Over simplification is more complicated than you think: Pakistan under threat

Recent reports of international media especially US media confirm that they look at Pakistan as a state that is collapsing. The grave situation is that Pakistani media is following this trend without considering the cultural ingredients and indigenous social, political and economical landscape of the country.

Ejaz Haider, the Consulting Editor of The Friday Times and OP-ed Editor of Daily Times, considered the hypotheses of this trend and wrote a wonderful article in the Friday Times in this context. Ejaz considered the reports currently having place in international media biased as they can not pass the test of sound analysis. 

Ejaz emphasized that a state can not be considered "Fail" if its 30% population is under poverty line, or its corruption level is high.  Hence poverty, poor governance, corruption, a broken court system, etc. are nothing new to Pakistan or, for the matter, to much of the developing world, including shining India. Author considered these reports “rely on simplistic rendering of facts presented out of context or as a montage of sorts for cumulative impact. . . Most of these reports rely on email contacts, interviews or phone conversations”.

The current problems are owed to US presence in Pakistan and roots may be linked with US role in Soviet occupation of Afghanistan.” The current problem was created by the eight years of Musharraf’s dictatorship; the army in cahoots with the Taliban; the violence is owed to India’s perfidy; because of poverty; use of force has compelled these people to retaliate, etc.”

Ejaz questioned that ‘why did no one talk about Pakistan as a failing state with all indicators of poverty, poor political and economic conditions, etc. before the insurgency?” There is just one issue “the insurgency”. “Can Pakistan deal with it ?” This is the thinking that lurking behind  this doomsday scenario for the west. Narrow it down and it would read: “Can Pakistan deal with it on our terms.”       

 Author considered that we can face the current challenges with Dialogue, rule of law, and strengthen judiciary. He further wrote: "Pakistani State and Society is far more complex and multilayered for it to come apart in the way reports  in the US press predict". 

The Lessons of Adversity: What has Corporate America learned fro the Economic Crisis?

"The Fortune 500 is having its worst slump ever, but the survivors have been taught a few things about thinking long term and sticking to principles", Rick Tetzeli wrote in his recently published article in Fortune Magazine's May 4, 2009. Rick highlights the learned lessons as follows:

1. Gorging on easy profits can be fatal.

Author recognised "Wall Street and Detroit tumbled for a lot of reasons, but high on the list is the fact that they thought the free buffet would be open indefinitely". In context of Wall Street, the beliefs were that "accepting risk would always pay off" and for Detroit "the assumption was that consumer preferences would be slow to change".   

2. Highly disciplined companies can thrive in all seasons.

The companies highly disciplines companies although suffered yet they didn't suffer nearly as much as others. "IBM (No. 14 in Fortune 500 companies) has become the model for pushing itself up the technology learning curve, while Johnson & Johnson (No. 29 in Fortune 500 companies) has relentlessly taken the long view".

3. The tech sector is now a pillar of stability.

The technology sector's  strength keeps growing. "Many of the tech companies that soared onto the list in the 1990s started as small, venture-capital-backed firms and have now become a mostly boring set of increasingly huge companies like Oracle (No. 113) and Cisco (No. 57)". And the future is promising.  Michael Moritz, a partner at Sequoia Capital, which helped bankroll Google and Yahoo, looks at the list this way: "I've always felt that if the venture business could add one name to the list every five or six years, that would be a massive achievement. No other sector of the economy does that."

4. The Fortune 500 is still an old-boys' club - but it's changing fast.

The majority, 485 of the 500 fortune companies, are run by men. But the scene is changing slowly. Today 15 women run Fortune 500 companies is an all-time high, up from seven in 2003. Lynn Elsenhans took over Sunoco (No. 41), marking the first time a woman has helmed an oil giant. 

5. The next five years may redefine everything.

Banking and automaking aren't the only industries that will be changed for good. Entertainment, publishing, and airlines face threats to their survival. And consider homebuilding: Five companies fell right off the list this year: Hovnanian, KB Home, Lennar, NVR, and Toll Brothers. 

The author stressed that the behavior of American consumer is changing and companies are adjusting their sale offers.  As Dollar Tree's stores CEO Bob Sasser says "We are positioned well for any economy. We sell things people need every day." The American consumer's focus on value vs. prestige may be changing in a lasting way. 

6. American business - we hope - has been tempered by fire.

"If the next five years will be defining ones, they will also be years where we should see U.S. companies apply what they've learned from 2008". 

