oddysey

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Saturday, September 01, 2007


By Richard Kim
Copyright by The Nation and Richard Kim
August 31, 2007

One way or another, Larry Craig is a goner. Facing intense pressure from Republican party chiefs and the embarrassment of having audio of his arrest broadcast on national TV, Craig is expected to resign shortly. If he doesn't, the RNC is prepared to call for his head and launch an ethics investigation.

Personally, I'm hoping Craig digs in and forces the issue. I'd love to see Mitt Romney elaborate on what he finds so "disgusting" about "I'm not gay" Craig, or Mitch McConnell explain why admitted john David Vitter is still in the Senate or why crook Ted Stevens hasn't been stripped of his committee assignments. The mutually assured destruction of the party of piety and hypocrisy is the best-case scenario one could hope for here.

Not that it doesn't come with a certain amount of collateral damage. Since Roll Call broke the Craig story, mainstream media--from Slate's Explainer to the Washington Post--have seemingly "discovered" the strange mating rituals of male public sex. A Sacramento CBS news duo even took it upon themselves to reenact the scene, complete with toe-tapping and prop bathroom stall divider. "Sexperts" have been called upon to parse the difference between a tap-tap-tap that signals sexual interest and a tap-tap-tap that indicates a difficult bowel movement. Websites like, which lists places where men meet for the former kind of toe-tapping, have had the most unlikely visitors from Newsweek.

Welcome America! Welcome to the world--not just of underground gay sex--but of law enforcement. The Minneapolis airport police have been slouching here for quite some time. Apparently, since May of this year, they've made 41 arrests like Craig's in an elaborate sting operation. Not to be outdone, the head of the Atlanta International Airport police boasted that they've arrested 45 men (take that Minneapolis!), including "a couple college professors" and "the CEO of a bank" (but alas, no Senators) in a similar sweep. As Doug Ireland reports over at Gay City News, Michigan police have them all beat; the Triangle Foundation reports "a caseload of 770 arrests in four months."

I didn't stress this in my last post on Craig--because I didn't think I'd have to--but such dragnets are not only motivated by homophobia, but are practically, if not technically, police entrapment. They're a legacy of a pre-Lawrence legal order that criminalized sodomy, and they endure to this day because gay sex, even and perhaps especially the suggestion of its solicitation, is still seen as violation of the norms of public life.

Heterosexuals routinely use public space and the internet to solicit sex from each other; sometimes this sex is among perfect strangers or in public (or quasi-public) itself. Unless they involve minors, none of these practices are the subject of undercover busts. Instead they're romanticized (teenage makeout sites), tolerated as nuisances (bad pickup lines, whistles, Lindsay Lohan) or generally treated as vital, sexy aspects of modern social life and economy.

Just once I'd like to see the script flipped. Why don't the Minneapolis police post undercover female cops at airport bars who gesture provocatively towards the bathroom and then arrest any man who follows? Using newfound, post-9/11 surveillance powers, law enforcement should determine the identities of everyone who posts details of their sexcapades on These are dangerous, lewd heterosexuals who have admitted to having had actual sex--not in the airport--but on the airplane! Baby-faced, 21 Jump Street-type cops should be assigned to every high school to offer blowjobs to jocks underneath the bleachers. Anyone who shows up at the designated coordinates should be arrested. Depending on the jurisdiction, some arrestees may even get their names permanently listed on sex offender registries! The entire city of Myrtle Beach should be staked out for the month of March. And don't even get me started on the subject of Craigslist.

These scenarios may seem outlandish and as long as we live in a straight world, they will never come to pass. But all the tools for their enforcement are already upon us. As Jack Dwyer points out in his excellent anatomy of police surveillance in a post-9/11 New York, the NYPD routinely uses undercover operatives to monitor gatherings as benign as bicycle rides and memorials. These techniques are rightly decried as infringements on the rights of citizens to use the public sphere to express themselves. When that expression is explicitly political, the left reflexively leaps to the fray. But when it comes in the form of someone like Larry Craig, we seem somewhat adrift (see the Slate editors). But nothing Craig did--he solicited, but did not have, sex in public--should be illegal. In fact, absent his hypocrisy, nothing he did should be objectionable either.

Iowa Gay Marriage Applications Halted

Iowa Gay Marriage Applications Halted
Copyright © 2007, The Associated Press
7:07 PM CDT, August 31, 2007

DES MOINES, Iowa - Same-sex marriage was legal here for less than 24 hours before the county won a stay of a judge's order on Friday, a tiny window of opportunity that allowed two men to make history but left dozens of other couples disappointed after a frantic rush to the altar.

At 2 p.m. Thursday, Judge Robert Hanson ordered Polk County officials to accept marriage license requests from same-sex couples, but he granted the stay at about 12:30 p.m. Friday. By then 27 same-sex couples had filed applications, but only Sean Fritz and Tim McQuillan of Ames had made it official by getting married and returning the signed license to the courthouse in time.

In the front yard of the Rev. Mark Stringer, pastor of the First Unitarian Church of Des Moines, they become the only same-sex couple wed in the U.S. outside of Massachusetts, where some 8,000 such couples have tied the knot.

Stringer concluded the ceremony by saying, "This is a legal document and you are married." The men then kissed and hugged.

"This is it. We're married. I love you," Fritz told McQuillan after the ceremony.

No more same-sex weddings will be recognized, and no more applications will be accepted, pending Polk County's appeal of Hanson's ruling to the Iowa Supreme Court, County Attorney John Sarcone said.

Hanson's order had applied only to the county, but because any Iowa couple could apply for a license, people from across the state rushed to Des Moines, only to see fluorescent green signs explaining the stay and adding, "Sorry for the inconvenience."

