Last week NYTimes Magazine ran the story The Jihadist Next Door which chronicled the radicalization and self-recruitment of Omar Hammami, a member of the terrorist group al Shabab in Somalia.

Hammami, who grew up in Alabama a product of a middle-class family in a two-religion household, began his radicalization while in high school. According to the story, during his sophomore year in 2000 Hammami defended Osama bin Laden after a classmate suggested bin Laden be shot dead for his involvement with the 1998 bombings of US embassies in Kenya and Tanzania.

“What if I said that about Billy Graham?” said Hammami to his classmate, a Christian.

“Billy Graham is a peaceable preacher,” said the classmate “Osama bin Laden is a terrorist.”

In reply, Hammami said “one man’s terrorist is another man’s freedom fighter.”

From here, the article takes the story of Hammami and reveals some insight into how individuals go from unlikely beginnings to become international terrorists.

In my opinion (*not a psychologist), Hammami had some behavioral traits that are fairly common amongst Islamic radicals who resort to terrorism. Specifically, recognition and popularity amongst Islamic peers seemed to drive Hammami’s participation in violent jihad. Reportedly, Hammami’s feelings towards the conflict in Somalia and the suppression of the Islamic armed group al Shabab hardened his resolve to fight. Paraphrasing from the article:

By 2006, Hammami had become convinced that “jihad had become an obligation.”  And further, he wanted to help his “captive brothers and sisters” while helping himself “obtain the highest rank available” as a Muslim. In August 2006 Hammami wrote “where is the desire to do something amazing? Where is the urge to get up and change yourself — not to mention the world and other issues further off?”

Eventually, Hammami would travel to Somalia and join up with al Shabab, which brings me to my next point: along with notoriety, I feel individuals become radicalized because they embrace conflict and have a proclivity towards merciless adventurism. In essence, they are jihad adrenaline junkies. I think this trait is shared amongst other jihadists, like the perpetrators of the 2008 Mumbai attacks. Thus along with the ascetic of traditional Islamic life, these radicals also enjoy the popularity and adventure that violent jihad can give them.

Posted by Billie Bender on 03 Feb 2010 No Comments »

Coincidences and similarities. At Fletcher, they become international.

Paulo Bilyk F’92, from Brazil. Peter Ackerman, F’69, PhD alum, from the USA.

Paulo, CIO and founding partner of Rio Bravo, an independent asset management firm. Peter, Managing Director of Rockport Capital Incorporated, a private investment firm.

source http://www.accountants.org

Previously, Paulo was a partner and executive director of Banco Pactual, which he joined as a financial analyst in 1992 and was responsible for building the bank’s M&A advisory group. Formerly, he worked at Itautec Informática with the US Department of Commerce and Department of Defense.

From 1978 to 1990, Peter was Director of International Capital Markets at Drexel Burnham Lambert where he structured, financed, and invested in hundreds of recapitalizations. Since its inception in 1990, Rockport has made numerous direct investments in fields as diverse as movie libraries, publishing, propane distribution, textiles, custom labeling, wax refining, auto part remanufacturing, variable life insurance, and internet-based food retailing.

Paulo, board member of the Magda Tagliaferro Foundation for piano education in Sao Paulo, board member at the Incheon Center for International Cooperation and Exchange (ICICE), an NGO that promotes the city of Incheon, in South Korea, as a hub for international cooperation and exchange.

Peter, chairman of the International Center on Nonviolent Conflict, member of the board of the Council on Foreign Relations, and member of the US Advisory Council of the US Institute of Peace.

Paulo, the president of AME Campos, a community organization dedicated to social and cultural advancement in Campos do Jordão, Brazil.

Peter was the executive producer of Bringing Down a Dictator, the Peabody award-winning documentary that chronicled the fall of Slobodan Milosevic in Serbia.

Both are members of the board of overseers of the Fletcher School; to which Peter is the Chairman.

Posted by Erika Tabacniks on 28 Jan 2010 No Comments »

Finding a summer job is a task that demands time and patience. Sometimes, after being offered an internship, students have to create their own work plan, according to their experiences and professional goals. I started studying at Fletcher in Jan/2009, which allows me to do 2 summer internships. Last year I had the opportunity to work with EDA Capital Connect in Delhi, India. EDA’s goal is to provide resources and capacity building to small enterprises that lead to long lasting results and poverty alleviation.

Aimed at channeling funds from investors to social enterprises (especially Microfinance Institutions) I developed new membership markets, structured offline services, facilitated deal closures, provided media outreach and structured the internship program. I was in India for almost four months and have kept in touch with EDA and provided operational support whenever necessary.