7. Business will be more accountable.

There is a societal pressure on the companies to be more accountable and companies are preparing for the same. Ram Charan, a consultant to CEOs of many Fortune 500 companies, foresees: "a shift in the composition of executive pay. Corporate boards will try to ease the grip of Wall Street by adopting pay structures that consider all stakeholders, including employees and customers". 

That would be a change we could all live with. And a sign that we actually learned something from the disaster.

How to Mitigate the Urgent to Focus on the Important

I have just gone through a short essay of HBR. In this essay, Gina Trapani shared some important tips for effective time manegement and to ehance personal productivity.

Gina wrote "Busy people have two options when they decide how their workdays will go: they can choose to be reactive to urgent demands on their time, or proactive about focusing on what they decide is important. The only way to actually get things done is to mitigate the urgent to work on the important".

She further differentiate between urgent and important tasks: "Urgent tasks include things like that frantic email that needs a response RIGHT NOW; a sudden request that seems like it'll only take two minutes but often ends up taking an hour; a report you've got to write up before a meeting . . . Urgent tasks are usually short-term and we're drawn to them because they keep us busy and make us feel needed. But dealing with a constant stream of urgent tasks leaves you wrung out at the end of the day, wondering where all the time went, staring at the undone actual work you've got to complete”

She further considered “Important work moves you and your business towards your goals. The important stuff doesn't give us that same shot of adrenaline that the urgent requests do. It can involve thinking out long-term goals, being honest about where you are and want to be, and just doing plain hard work that feels boring and tedious".

Finally, She provides the following points and conceded that an awareness of the difference and a few simple techniques can help:

Choose three important tasks to complete each day. Write them down on a slip of paper and keep it visible on your desk. When you have a moment, instead of checking your email, look at the slip, and work on an item. Keep the list to just three, and see how many you can complete.

Turn off your email client. Shut down Outlook, turn off new email notifications on your BlackBerry, do whatever you have to do to muffle the interruption of email. When you decide to work on one of your important tasks, give yourself an hour at least of uninterrupted time to complete it. If the web is too much of a temptation, disconnect your computer from the Internet for that hour.

Set up a weekly 20-minute meeting with yourself. Put it on your calendar, and don't book over it — treat it with the same respect you'd treat a meeting with your boss. If you don't have an office door or you work in an open area that's constantly busy, book a conference room for your meeting. Go there to be alone. Bring your project list, to-do list, and calendar, and spend the time reviewing what you finished that past week, and what you want to get done the following week. This is a great time to choose your daily three important tasks.

The Great Recession

Economists generally agree this is the worst economic downturn since the Great Depression, but they say despite pain, another depression isn't likely.

By Chris Isidore, CNNMoney.com senior writer

Last Updated: March 25, 2009: 5:19 PM ET

NEW YORK -- Is this the worst economy since the Great Depression? And what are the chances of the economy falling into another depression?

The answer to the first question is fairly clear. In most ways that matter to economists and average Americans, this is the worst economic crisis since the Depression.

The answer to the second question is not as clear. While the National Bureau of Economic Research officially declares the beginning and end of recessions, nobody does that for depressions.

Still, the general consensus of economists is that another depression is not likely. But the risks are greater than they were only a few months ago.

Why this recession is so bad

First things first: Even though it may seem obvious to most that this is the worst downturn since the Great Depression, the economy has experienced other serious recessions in the past, particularly in the mid-1970s and early 1980s.

But this recession dwarfs those two for several reasons.

In terms of length, the longest post-Depression economic decline was 16 months, which occurred in both the 1973-75 and 1981-82 recessions. This recession began in December 2007, which means that it will enter its 17th month next Wednesday.

The current recession is also more widespread than any other since the Depression. The Federal Reserve's readings show that 86% of industries have cut back production since November, the most widespread reduction in the 42 years the Fed has tracked this figure.

What's more, every state reported an increase in unemployment this past December, the first time that has happened in the 32 years that records for unemployment in each state have been kept.

"This is important because there's nowhere you can move to find a job," said Gus Faucher, director of macroeconomics for Moody's Economy.com.

Finally, during the past nine months, the drop in household wealth has been larger since anything on record in the post-World War II period.

Why this won't be another depression

So far during this recession, the nation's gross domestic product, the broadest measure of economic activity, has dropped about 1.7%. Forecasts of experts surveyed by the National Association for Business Economics work out to about a 3.4% decline in GDP over the life of this recession.