Lytishya Borglum and partner, Danielle Borglum, drove 2 1/2 hours from Cedar Falls, along with their 13-month-old daughter, Berlyn. They planned to apply in Polk County and told their pastor in Cedar Falls to be ready to marry them when they returned.

"(We) plan to take the application home and pray that things change. Even though it is a setback, it is a step in the right direction," Lytishya Borglum said.

She said they would like to get legal status to gain more rights but added, "As far as we're concerned, our marriage is between us and God. We've been married for three years -- if you ask us."

Accepting marriage licenses from same-sex couples has been illegal under a 1998 state law that permitted only a man and a woman to marry.

Hanson, ruling in a case filed by six same-sex couples who were denied marriage licenses in 2005, declared the law unconstitutional Thursday. He ruled that the marriage laws "must be read and applied in a gender neutral manner so as to permit same-sex couples to enter into a civil marriage."

The marriage license approval process normally takes three business days, but Fritz and McQuillan took advantage of a loophole that allows couples to skip the waiting period if they pay $5 and get a judge to sign a waiver.

Other couples, even those who got an early start Friday, were out of luck. Katy Farlow and Larissa Boeck, students at Iowa State University, said they got to the county recorder's office at 5 a.m., then sat in lawn chairs and ate snacks until the office opened at 7:30 a.m. They got their application in but didn't get their license.

"This might be our only chance," Farlow said. "We already knew we were spending the rest of our lives together."

Hanson granted the stay after Sarcone filed a motion saying his ruling should be put on hold because lifting the ban was far reaching and would likely be overturned by the Iowa Supreme Court.

Hanson wrote that Sarcone's arguments "do indeed constitute good cause for the issuance of the requested stay."

Plaintiff's attorney Dennis Johnson had argued that the county's appeal probably would not succeed and disputed its contention that a reversal would throw any licenses issued into legal doubt.

He said a marriage license is valid until one or both of the spouses seek to have it dissolved or one dies, "regardless of changes in the law that may occur after the couple marries."

The Iowa Supreme Court can refer the case to the Iowa Court of Appeals, consider the matter itself or decide not to hear the case. The flurry of activity in the courts prompted a quick response from some lawmakers. House Republican leader Christopher Rants called on Democrats, who hold a majority of seats in the Legislature, to respond.

"The Democrats should call a special session immediately to take up such issues and to introduce a marriage amendment for Iowa's constitution," he said in a statement. "House Democrats need to start leading or get out of the way."

Language defining marriage as being between a man and a woman has been written into the constitutions of 27 states, according the National Conference of State Legislatures. Most other states have laws to the same effect; Iowa's was approved overwhelmingly by the Legislature in 1998.

Gov. Chet Culver on Thursday issued a statement stating his opposition to gay marriage and said he would wait for the court process to play out before considering any push for legislative action.

"While some Iowans may disagree on this issue, I personally believe marriage is between a man and a woman," Culver said.

Gay marriage is legal in Massachusetts, and nine other states have approved spousal rights in some form for same-sex couples.

* __

Associated Press writers Henry C. Jackson, Amy Lorentzen and Nafeesa Syeed contributed to this report.

Obama leads with corporate crowd - Clinton can play hometown card, too, but it has done little to help her so far

Obama leads with corporate crowd - Clinton can play hometown card, too, but it has done little to help her so far
By Susan Chandler
Copyright © 2007, Chicago Tribune
September 2, 2007

The typical Midwestern business leader is a rock-ribbed Republican who favors socially moderate policies but strongly opposes more regulation and higher taxes. That makes it somewhat of a surprise that Barack Obama, a Democrat from Chicago's South Side, appears to be winning their hearts and wallets.

Hundreds of Chicago executives, lawyers and investment bankers have written checks to Obama, according to a Tribune analysis of campaign contributions during the first six months of this year. Most aren't hedging their political bets by giving money to New York Sen. Hillary Rodham Clinton, the Democratic Party's front-runner in national polls—so far anyway.

Obama's allies in corner offices run the industry gamut from Exelon Chief Executive John Rowe to Madison Dearborn Chairman John Canning to Baxter International CEO Robert Parkinson.The Obama camp also is being supported by Brenda Barnes, the CEO of Sara Lee Corp.; William Osborn, the head of Northern Trust Corp.; and Michael Krasny, founder of CDW Corp.

The Tribune analysis found that among CEOs of the Chicago area's 50 largest publicly traded companies, 10 made personal contributions directly to Obama totaling a little more than $29,000. Clinton's tally: zero.

The aggregate numbers are fairly small because federal election laws limit individuals to $2,300 in donations for the party primaries and another $2,300 for the presidential election. If a candidate ends up not winning the nomination, he or she must return the contributions related to general election.

Clinton still has plenty of time to catch up, her supporters point out. Serious fundraising kicks into gear again after Labor Day.

Among Republican contenders, former Massachusetts Gov. Mitt Romney was favored by a handful of Chicago CEOs—including Miles White at Abbott Laboratories, Judson Green at Navteq and Patrick Moore of Smurfit-Stone Container Corp.—who gave him a total of about $8,000. Arizona Sen. John McCain came in second, and former New York Mayor Rudolph Giuliani came in third.

The top executives at Chicago's 50 largest private companies were more Republican than their public-company peers, with fewer than 10 contributing to any presidential hopeful in the first half. Of those that did, four gave money to Romney, including Craig Duchossois of Duchossois Industries Inc. and William Wirtz of the Wirtz Corp., who also donated a smaller amount to McCain.

One Chicago company that has the bases pretty well covered is Equity Residential Properties Trust, the giant apartment landlord. CEO David Neithercut gave money to Obama and Dodd, while Chairman Sam Zell backed Giuliani and McCain. (Zell is a director of Tribune Co., which owns this newspaper.)