In order to help first years and the new Januarians to think of possible tasks for their summer jobs, I’ve summarized my main responsibilities below.

My tasks were grouped into five domains and included the following items:

Developed New Membership Markets

MFIs in Latin America: wrote report analyzing the landscape, traits and characteristics, and identifying which regions and subsectors CapitalConnect should target.

Social enterprise in Latin America: researched the social enterprise landscape in LatAm and wrote report identifying trends and best practices.

Developed a list of Latin American organizations (Investors, banks, MFIs, SE’s, etc) that would benefit from joining CapitalConnect.

Improved and Expanded Membership Base

Social Investors: contacted the main investors in the social enterprise scene and performed research on their investment philosophy, target areas and target countries.

New members outreach: contacted and followed up with prospective members on list of Latin American organizations.

Marketing material: translated CapitalConnect’s brochure into Spanish and Portuguese.

Facilitated Deal Closure

Business Plan Template: created and implemented a business plan template for member social enterprises.

Financial Advisory Services: researched and prepared a report on the financial advisory services provided to MFIs / other social enterprises by the “competitors” identifying 1) the variety of services that consultancies provide social enterprises to assist them in obtaining funding (e.g. business plan / pitch page templates, discussing FAQ by investors, assistance with business valuation) 2) The existing players 3) Recommendations on what services CapitalConnect should add to our offering / which financial advisory companies we should partner with.

Offline services: created brochures of consulting services to SEs and MFIs and another one for investors.

Provided Media Outreach

Spread the word about CapitalConnect: created twitter account, registered the company with The Mix Market, created justmeans account, registered with Xigi.net and SoCap09.

Newsletter: wrote the content of issue 1, analyzed data, created graphs and tables.

Structured Internship Program

Project Profile for Internship: wrote internship profile, job details and information about the company.

Internship evaluation form: created form to be filled out by interns at the end of their internships.

Good luck!

Posted by Erika Tabacniks on 28 Jan 2010 No Comments »

Brazil has been the focus of policymakers, private sectors, journalists and the academia worldwide. To maintain the recent momentum, the country’s public and private sectors need to join forces and tackle its greatest challenge: bridging the gap between two worlds: (i) an upper class that lives in the core of its big cities with world-leading companies and high purchasing power, and (ii) a lower class that lives in poverty in smaller cities and in the countryside. According to the World Bank, Brazil has one of the highest income and capital inequalities in the world. Addressing this issue requires higher investment in infra-structure, education and the continuing expansion of national social programs.

Second-largest consumer of cocaine in the world, illicit producer of cannabis, Brazil has a long way to go on the war on drugs. According to the Central Intelligence Agency, there has been an upsurge in drug-related violence and weapons smuggling in the country. Not only is Brazil used by traffickers as a way station for narcotics air transshipments between Peru and Colombia, but it is also an important market for Colombian, Bolivian, and Peruvian cocaine and a key player in the transshipment cocaine headed for Europe. Furthermore, there has been significant illicit financial activity in the Tri-Border Area. The illicit narcotics proceeds are often laundered through the financial system.

Even though the government has a large-scale eradication program to control cannabis, the situation requires a lot of effort and important structural changes. The war on drugs is a good opportunity for the country to lobby Washington for a change in the conduct of this issue. Barack Obama’s election is an opportunity for fresh thinking, and a discussion on drugs policy is a pressing need.

Brazil is seeking broader solutions to internal problems as seen by its greater participation in the South American economic integration. Increasingly, its private sector is looking outside its borders for diversification and growth. However, surviving in the global arena might be tough for many companies since an inward-looking culture still prevails in the country. Brazilian politicians could learn with their Chinese counterparts and play a more active role in helping companies expand abroad. Moreover, a problem that needs to be addressed is the additional cost of doing business in the country because of poor infrastructure, weak tax and labor reform, among other problems which are slowly being addressed by the current government.

Against that backdrop, hosting the World Cup in 2014 and the Olympics in 2016 has brought a sense of urgency to the country. A positive outcome might be an increase in the interaction of public and private sectors to carry out some overly needed infrastructure investments.

Posted by Erika Tabacniks on 24 Jan 2010 No Comments »

Brazil has adopted a neoliberal economic model that prioritizes cuts in government expenditures and privatizations. These changes have affected the retired officers of the Armed Forces. Under the previous military regime, they were offered positions within state enterprises and the federal bureaucracy. Nowadays, there is a lack of state enterprises in which these officials could work at the time of their retirement.