To be sure, there already have been some quarters where the drop was much more severe. The government will report its final revision of GDP for the fourth quarter of 2008 and economists are expecting that report to show an annual rate of decline of 6.6%. And some economists think the drop in the first quarter could be even greater.

But measuring the drop in economic activity from top to bottom is how economists judge a recession's depth. And a 3.4% drop would be the worst since World War II, and far worse than the average recession in that period.

Still, that's a long way from the 26.5% drop in GDP that took place between 1929 and 1933.

One of the main reasons why economists think another depression could be avoided is that it will take more than just a sharp decline in consumer spending and household wealth to spark a depression.

Even though household net worth has fallen a record $11 trillion, or 18%, during the course of this recession, the broader economy can weather such a shock.

Historically, stock market crashes and bursting housing bubbles haven't necessarily led to depressions. It takes a variety of economic factors and policy decisions to turn a recession into something even more serious.

"I don't know if you can make a causal link between a loss of wealth and a depression," said Lakshman Achuthan, managing director of Economic Cycle Research Institute.

Learning lessons of the 1930s

Significant policy changes since the 1930s will also cushion the blow.

Unemployment insurance, Social Security payments and larger government at the federal, state and local levels keep money flowing into the economy even as consumers and businesses pull back on their own spending.

"There's a lot more safeguards in place," said Keith Hembre, chief economist at First American Funds.

Hembre said the $787 billion stimulus bill passed by Congress in February will also spur more economic activity down the road.

In addition, the Federal Reserve, led by Great Depression expert Ben Bernanke, has pumped trillions of dollars into the economy with new lending programs the central bank has never tried before. That has swelled the supply of money. By way of contrast, the money supply tightened during the Great Depression.

There were many other policy mistakes made in the 1930s that economists say are not being repeated today, including stiff tariffs that killed international trade and government imposed limits on prices and production levels.

Even if Congress imposed "Buy American" provisions in the public works paid for by the stimulus bill, there is no call to move back to the strict protectionism of the 1930s or production and price controls.

"I'd like to think we've learned something, so in terms of policy we're doing better," said Achuthan.

Still, even if the United States does not enter another depression, that doesn't make the current economic crisis any less painful for many Americans. Also, few economists are predicting an end to the recession anytime soon.

Hembre said he is worried that the country could be in a period of prolonged economic stagnation similar so the so-called lost-decade that Japan suffered starting in the 1990s. He said continued weakness in housing and high debt levels by households and governments could hold the economy back for some time.

And some economists aren't completely ruling out another depression.

In a paper for the National Bureau of Economic Research last month, Harvard University professors Robert Barro and Jose Ursua put the chance of a minor depression (which they defined as a GDP decline of at least 10%) at about 20% and a 3% chance of a major depression (defined as a GDP drop of at least 25%). Moody's Economy.com is forecasting a 10% chance of a depression.

Source: CNNMoney.com

Will the banks survive?

A wave of troubled loans threatens to send weak ones into the arms of Uncle Sam.

By Shawn Tully, senior editor at large

February 27, 2009: 7:17 AM ET

(Fortune Magazine) -- On Friday, Feb. 20, investors watched in horror as shares of Bank of America plunged below $3 and Citigroup's stock broke $2, giving the two pillars of U.S. banking a combined market value of $26 billion - far below that of Kraft Foods.

Fear is spreading that if all that rescue money can't revive these stumbling giants, only one road remains. Everyone from former Fed chief Alan Greenspan to Senate Banking Committee chairman Chris Dodd is warning that the sole solution may be the once unthinkable one: nationalization.

How can it be that the banks are tottering after the government fortified them with hundreds of billions in bailout cash and guarantees on their troubled assets? For the past 18 months, the banks' problems with toxic securities, especially collateralized debt obligations (CDOs) and other exotic products that packaged subprime mortgages, attracted most of the attention - and alarm. Now the storm is entering an entirely new phase that's potentially even more dangerous: a historic meltdown in the bread-and-butter businesses of credit card, home-equity, and mortgage lending.

The scale of potential losses in consumer and business loans swamps what's left from the securities debacle by a factor of three or four to one. And the next wave, the looming defaults on commercial real estate loans financing the likes of half-leased retail malls, will soon cause a fresh round of pain. "We've now moved from the securities phase to the lending phase of the banking crisis," says Tanya Azarchs, a managing director in S&P's financial services ratings group. "For 2009 we expect that loan losses will be much worse than for 2008 and that securities write-downs will be much less."