Obama's fundraising lead among business types is reflected among Illinois residents in general.

Through the first half of the year, Obama received $7.7 million in campaign contributions, according to the latest amended filings available from the Federal Election Commission.

Clinton raised less than one-quarter of that—$1.8 million.

No Republican presidential candidate has even broken the seven-figure mark in Illinois. McCain, whose campaign has stalled from lack of money nationally, has raised more than $735,000. Romney has gathered $623,000, and Giuliani rounds out the top three with $575,000, according to the election commission.

As disappointing as that is for the Republican Party, it has got to be a bigger disappointment for the Clinton campaign.

Clinton has claimed hometown status here because she grew up in suburban Park Ridge. Illinois also was a big contributor to her husband's two successful runs for president, and now the state is holding its primary in February, early enough to sway the choice of a presidential nominee.

Clinton's campaign leaders are putting the best spin on the situation. They say they haven't tried very hard in Illinois, choosing instead to target other states. They also say fundraising here picked up quite a bit in the second quarter.

"Obviously to see this kind of support in Illinois has been a pleasant surprise," said Clinton spokesman Blake Zeff. "Each time Hillary has come to Chicago, the reception has been extremely warm, and for that we are very grateful."

Clinton picked up an important endorsement this summer from prominent Republican donor Terrence Duffy, the head of the Chicago Mercantile Exchange. Duffy praised her for crossing party lines and combining leadership with "pragmatic problem-solving skills."

Clinton's distant second in Illinois fundraising could be hard to overcome, said political consultant Eric Adelstein.

"The better [Obama] does the more of a hindrance on her fundraising in this state it becomes," said Adelstein, who is not working for either candidate. "He has got a real lock on Illinois at this point."

James Tyree, CEO of Mesirow Financial, believes he is an example of why Obama has come on so strong in so short a time.

"I'm really not often active in these types of things, but in this case, I think Barack is such a unique talent, I think he can win. I think he is level-headed and balanced, unlike many of the other folks who are throwing their hat in the ring."

Tyree says he has not contributed to the Clinton campaign. "Barack has all my support, and I'm asking all my friends around the country to support him."

Kenneth Janda, an emeritus political science professor at Northwestern University, says Obama's fundraising success is two-pronged. Obama is tapping "new sources" who probably wouldn't have contributed to the presidential race at all, Janda says. Others simply want to make sure they have access to him whether he ends up as the presidential nominee or remains one of the state's two U.S. senators.

"That's the critical factor. They want to be on-board," Janda said. Contributing to both Obama and Clinton would be a "pretty transparent" attempt to hedge one's bets and won't have the same payoff with the eventual winner, he added.

Still some high-profile business people are contributing to both Democratic front-runners.

John Bryan, the former CEO of Sara Lee Corp., has donated to Obama and Clinton. So did William Daley, the Midwest chairman of JPMorgan Chase & Co. and the mayor's brother. Bill Daley didn't stop there: He also gave money to the presidential campaigns of former North Carolina Sen. John Edwards and Connecticut Sen. Christopher Dodd.

Some share within party
Another person spreading his money around is William Brandt, the turnaround specialist who has hosted several big fundraising dinners for former President Bill Clinton and is a close friend and adviser of Hillary Clinton's.

Brandt has contributed the maximum amount—$4,600 for the presidential primary and general election—to Clinton and Obama. He also has contributed to the primary campaign of Edwards, who is running third in the polls.

Brandt said he is doing it because he wants to encourage vigorous debate among a strong field of candidates. "I'm one of those Democrats who think we have an embarrassment of riches. I want them to be heard for as long as possible. I think the clash of ideas helps and sharpens both Barack and Hillary."

Yet there's no question who he wants to see in the Oval Office in 2008. "With our kids dying in Iraq, who do you want to be pulling the levers of power? It's got to be Hillary," Brandt said.

Brandt is willing to shoulder some of the blame for Clinton's slow start in Illinois. He says he advised her to focus elsewhere so as not to test the loyalties of local contributors. Brandt also predicts Clinton will catch up in Illinois before the primaries begin early next year.

She took a step in that direction June 25 with a fundraiser at the Palmer House Hilton attended by 600 people, including Yusef Jackson and Ernie Banks. The dinner was a sellout and raised more than $1 million, twice what organizers had hoped.

The summer is a slow period because many people are on vacation, so Brandt doesn't expect another big surge until after Labor Day.

For Clinton, New York and California continue to lead in her fundraising efforts. Illinois ranks eighth for her. The Land of Lincoln comes in second for Obama, trailing only California, a more populous state. New York ranks third for Obama.

Obama backers not surprised
Obama advisers John Rogers, CEO and founder of Ariel Capital Management, and Valerie Jarrett, CEO of Habitat Co., say Obama's fundraising success here should come as no surprise.

"I get calls all the time from people who want to be involved, write checks, volunteer. I've been involved in politics for 25 years, and I've never seen anything like it," said Rogers, who heads one of the country's largest minority-owned investment firms. "People just believe in him and like him personally."

It is more than just charisma, says Jarrett, who chaired Obama's finance committee during his Senate race. Despite his liberal policies such as universal health-care coverage, he is trusted by the local executives and entrepreneurs because they have seen him operate up close.

"The business community here knows him and what kind of elected official he has been. His fundraising numbers demonstrate complete confidence in his candidacy," she said.

The Clinton-Obama race has revealed some fault lines in Chicago's wealthiest family—the Pritzker clan. Real estate executive Penny Pritzker is heading up national fundraising for Obama, while her brother, venture capitalist J.C. Pritzker, is the national chairman of Citizens for Hillary, an initiative designed to garner votes and contributions from the grass-roots level.