Another problem in Brazil is that payments for personnel and pensions absorb most of the Defense budget, limiting the amount of investments in maintenance and new equipment, bringing serious problems to the branches:

Army: the effective military is about 358,000 people; 78% of the vehicles are at least 34 years old and some trucks and artillery guns date back to WWII. Out of the 1,437 armored vehicles, over 40% are not combat ready, and 40% or 2,670 of the vehicles are not operational. Additionally, some weapons have been in use for more than 40 years and the amount of ammunition stock is only 15% of what is recommended.

Navy: in 2007 they had 21 combat surface ships to patrol the coastline, and only 10 of them were operational, most with operating restrictions. Out of their 5 submarines, one is fully operational, two operate with restrictions; and 27 or 46% of their 58 helicopters are inoperable.

Air Force: 60% of the aircraft is at least 20 years old and only 37% is operational. Lack of maintenance and spare parts have grounded 452 aircraft.

The low spending levels, insignificant in terms of GDP, suggest that the military has to compete with the civilian ministries and they end up losing in most of the cases. In addition, despite the fact that the military is still the most influential player on some issues, the number of civilian actors involved in the decision-making process has increased. The Ministry of Finance, for example, has become the dominant player on budgetary issues. Also, the Armed Forces must deal directly with the Congress, responsible for approving the budget. To end cuts in the government’s economic allocations into this department, a budget tied to spending and investment in national defense should be created.

Posted by Erika Tabacniks on 24 Jan 2010 No Comments »

A main feature of an international bankruptcy system for sovereigns is the automatic stay, which prevents creditors from bringing actions to collect their debts, or to foreclose on assets. This system is believed to help reduce bailouts and therefore moral hazard. Sachs argued that a system facilitating debtor defaults through an orderly bankruptcy process would be an alternative to the current IMF lending process; that is if debtors could have orderly defaults, IMF lending would not be necessary. The lack of explicit priorities on sovereign debt has led to the treat of dilution- meaning that the sovereign is able to issue more debt than it would otherwise be able to do with priorities. If earlier debt has priority, subsequent debt that leads to over borrowing is less likely to occur.

However, there is no judicial workout in developing countries, there is no bankruptcy court. Some of the functions that are missing include the sharing clause that can solve the collective action problem, representing the interests of syndicates. If all of the syndicates are pressing for attention, we assure that all creditors are treated equally through mandatory prepayment clauses, which are similar to a share clause, it is an obligation of the debtor to maintain the unity of the banking group.

Another innovation is the debt for equity swaps offered by Mexico: dollar debt for peso cash swaps, required to be used to invest. The benefit is that the debt is purchased at a discount and then exchanged for a smaller amount worth of pesos: “this is the magic solution”; but there weren’t that many state owned enterprises, it was a local currency debt problem and not a liquidity crisis, as thought by many. To restructure the package, banks had to add amendments to the agreements. Bonds were excluded from the restructure mainly because it was hard to contact them, it was a small amount of the money, there were just individuals and most of the market was institutions. In addition to that, money owed to the World Bank and the IMF was not structured either. Therefore, new money was the new technique, so a group of banks and the IMF would provide additional money.

Countries can’t really go bankrupt because there is no country bankrupt law. Countries, instead, become insolvent. The IMF has played a bankrupt role a while ago, but there is no way about being sure about the quality of assets. A carefully thought-out international sovereign bankruptcy procedure may cause troubles now tackled by a politically-compromised IMF to be relegated to the marketplace. Bailouts might become rarer and more justified. Moreover, the “last man syndrome”, the ability of a single creditor to blackmail others into an uncomfortable deal, might be eliminated. However, it is hard to predict whether or not countries will abuse the bankruptcy procedures.

Posted by Erika Tabacniks on 20 Jan 2010 No Comments »

The international system is characterized by decentralization and it is made up of a network composed of bodies and organizations that have an active voice in international decision-making, such as NGOS, multinational companies, for-profit and not-for profit organizations, states and others. The process through which this system operates is called the “justificatory discourse” which includes the elaboration, the application and mainly the interpretation of international rules.

International organizations (IOs) are venues for diplomatic talks and agreements that create this justificatory discourse. Most IOs, in addition to being an area where these discussions are held, are also actors as they make decisions that affect states and events.

This idea is shared by the social constructivists who believe that these norms, once agreed upon in IOs are internalized by the states, changing their interest and identities. IOs sometimes take the lead as a “norm entrepreneurs”, but in a manner that it interfaces with other actors in order to achieve higher efficiency.