***

Those looming losses make it inevitable that the government will shower the banks with more bailout billions - and get big ownership stakes in return. But that will fall far short of what most people think of as nationalization.

Speaking before Congress, Federal Reserve chairman Ben Bernanke said that nationalization means that the government takes 100% ownership, wipes out the shareholders, and runs the bank. "I don't think we want to do that," he said. He added that talk of nationalization misses the point. And he's right: The government already exerts tremendous influence over the industry, requiring banks that take federal money to limit compensation and modify mortgages, among other restrictions.

Moreover, the government seizes banks all the time. Since the beginning of 2008, the FDIC has shut down 39 insolvent institutions (leaving shareholders with nothing), reselling the branches, loans, and bad assets as quickly as possible. In the rare cases when it can't find a buyer, the FDIC will run the bank, as it is doing with Indy-Mac, which it took over in July. (A sale of Indy-Mac is now in the works.) And the agency is likely to be busy for some time to come: During the last banking crisis, from 1989 through 1992, it seized 1,368 banks.

The big banks, however, will get all the help they need to avoid that fate. The administration plans to put the 19 banks with assets of more than $100 billion through a rigorous financial analysis called a stress test. The banks will have to calculate their losses under severe conditions, including increased unemployment and continued home-price declines. The goal is to establish which institutions are so short of capital that they can't sustain current loan books, let alone expand credit.

Washington won't let those big banks fail: It will boost their capital by purchasing preferred stock that will pay a 9% dividend. If a bank has trouble paying the hefty dividend, it can convert the preferred shares into common stock. Hence, the weakest big banks may well end up with the government as their largest shareholder.

***

To understand the forces that will drive some banks into the arms of Uncle Sam, let's take a deep dive into their balance sheets. We'll concentrate on the four biggest U.S. institutions - Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500), J.P. Morgan Chase (JPM, Fortune 500), and Wells Fargo (WFC, Fortune 500) - because they hold almost half of U.S. consumer and business loans and account for most of the problem securities that haunt the industry.

First, let's examine the banks' securities portfolios. According to brokerage FBR Capital Markets, the four big banks hold almost $2 trillion in investment and trading securities such as collateralized debt obligations (CDOs), collateralized loan obligations (CLOs), and commercial and residential mortgage-backed securities - including the subprime paper that started the whole debacle. Accounting rules require the banks to mark almost all such assets to market-adjust their value according to prices brought by comparable securities in recent sales. But the markets for many of these assets are frozen, making it difficult or impossible to value them accurately.

That doesn't mean, however, that they are necessarily being carried on the banks' books for much more than they are worth, as is widely believed. In fact, banks have been marking the securities down for well over a year. According to Azarchs of the S&P, three types of debt are fairly valued or undervalued on banks' books: bundles of home loans backed by Fannie Mae (FNM, Fortune 500) and Freddie Mac, the notorious subprime CDOs that started the problem, and leveraged loans that shops like Blackstone (BX) and KKR used to finance buyout deals. The loans backed by Fannie and Freddie are essentially government guaranteed. Banks are carrying them at about 90 cents on the dollar, so they are fairly valued. The banks have marked down many subprime CDOs to 25 cents, and they are carrying the leveraged loans at around 75 cents. But Azarchs contends that a fair portion of those loans are producing income and will be paid back. "In both categories the potential losses in many cases, in my opinion, are a lot lower than their prices on the banks' books," she says.

Other securities are still overvalued: for example, mortgage-backed securities based on jumbo home loans, those too big to be guaranteed by Fannie and Freddie. Azarchs says that these securities at the four big banks are now marked at around 78 cents, probably an inflated number given the soaring mortgage default rates. Another area where the marks are too high is packages of commercial real estate loans. "Even if they're still paying full interest, many of the buildings backing them are worth a lot less than the loans," says Tom Barrack, CEO of Colony Capital, a private equity firm specializing in real estate. "They're really worth around 50 cents, and they're marked at 70 cents."

The banks also face losses on the insurance contracts they bought to protect against losses on many of these securities from monoline insurers such as Ambac and MBIA. Those insurers have run into trouble and seen their credit ratings cut, which forces the banks to take reserves against potentially uninsured losses, a trend that's bound to accelerate.