However, campaign records show that most Pritzkers and many members of the billionaire Crown family are backing Obama rather than Clinton.

A number of Chicago business leaders are hedging their bets in a different way—they gave money to Obama and McCain.

Public relations magnate Daniel Edelman did, and so did Krasny, Rowe and Osborn. Canning found a different straddle—Obama and Romney.

But with McCain running short of cash and trailing in the polls, he appears increasingly unlikely to be the Republican candidate, political experts say. That leaves Chicago's business community with a big bet on Obama, one they hope will pay off if he becomes the first Illinois politician to occupy the Oval Office since Abraham Lincoln.

More Than 1,800 Iraqis Killed in August

More Than 1,800 Iraqis Killed in August
Copyright © 2007, The Associated Press
7:57 AM CDT, September 1, 2007

BAGHDAD - Civilian deaths rose slightly in August as a huge suicide attack in the north two weeks ago offset security gains elsewhere, making it the second deadliest month for Iraqis since the U.S. troop buildup began, according to figures compiled Saturday by The Associated Press.

U.S. deaths remained well below figures from last winter when the U.S began dispatching 30,000 additional troops to Iraq.

At least 1,809 civilians were killed in the month, compared to 1,760 in July, based on figures compiled by the AP from official Iraqi reports. That brings to 27,564 the number of Iraqi civilians killed since AP began collecting data on April 28, 2005.

The August total included 520 people killed in quadruple suicide bombings on Yazidi communities near the Syrian border. The horrific attacks made Aug. 14 the single deadliest day since the war began in March 2003.

Eighty-five coalition troops -- 81 American and four British -- died in August, down from 88 the month before, including 79 Americans. The average rate of 2.74 coalition deaths per day was the second lowest since the surge began, and down from a peak of 4.23 per day in May.

May also saw the highest number of civilian deaths since the start of the year, with 1,901.

U.S. officials have maintained that violence is declining in Iraq in the run-up to a series of reports to Congress this month that will decide the course of the U.S. military presence here.

The top U.S. commander, Gen. David Petraeus, was quoted Friday as saying the troop increase has sharply reduced sectarian killings in Baghdad. Petraeus is expected to make the same point when he reports to Congress in about two weeks.

"If you look at Baghdad, which is hugely important because it is the center of everything in Iraq, you can see the density plot on ethno-sectarian deaths," the Australian newspaper quoted him as saying during an interview in the Iraqi capital.

"It's a bit macabre but some areas were literally on fire with hundreds of bodies every week and a total of 2,100 in the month of December '06, Iraq-wide. It is still much too high but we think in August in Baghdad it will be as little as one quarter of what it was," the newspaper quoted Petraeus, who gave no specific figures.

American hopes brightened this week when the most powerful Shiite militia leader, Muqtada al-Sadr, ordered a halt to attacks by his Mahdi Army for up to six months to reorganize and purge it of unruly factions that the U.S. maintains are armed and trained by Iran.

"If implemented, Sadr's order holds the prospect of allowing coalition and Iraqi security forces to intensify their focus on al-Qaida-Iraq and on protecting the Iraqi population," the U.S. military said in a statement Saturday.

The statement said an end to Mahdi Army violence "would also be an important step in helping Iraqi authorities focus greater attention on achieving the political and economic solutions necessary for progress and less on dealing with criminal activity, sectarian violence, kidnappings, assassinations, and attacks on Iraqi and coalition forces."

The government-run newspaper Sabah published a front-page editorial Saturday praising al-Sadr's declaration as "a correct decision" and urged other militia leaders to follow suit.

Despite those comments, U.S. and Iraqi forces have not let up on raids against extremists in Shiite areas.

Before daybreak Saturday, Iraqi and American forces raided Sadr City, the Baghdad stronghold of the Mahdi Army. Several cars were demolished during the operation by U.S. tanks, according to a police officer speaking on condition of anonymity and Associated Press Television News video from the scene showed several crushed cars on the street.

The U.S. military said American troops and Iraqi police were involved in the raid and searched two houses, detaining three suspects. On the way back to base the group was attacked with a roadside bomb but suffered no injuries, Spc. Emily Greene said in an e-mailed statement. There was no mention of the crushed cars or other collateral damage.

Leaflets scattered around Sadr City urged people to report on Shiite militants who are cooperating with the Iranians, providing a cell phone number and an e-mail address.

"The criminal Iraqis who work with the Iranian Revolutionary Guards are toys under Persian control," read one of the leaflets, which pictured a puppet dancing on strings. "Iranian Revolutionary Guards are interfering in Iraq's affairs while Iraqis are dying."

Armed Shiite groups are locked in a struggle for power in Shiite areas of the capital and in the Shiite heartland of the south, which includes major religious shrines and vast oil wealth. Control of the shrines offers not only prestige but access to huge sums of money donated by Shiites from around the world.

As part of that power struggle, gunmen on a motorcycle assassinated Muslim al-Batat, an aide to the country's top Shiite cleric, Grand Ayatollah Ali al-Sistani, police said. The attack occurred in Basra, where numerous militias are competing for power.

International Herald Tribune Editorial - Diana

International Herald Tribune Editorial - Diana
Copyright by The International Herald Tribune
Published: August 31, 2007

Has it been 10 years already since Diana died? The best evidence isn't the calendar. It's the photographs of the Princess of Wales, staring out at us from the newsstands and TV. They remind us how distant the near-past can seem, how sensitive we are to the nuances of the present.