Below are some examples of IOs that act as arena, actors or both:

The Security Council (SC) of the UN, for example, is both. It was created to promote and maintain international peace and security and it has the ability to create binding laws directed at one or more states according to its roles described in the UN Charter (Articles 24 and 25). Therefore, its members eventually meet to deliberate on matters of interest to the nations, but it also acts directly in conflict zones.

The General Assembly of the UN, on the other hand, is an arena, as its main important role is to serve as a venue for discussions in order to create recommendations. Unlike the SC, it does not have the power to make international binding decisions. Important to highlight, however, that it can act when the SC is paralyzed.

The Secretary General of the UN and the president of the World Bank are both actors, and the SG’s role is somewhat more restrained than the president of the WB. Both of them make important decisions that shape the international system.

NGOs are both. In fact, analyzing the influential power on IOs, Jessica Matthews argues that there has been a shift of power from the state towards IOs and to levels of government below the national level, mainly NGOs. In this sense, the role of NGOs has become more important along the years, as they can be very influential in international decision making to the point where its legitimacy might be questioned. NGOs, in this case, act as arenas that allow the voices of others that would not otherwise be heard; and also as actors as they spread knowledge to increase public awareness and broaden participation in international decision-making in order to set policy agendas.

International organizations, therefore, have an important role in international relations and the legal system, not only facilitating and addressing discussions, but also making important decisions in different situations and networks.

Posted by Erika Tabacniks on 19 Jan 2010 No Comments »

In corporations, debt contracts are enforced by the threat of liquidation, in other words, by a legal mechanism for transferring the firm’s assets to the creditors in the event of default. However, this enforcement means is less reliable when it is relating to sovereign debt. This is mainly because few sovereign assets are in fact located in international territory and a sovereign cannot credibly commit to hand over assets within its borders in the event of a default. This is also explained in part by “sovereign immunity” which limits the extent to which sovereign assets in foreign jurisdictions can be attached by creditors. Domestic bankruptcy law serves as a useful model in the insolvency context, but the applicability of the corporate model is limited by the unique characteristics of a sovereign state.

The debt crises of the 1980s raised concerns such as growth in public lending and developing countries shedding away from market forces, increasing debtor’s moral hazard; an increase in creditor moral hazard since public money helped banks avoid full consequences of their imprudent lending; an increase in real systemic risks since major banks could have gone bankrupt; and the problem remained. To reduce the debt, there was the creation of plans and also securitization.

When comparing the debt crisis management post-1990 (bailouts, restructurings, and defaults) with the 1980s debt crisis, the following characteristics are important:

-          There were many different types of crisis not only default crises. Mostly triggered by exchange rate depreciations. Injecting liquidity would have been reasonable in some cases, while more fundamental economic problems were at the core in some other cases.

-          The crises involved defaults or potential defaults on bonds as well as loans. Given the number and diversity of the bondholders, and lack of regulatory frameworks, resolutions were more difficult.

-          There was less threat of systemic risk to the banking system as bank exposure as a percentage of capital was less than in the 1980s. There was still a country contagion issue such as the Asian crisis of 1997.

-          Fewer actual debt moratoria.

-          Role of IMF as provider of funds and manager of debt crises grew. It has shifted from conditionality programs for fiscal and monetary austerity of 1980s into detailed structural conditions such as privatization and law reform.

The Brady Plan was created so that the government of the debtor country issued the so-called Brady bonds (named after the Secretary of Treasure) in exchange for outstanding debt in arrears to banks, at a negotiated discount related to the market price of the notes traded in the secondary market. A crucial part of the new scheme was the security for the new debt- US zero coupon bonds.

The Brady plan would address to long term solvency problem, reduce the debt, and buy some collateral and so on. Most countries who had Brady Plans paid off all their debt and that debt crisis is no longer with us. Once you go through bankruptcy, your bad debt from the past is gone.

Posted by Erika Tabacniks on 04 Jan 2010 No Comments »

When securitizing you are moving risks. Securitization allows lenders to manage credit risk by transferring the risk to a wide pool of investors. In turn, it allows them to add credit risk to their portfolios (similar to credit derivatives). It requires extensive legal and accounting framework and it allows the removal of assets from the balance sheet through a transfer to a Special Purpose Vehicle (SPV).