If the securities held by the banks do indeed contain plenty of bargains (alongside the overpriced merchandise), why aren't buyers lining up to take them off the banks' hands? The reason is threefold: First, buyers who have jumped in so far have been badly burned because of gyrating prices. In the fourth quarter, just when it looked as if once-toxic securities were raving bargains, prices collapsed as rates on everything from junk bonds to triple-A corporate debt exploded. Second, the buyers are financing their purchases with short-term loans, so they typically can't hold the assets until they mature. Instead, they're getting killed by margin calls from lenders. Third, potential buyers are sitting on the sidelines while Washington designs a plan for dealing with toxic assets that may give them a better deal.

The buyers' strike won't last. In early February the Treasury announced that it would provide up to $1 trillion in financing for private buyers to purchase illiquid assets. That program is bound to stir the vultures. A few investors are ready to pounce: "We see lots of fabulous bargains, with good assets often selling at 60 cents," says Michael Tennenbaum of Tennenbaum Capital Partners, an investment firm specializing in distressed debt. And Colony Capital has raised a $1 billion fund to purchase beaten-down bonds.

As more transactions occur, we'll get a better idea of how overvalued or undervalued various securities really are. According to estimates by FBR, the banks will end up writing down around 4.5% of their trading and investment portfolios, mostly over the next three years. For the big four, that would mean losses of $90 billion, or around $30 billion a year. That's a large number, but it's far less than the $150 billion the four (and the banks and firms they have acquired recently) have written down since late 2007.

***

Now let's examine the second, far more dangerous menace lurking in the loan portfolios. The big four hold $3.6 trillion in credit card, home-equity, mortgage, commercial real estate, and other consumer and business loans. Those loans are deteriorating with shocking speed: Default rates will soon surpass the worst of any recession in decades. Since mid-2007, for example, the charge-off rate for credit card loans has jumped from 3.8% to 7%. Overall, the four big banks suffered charge-offs of around 1% of their portfolios through the middle of 2007. For the fourth quarter of 2008 the figure jumped to 2.6%. And things are getting worse - delinquencies in all categories are rising. Star analyst Meredith Whitney predicts that credit card losses will climb above 10%, far higher than in any recent recession.

How high will the losses mount? FBR predicts the banks will eventually write off about 9% of their loan portfolios, with the vast bulk of losses coming in the next three years. That would hit the big four with around $300 billion - or $100 billion a year - in credit losses, more than three times the projected damage from their toxic securities.

And that explains the talk of nationalization. The challenge for the banks now is to earn enough money from normal operations that they can avoid taking additional government aid - which is not an impossible dream. Unless the U.S. falls into a near depression, it's likely that the majority will succeed. Among the big four, J.P. Morgan and Wells Fargo have the best prospects. They boast relatively strong capital ratios and are striving to stay ahead of the government by raising capital on their own. J.P. Morgan just announced a steep dividend cut that will save $5 billion annually and greatly strengthen its balance sheet. By concentrating on consumer banking, Wells Fargo mostly avoided the securities mess. It's likely to raise additional cash by selling the East Coast branches it inherited from its merger with Wachovia to concentrate on its powerful Western U.S. franchise.

And even BofA, saddled with the disastrous purchase of Merrill Lynch (see "Divorce - Bank of America Style"), could find a clear path out of the muck, although that's far from certain. The smart money is betting that Bank of America will soon launch a big asset sale, including Merrill Lynch's prime brokerage, which caters to hedge funds; reportedly, it has already put private bank First Republic on the block. That could give BofA sufficient capital to sidestep a bailout. Then the bank could rely on its powerful nationwide low-cost consumer franchise to rebuild its balance sheet. "Investors underestimated BofA," says Whitney. "BofA should be able to start building capital by the middle of 2009."

The true basket case among the biggest banks is Citigroup. Citigroup's core businesses in areas like credit cards, branch banking, and international corporate lending are so weak that it cannot generate enough revenue to compensate for the deluge of losses. That means its puny equity capital is destined to keep shrinking or disappear entirely. Citi executives are already asking Washington for additional aid in exchange for as much as 40% of Citi's common stock. And after the stress test, it will probably need more cash, making it all but certain that the government will end up with a majority stake.

How the government proceeds from there will say a lot about the future of the banking sector. The fear is that Washington will continue to prop up Citi and other wounded banks in their current form. The best course would be to force battered banks to sell enough assets to restore their financial health - if that's possible - or to dissolve. That would demonstrate that Washington is serious about reviving the industry - the one that is absolutely essential to the nation's economic recovery.

Source: Forune Magazine