That, perhaps, is one of the ways to tell Diana's story - a shimmering wisp of the present who chose to be wedded to an institution that embodied the past. Except that there is something too simple, too allegorical in that telling, and in nearly every telling of her story. The fact is that she was an imperfect human being, like all of us, who married into a family of imperfect beings. She died in an accident that was as tragic as any accident in which a young mother dies.

It isn't clear what the global outpouring of grief that followed Diana's death really said about her life. It was, perhaps, the emotional counterpoint to her royal wedding. If fate wasn't going to round out her days in some appropriate way then it was up to the rest of us to provide the mythic touch that was missing. And so we did.

Nearly all the blanks in Diana's life have now been filled in, for better or worse. The only thing that remains open-ended is the reaction to her death. From a decade's distance, there is something a little incommensurate in that great global throb of grief. The temptation is to search Diana's nature, her character, her actions, for the source of it.

Perhaps the answer is no more complicated than this: The world is filled with so much to grieve over that grief itself seems incommensurate and indulgent. It is no slight to that young woman to say that in her death we recognized something our grief was good for.

International Herald Tribune Editorial - More realism, less spin

International Herald Tribune Editorial - More realism, less spin
Copyright by The International Herald Tribune
Published: August 31, 2007

A new report from the U.S. Congress' investigative arm provides a powerful fresh dose of nonpartisan realism about Iraq. With a crucial debate on Iraq set for next month, the report should be read by members of Congress who may be wavering over withdrawing American troops.

The Government Accountability Office, in a draft assessment reported Thursday, determined that Iraq has failed to meet 15 out of 18 benchmarks for political and military progress mandated by Congress. Laws on constitutional reform, oil and permitting former Baathists back into the government have not been enacted. Among other failings, there has been unsatisfactory progress toward deploying three Iraqi brigades in Baghdad and reducing the level of sectarian violence.

Earlier this year, President George W. Bush ordered a massive buildup of American troops in Iraq in a desperate attempt to salvage his failed strategy and stave off congressional moves to bring the forces home. He argued that he was buying a period of relative calm for Iraqi politicians to achieve national reconciliation.

The top American officials in Iraq, Army Gen. David Petraeus and Ambassador Ryan Crocker, are to present their assessments at congressional hearings in mid-September. Their findings, and a White House report due Sept. 15, are seen as a potential trigger for a change in Iraq strategy. Two things, however, are already clear. Iraq's leaders have neither the intention nor the ability to take advantage of calm, relative or otherwise. And a change in strategy seems the farthest thing from Bush's mind.

Bush has invoked Vietnam to argue against leaving Iraq. That argument is specious, but there is a chilling similarity between the two U.S. foreign policy disasters. In Vietnam, as in Iraq, American presidents and military leaders went to great lengths to pretend that victory was at hand when nothing could be farther from the truth.

Lay the blame on Wall Street and Main Street

Lay the blame on Wall Street and Main Street
By John Authers
Copyright The Financial Times Limited 2007
Published: September 1 2007 03:00 | Last updated: September 1 2007 03:00

We all stand in the shoes of US mortgage-holders now. The financial system, we now know, relies on them. In recent weeks, a string of European banks has discovered that they had lent to US borrowers, as investment-grade securities they held turned out to be contaminated by bad US subprime mortgage bonds.

With the risk of US mortgage defaults now dispersed globally, not just Americans but everyone else in the developed world has an interest in averting an escalation in US defaults.

There is also a global search for culprits. Alas it turns out that almost nobody is blameless.

The importance of US housing is hard to overstate. For at least a year now, a central risk on investors' radar screens has been that falling house prices would force US consumers to spend less. That could cut global demand. Housing data this week was that US house prices were falling and the overhang of unsold properties was rising.

Further, the credit crunch in world financial markets and the slumping US housing market might easily reinforce each other.

Tighter credit conditions make it harder to obtain a mortgage, and hence reduce the demand for housing. But the recent popularity of variable loans, known in the US as adjustable-rate mortgages (ARMs), could also increase the borrowing costs for those who already hold a house.

That could raise defaults still higher while pushing house prices down - tightening the credit crunch and deepening the impact on the economy.

The loss of confidence in mortgage-backed bonds means that the increase in ARMs could be substantial - maybe as much as 2.5 percentage points. For borrowers who were stretched in the first place, and who only borrowed on the basis of generously low initial "teaser" rates, that could be critical.

Anthony Sanders, an economist at Arizona State University, suggests that a total of $500bn in variable mortgages is due to "reset" this year, with another $450bn next year.

The problem originated with "subprime" borrowers - who have poor credit histories - but now it is affecting the "prime" market as well.

He says that loans for investment properties, such as summer houses, are experiencing unprecedented defaults. Delinquencies in popular vacation states, such as Arizona and Florida, are running at unprecedented levels.

The blame does not all belong with Wall Street or with regulators. Rather, much of it belongs to old-fashioned human fallibility. Otherwise highly-intelligent and rational people lose their grasp of reality when the subject is house prices.

Robert Shiller - the Yale University economist famous for his 2000 book Irrational Exuberance, which predicted that the tech bubble would burst - has written a chapter on housing for the second edition of the book. He believes the same factors are at work.

He shows that house prices have detached themselves from underlying rental values. Moreover, he suggests that house prices are more prone even than stock prices to irrational exuberance.

On housing, buyers get their information from widely-dispersed anecdotal evidence, biased towards "success stories". They also tend to look at the return on housing investment in terms of the raw profit made on the sale. They do not take the costs of renovations or mortgage interest into account, let alone inflation.

Nobody treats stocks this way. Share price performance is quoted in percentage terms. Indices are well publicised. So, understanding of their performance is relatively rational.