In the crisis everyone failed in anticipating the black swan, the insurance companies, investors, underwriters and rating agencies. It also involved corporate governance (CG) issues since there is a need for new models and a need to complement it with regulation. In this sense, there have been lawsuits brought against S&P and Moody’s – even though they weren’t underwriters or issuers of securities; they participated in the structuring of them. Therefore, in addition to macroeconomic factors, there are regulatory treatment devices that could have ameliorated the crisis.

Banking regulation is a specialized kind of Corporate Governance where there are additional concerns about the behavior of banks, a credit relationship between the government and the bank. The government wants control of what the bank does to overcome risky behaviors and moral hazard. The way thorough which government make sure they are ok, is by establishing capital requirements, similar to project finance that has a cushion for requirements. In this case, capital requirements are smaller if the transaction removes risk from the balance sheet. Some of the actions that could be taken to prevent them are mentioned in the De Larosiere report and include regulatory changes in order to avoid providing incentives that caused individuals to act in ways that would bring higher financial returns. Therefore, capital requirements might have ameliorated the crisis through their incentive effects but it is difficult to establish the correct amount.

When we compare models of financing and regulation (banking and securities) it is possible to note that banking regulations are concerned with the safeness and soundness of the institution, there is a financial self-interest involved. In the case of securities, there is a concern with the securities sale transaction to promote the activity of the market and make sure there is enough regulation in it. In order to do so, there are registration requirements, disclosure requirements, and anti-fraud provisions. All of them have a choice of law problem when deciding which law to apply due to the existence of different domestic laws. One possible solution would be the harmonization that would also avoid regulatory competition and arbitrage.

From an accounting and bankruptcy standpoint, the distinction is that there is a true sale, not a security transaction. There are two fundamental questions in each of these areas: (i) the Special Purposes vehicle must be a separate person; and (ii) it must have gotten ownership, in other words, it must have had a true sale.

The crisis has presented a lot of challenges to banking and securities regulation. As the crisis unfolds and possibly comes to an end, international coordination and cooperation has a crucial role to play and is of great importance between the markets.

Posted by Erika Tabacniks on 04 Jan 2010 No Comments »

One of the main points of the Brazilian Defense Plan is to reduce dependence on imported equipment and ensure that the needs of the military technology be provided by the national industry. To achieve that, the government should guide the Armed Forces to slowly replace foreign suppliers of arms, helicopters, airplanes, ships and radar, by domestic suppliers in order to stimulate the national defense industry.

The domestic industry, however, is in need of additional investments. Besides Embraer, the only remnant of the Brazilian arms industry in a favorable situation, Brazil has a limited number of national defense equipment suppliers:

•              Avibras: manufacturer of air-to-ground and surface-to-surface defense;

•              Mectron: producer of the Piranha air-to-air missile;

•              Imbel: arms manufacturer;

•              Orbisat: producer of locks and helmets for security companies (has recently started creating projects for manufacturing low-height satellites).

The reorganization of the defense industry can be done through a special provision for companies that manufacture military devices. The idea is to remove the constraints of the Bidding Law that incur on them and change the limited allocation of funds in the Union budget. Nonetheless, the State can start playing a more active role in these companies by means of a golden share as suggested by the current Administration. These companies, monitored by the State, would be responsible for manufacturing electronic warfare equipment and artifacts for individual use, among others.

In addition to these incentives, the government must also invest in sectors such as automotive, naval, electronics, railroad and hospitality. This incentive can be done through a reduction of taxes and tariffs on imported machinery and equipment that are used by these industries.

Furthermore, Brazil needs to attract the civilian intelligence to launch the development of armaments. The government needs to raise investment in education, especially in high level technical research programs in order to increase the link between academia, private sector and military. This can be attained through a significant increase in the number of scholarships destined to fellows interested in doing doctoral and post-doctorate programs abroad.

In the short term, the defense plan calls for partnerships with military powers and neighboring countries in technology development and production of material for military use. The partnerships that Brazil is weaving with powers such as France and Russia are a key step in the technological development of the domestic industry. The purchase of fighter jets, submarines and helicopters is the formula to import technology and unleash the national industry. One alternative is to buy old fighter jets with full transfer of technology, so that a domestic company begins producing the imported model.

In the medium and long terms, however, the goal is to achieve greater autonomy in R&D and production of war materiel. This is important because Brazil cannot rely on partnerships with other powers or allies to develop its security strategy or it will lose freedom of action in the future and might jeopardize its safety in the case of a conflict involving the interests of those partners.

Autonomy in R&D will happen over time, provided there is planning and continued political action in the next government. This field must be treated as a goal of the State, rather than a government policy, as has always happened.

Posted by Erika Tabacniks on 26 Dec 2009 No Comments »