Memories are short, too. The current housing boom in the UK has taken place barely 15 years after the disaster of the early 1990s, when many homeowners were stranded in their houses by negative equity.

So Wall Street and Main Street share in the blame for the debacle. Sadly, the same applies to the central banks now charged with getting everyone else out of this mess.

The Bank of England egged on house price inflation in the UK with what now looks like a badly judged rate cut back in August 2005. The housing market had been calming before that cut.

Worse, the last two chairmen of the Federal Reserve actively cheered on the irrational exuberance in US housing.

Alan Greenspan, who stood down last year, gave ARMs a warm endorsement, and said that fixed-rate mortgages "effectively charge homeowners high fees for protection against rising interest rates and for the right to refinance". Those fees now look as though they would have been worth paying.

As for his successor Ben Bernanke, in 2005 he said that the US had "never had a decline in housing prices on a nationwide basis", and that rising house prices "largely reflect strong economic fundamentals", not a bubble.

In combination, then, they sent out a message to Americans not to protect against higher rates, and not to worry about the risk of falling house prices.

With hindsight, that was not good advice.

Hedge Funds face their worst month in seven years

Hedge Funds face their worst month in seven years
By James Mackintosh
Copyright The Financial Times Limited 2007
Published: September 1 2007 03:00 | Last updated: September 1 2007 03:00

August looks to be the worst month for hedge funds in seven years and is close to being the worst since 1998 as almost all hedge strategies have failed to perform.

The average hedge fund was down 3.2 per cent with one trading day left in the month, according to Chicago-based Hedge Fund Research, after a sharp recovery from a far worse position in the past two weeks. This is the worst since November 2000, when hedge funds were knocked back 3.5 per cent in a month.

"A manager who is flat in August looks like a hero at this point," said Yannis Procopis, deputy chief investment officer at CMA, a $2.6bn (£1.3bn) fund of hedge funds.

Poor performance at hedge funds frequently leads investors to pull their money, which can prompt a spiral of decline in markets as highly geared funds are forced to sell investments to meet the redemptions. But it remains unclear how much is being withdrawn, with many investors apparently sticking with their holdings in the hope of a turnround.

Hedge funds - mainly offshore investment vehicles designed to make money whatever markets do - suffered as concerns about US subprime mortgages caused wild swings in stock markets.

But after a disastrous start to the month, when many computer-driven quantitative equity funds plummeted 30 per cent or more, the sector has staged a strong comeback, recovering sharply in the past two weeks.

Equity long-short hedge funds - the biggest sector - were hit badly in August, with many funds down 10 per cent by mid-month, along with Japan specialists and quantitative equity, known as statistical arbitrage.

"Japan seems to have been an absolute blood-bath, along with quant," said the head of one large London fund.

Also hit hard were merger arbitrage and event-driven strategies, which aim to make money by betting on takeover deals.

Those down include the biggest names in the industry, among them major funds from Goldman Sachs, Highbridge, DE Shaw, Tudor, Lansdowne, Atticus, Blackstone and Caxton. But a handful of big-name funds escaped the mess, with Brevan Howard up and some of Marshall Wace's largest funds recovering from significant losses to enter positive territory.

Hedge funds and advisers say that so far investors have not panicked, and they do not expect industry-wide redemptions.

"Some people have taken money off the table in some of the event-driven strategies, but it is only small amounts," said Sean Capstick, co-head of capital introduction for Deutsche Bank.

Financial Times Editorial Comment: Subprime loans – subprime solutions

Financial Times Editorial Comment: Subprime loans – subprime solutions
Copyright by The Financial Times
Copyright The Financial Times Limited 2007
Published: August 31 2007 18:11 | Last updated: August 31 2007 18:11

The US subprime loan crisis has turned into a morality play. Subprime borrowers – people with bad credit who took out high-priced mortgages to buy homes beyond their means – are cast as hapless victims. Subprime lenders (and the investors who bought their securitised loans on Wall Street) are portrayed as Shylocks preying on the American poor. Now the whole crew is looking to the government to step in, and spare them the consequences of their financial alchemy. Washington should resist.

President George W. Bush on Friday announced some modest measures to help truly needy borrowers, but he ruled out a bailout for the merely greedy (whether borrowers or investors). Unfortunately, Congress will probably not stop there. Millions of Americans could still be about to lose their homes, and millions more will lose money in the markets. That is the kind of crisis politicians cannot resist meddling with.

Presidential candidates are marketing their own solutions: Barack Obama has proposed a fund financed by fines on “irresponsible” lending (whatever that is). The powerful House financial services committee will hold hearings next week that could lead to legislation within weeks. The chairman of the committee, Democratic congressman Barney Frank, has made clear that he thinks the subprime crisis proves US financial markets are under-regulated. He favours everything from new underwriting standards to a new right to sue everyone from brokers that sold the loans, to banks that originated them, to investors that bought them in the secondary markets.

The result could be a stifling new web of rules and liabilities that will choke off lending to the people that subprime loans were originally meant to serve: those who need a modest home, but cannot get a normal mortgage because of credit problems.

That would be a shame: Congress should be careful not to over-react. US markets are already burdened with ligitation risk; the last thing they need is more liability.

Much can be done to save Americans from themselves: mortgage loans should be more transparent, so borrowers know how much they really owe. Borrowers can be educated to make good decisions about their mortgage (life’s most important financial decision).

But if Congress loads on too much litigation risk, mortgage finance for non-ideal borrowers will simply dry up. More regulation and liability is probably inevitable: but those who have done due diligence on their loan should be exempted. Not every subprime loan is a scam.

There is no sense in adding the huge cost of litigation to a problem that is already cripplingly costly. The market has learnt its lesson; do not lend to people who cannot pay. It is hard to see how the legislators can improve on that.

Market vultures await more blood

Market vultures await more blood
By John Authers
Copyright The Financial Times Limited 2007
Published: August 31 2007 18:40 | Last updated: August 31 2007 18:40

World markets have been in crisis for weeks. That should mean rich pickings for someone. One of the oldest, but truest, aphorisms in investment is that you should “buy when there’s blood in the streets”.

There is speculation that the legendary investor Warren Buffett, who is sitting on a huge cash pile, is about to start spending it. And hedge funds started buying up stricken subprime lenders earlier this year, to a flurry of publicity. But the history of those deals is problematic.

For example Lone Star, a private equity group, on Friday offered to buy Accredited Home Lenders, troubled by bad subprime debts for months, for about $225m. But this was only after it pulled out of a planned $400m purchase announced earlier this year. The message for other circling vultures is that there may not yet be enough blood in the streets.

Another deal hailed as a masterstroke, Bank of America’s purchase of a $2bn stake in Countrywide, the biggest US mortgage lender, also needs to be proven. Countrywide’s stock has drifted down since the deal was announced. The market is still unconvinced either that Countrywide is a bargain, or that the BofA investment will be enough to propel the company back to safety.

Value investors, such as Mr Buffett, are not gamblers. Part of their creed is that by buying cheap they buy a “margin of safety”. Even if a company goes bust, for example, they want to know that its break-up value is bigger than the price at which they buy.

At first glance, it looks as though financial stocks represent a good value opportunity. They are usually valued by their multiple of book value (the total value of the assets on their books, minus their liabilities). On this basis, they are their cheapest in more than a decade.

But there is no margin of safety in financial stocks. The low multiple to book value is not – as would usually be the case – because of pessimism about future earnings prospects.

Rather, it is because nobody quite believes the current stated book values. With subprime defaults running high, and with financial services groups around the world discovering they cannot put a value on assets they had thought were safe, many may have to mark down the assets on their balance sheets. That generates uncertainty and it does not offer much margin of safety.

But if the bargain-hunters are not yet finding opportunities to make money, others are. Sadly, they are betting on things to get worse.

They can do this with great comfort, because the market’s previous ridiculously low estimate of risk allowed them to place their bets at what now seem to be insanely cheap prices. Bargains were to be found when the credit market was at its peak – but it is now too late to get in and profit to the same extent.

One of the most successful investors to bet on a credit crunch was Jim Melcher, who has run Balestra Capital, a small New York hedge fund, for almost a decade. It has doubled so far this year. He did this by exploiting the complex new debt instruments that are now exploding in the faces of their inventors.

For example, he bought credit default swaps (CDSs) against a range of 30 collateralised debt obligations (CDOs) that were rated AA. Translated into English, he bought insurance against default by packages of loans that were not the highest quality, but were not junk either.

The cost to him, the effective premium, was 0.6 per cent per year. This was the most he could possibly lose from the strategy. The potential profit, if all the bonds issued by the CDOs were to default, was 100 per cent. He now expects to make this on about 20 of the CDOs for which he bought protection. “I’ve never seen a cheaper play to make where you could take less risk with more return than I was offered in this market,” he says. That was a classic value investor’s investment – tiny risks to the downside, with potentially huge profits. He is not waiting for the CDOs to go to zero and has taken profits on a third of these bets. In one case this involved taking $7m for an investment that had cost about $50,000 some months earlier.

Other bets also took advantage of new esoteric instruments and paid off handsomely. He sold short the ABX index of subprime mortgage bonds, a manoeuvre that made money when the price of these bonds shot down.

He also sold short high-yield, or “junk” bonds while buying Treasury bonds. That paid off when there was a sharp increase in the extra yield that junk companies had to pay. And he bought the Japanese yen, which has risen during the market mayhem.

The risk was that someone on the other side of the transactions had to pay up. These counterparties are usually investment banks and Mr Melcher thought some might go under. As insurance he bought “put” options – giving the right to sell stock for a given price – in investment banks. These were cheap because they were “out of the money” – meaning that they conferred the right to sell for a price far below the price at which the companies were trading.

That trade also proved lucrative, as the fall in investment banks’ share prices has pushed up the price of the options. Even his insurance policy is making money.

The true bargains, then, were when the credit market was at its peak. There will be chances to pick up undervalued securities when this crisis has played itself out. But for now, the discouraging news is that value investors remain on the sidelines – while Mr Melcher is still betting on things to get worse.

The writer is FT investment editor

Cheney the survivor without challengers

Cheney the survivor without challengers
By Andrew Ward and Edward Luce
Copyright The Financial Times Limited 2007
Published: September 1 2007 03:00 | Last updated: September 1 2007 03:00

Dick Cheney once jokingly referred to himself as Darth Vader - such was his dark reputation with the mainstream US media. With the departure of Karl Rove on Friday, George W. Bush's electoral mastermind, the US vice-president is seen as "the last man standing" in the administration.

Yet far from being the increasingly isolated figure that he is often portrayed, Mr Cheney wields influence that has arguably never been greater. Among the close circle of trusted advisors that Mr Bush has relied on since coming to the White House, only Mr Cheney remains.

The others - the so-called "Texas mafia" that included Harriet Miers, the former counsel, Dan Barlett, director of communications, Karen Hughes, a senior advisor, Alberto Gonzales, the outgoing attorney-general and Mr Rove - have all left.

It was this informal coterie that would retreat with Mr Bush to his private quarters after formal White House meetings and take the hard decisions. "These were the people Bush trusted and where he could say anything," said a former Cheney aide. "Cheney will now be unchallenged."

Of the inner circle, Mr Rove was probably the only one with equal weight to the vice-president - although they did not always see eye to eye. Mr Rove's principal agenda has been to expand the Republican party'selectoral base to create a "permanent majority". Mr Cheney's has been to expand the executive powers that he believes were illegitimately taken from the White House after Watergate in the 1970s.

Often they were chasing two different rabbits. It is Mr Cheney who looks farlikelier to accomplish his agenda. "There is no one left who can now out-argue the vice-president," says Jule-anna Glover, another former Cheney aide.

The fact that the White House has no candidaterunning in 2008 further increases Mr Cheney's room for manoeuvre, particularly given Mr Rove's departure. "Rove was first and foremost a political animal," says Stephen Hayes, Mr Cheney's biographer. "He looked at how policies could benefit the Republicans. Cheney's attitude is: 'Politics be damned. This is the right thing to do. Now someone else go sell it to the American public and our allies'."

Nor, as some have suggested, does Mr Gonzales' departure necessarily weaken the vice-president's hand. "In terms of the formulation of arguments, Gonzales was never much of a player," said John Bolton, a former ally of Mr Cheney in the Bush administration and a former UN ambassador, now at the American Enterprise Institute in Washingon. "David Addington [a senior Cheney aide] was the main theoretician of executive privilege and he is still there."

The first significant test of Mr Cheney's influence in the post-Rove era will come within the next few weeks, when Mr Bush picks a nominee to replace Mr Gonzales as attorney-general. People close to the White House say Mr Cheney wants a conservative nominee who will defend the expansion ofpresidential power he has championed over the past six years.

But Mr Bush is under pressure from others in the administration to choose an independent figure who would stand up to the White House. Bruce Fein, a former senior law officer in the Reagan administration, says the identity of Mr Gonzales' replacement will determine "whether the Cheneyexecutive privilege agenda will continue to prevail".

Mr Cheney, who has declined several requests for interviews, has focused his vice-presidency on reversing the constraints placed on executive power following Watergate and the Vietnam war. It was this philosophy that led to the launchof a controversial domestic eavesdropping programme after the September 11 2001terrorist attacks, the opening of the GuantánamoBay detention centre and the blurring of US policy towards torture. Perhaps the clearest evidence of Mr Cheney's overriding influence is the deadlock over the future of Guantánamo.

The vice-president is the only high-profile administration official still arguing for the detention centre to be kept open. Yet his views have so far trumped the growing consensus elsewhere in the administration about the need to work towards closing the facility.

"Cheney's most important goal is to establish beyond this presidency the White House's pre-eminent and in some respects exclusive role to make war, determine what war is and who is a combatant," says Mr Fein. "That will be his legacy."

While Mr Cheney has lost some ground to foreign policy moderates, those who know him well insist he will continue to push for tougher action to prevent Iran acquiring nuclear weapons. "He should not be underestimated on this point," says a former senior administration official.

"Cheney has argued for military action against Iran before and he will likely do so again. If the current round of UN resolutions fail to get Iran to change course, then Cheney's argument will gather strength through 2008."

Mr Bolton says on foreign policy the Bush administration will retain its strongest freedom of action. "People tend to forget that we do not have a parliamentary system - the powers of the executive do not depend on whocontrols the legislature or on the state of public opinion," he says. "We have aseparation of powers. This is especially true of foreignpolicy."

Bernanke fuels hope of interest rate cuts

Bernanke fuels hope of interest rate cuts
By Krishna Guha in Jackson Hole and Andrew Ward in Washington
Copyright The Financial Times Limited 2007
Published: August 31 2007 15:10 | Last updated: September 1 2007 00:35

Ben Bernanke said on Friday the Federal Reserve would act as needed to ease the impact of recent market turmoil on the economy, in a speech widely interpreted as opening the door to possible interest rate cuts.

Most analysts viewed the remarks as a sign that the Fed is virtually certain to lower rates at its September 18 policy meeting, although the Fed chairman, who said the effects of market turmoil remained uncertain, did not make any commitment to do so.

In his most detailed remarks on the liquidity crisis since it began to intensify some three weeks ago, Mr Bernanke made it clear the central bank would not cut rates merely to bail out investors. He said: “It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.”

But he added that developments in financial markets “can have broad economic effects felt by many outside the markets”.

The Fed would “act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in markets”, Mr Bernanke told central bankers at their annual retreat in Jackson Hole, Wyoming.

Mr Bernanke’s remarks came as President George W. Bush announced measures to help struggling homeowners refinance mortgages through an expansion of the Federal Housing Administration and tax changes.

But Mr Bush insisted there would be no government bail-out to solve the subprime mortgage crisis.

Investors were cheered by the two speeches, with the S&P 500 index closing up 1.1 per cent to 1,473.99.

A key measure of the cost of insuring against defaults on the credit markets cheapened significantly, in a sign that confidence may be returning. The CDX index of credit derivatives moved to 69.5 basis points, down from 73bp on Thursday.

But banks still faced higher financing costs in the money markets, as the key three-month Libor rate reached a new high of 5.62125 per cent – its highest level since the beginning of the credit crunch and its highest since 2001.

Meanwhile, investors’ flight to the relative safety of Treasury bonds appeared to have abated, with the yield on the two-year bond rising 4bp to 4.15 per cent.

Many in the market who had been pricing in a cut in interest rates were buoyed by the fact that Mr Bernanke gave no hint that he would not do so. “It was his duty today to dissuade the markets if he felt the markets were incorrect in their assumptions,” said Tony Crescenzi, strategist at Miller Tabak.

Mr Bernanke said recent data suggested the economy grew at a “moderate pace” this summer, but they may not be a good guide to how the economy will perform as the effects of the financial turmoil bite.