John Fenzel • August 22, 2012

In his excellent Middle East travelogue, “Baghdad Without a Map and Other Misadventures in Arabia,” Tony Horwitz writes:

“In Egypt, aggression and impatience are frowned upon. The unofficial Egyptian anthem, ‘Bokra, Insha’allah, Malesh’ (‘Tomorrow, God Willing, Never Mind’), isn’t just an excuse for laziness. In a society requiring millennial patience, it is also a social code dictating that no one make too much of a fuss about things.”

This sentiment seemed alive and well in Cairo as Mohammed Morsi was sworn in as Egypt’s president last month. Not even the first choice of the Islamist Group, the Muslim Brotherhood, Morsi was widely viewed as an accidental president of sorts, and therefore destined to be a figurehead president. It was widely believed that real power would continue to reside, as it always had, in the Supreme Council of the Armed Forces—or SCAF.

But early last week, Morsi took everyone by surprise—including the United States. In a lightning-fast series of maneuvers and brokered deals that would make Machiavelli proud, Morsi removed his political and military rivals, and nullified a constitutional decree that gave the military council ultimate authority over Egypt’s administration, security and, significantly, the government’s purse strings.

Simultaneously, Morsi issued a constitutional edict granting himself full authority over the executive and legislative branches of government. Knowing a bridge too far when he saw one, he left the judiciary alone. To preempt any potential dissent from the judiciary, Morsi appointed reformist senior judge Mahmoud Mekki as his vice president.

The ostensible catalyst for the shakeup was the killing of 16 Egyptian soldiers in northern Sinai earlier in the week, but it seems obvious that this was only a convenient excuse for actions already planned. Morsi quickly exploited the incident, and replaced his defense minister, the army chief of staff and each of the service chiefs.

It is the moral equivalent of a U.S. president firing his Secretary of Defense and all of his Joint Chiefs of Staff in one fell swoop.

Morsi’s stunning consolidation of power followed a sequence that caught the occupants of Washington’s “C” suites and cabinet secretaries completely off-guard. Reluctant to admit a lack of advance knowledge of Marsi’s power-play, State Department spokesperson Victoria Nuland said:

“We obviously did know that there were discussions ongoing about a new defense team — with regard to the precise timing, less so.”

In retrospect, the move should have been fully anticipated. The obvious historical examples of past presidents Anwar Sadat and Hosni Mubarek are clear evidence that staying power in Egyptian politics requires strength. Morsi was understandably motivated to reclaim the political power that the military had seized in the wake of the Arab Spring uprising last year.

To calm those at home and abroad, Morsi delivered a radio address, insisting,

“I never meant to antagonize anyone… We go on to new horizons, with new generations, with new blood that has long been awaited.”

Assuming an apparent wait-and-see posture, the White House has yet to offer any substantive reaction to Morsi’s dramatic power-grab, except to issue non-specific diplomatic statements about “shared interests” and the new appointees being “well known” to them.

Their silence on the real issues at hand is what’s so significant. Indeed, if the aim of the White House’s long-range goal was Egypt’s “full transition to civilian rule,” as Secretary of State Hillary Clinton has articulated it, the end result has been hardly worthy of celebration. Any vision of a secular democracy in Egypt has been relegated to virtual-mirage status.

While the administration would like to calmly portray Morsi as doing what is necessary to place Egypt back on the road to democracy, it should be worried. Morsi’s actions point to a far more ominous course now underway.

A judge in Egypt’s Higher Constitutional Court (HCC), immediately responded to Morsi’s actions, saying, “A president does not have the power to abrogate a constitution, even a temporary one….”

With his newfound authorities in place, and with the ability to rewrite the new constitution, the process of Islamizing Egypt’s domestic policy is almost sure to follow.

Despite Morsi’s personal assurance to media chiefs that press freedom would not be restricted, actions to suppress media criticism against Morsi are now fully underway. The day after Morsi’s “Sunday Coup,” police attempted to confiscate all copies of newspapers critical of the Muslim Brotherhood and suspended the broadcast license of a television station that has actively criticized Morsi in the past. Last week, Egypt’s upper house of parliament appointed new editors for the country’s 50 state-run newspapers, effectively placing the media under Brotherhood control.

Morsi now has control of all executive and legislative levers of powers, and has reinforced his authority by imposing control of the media. In such an environment, and given the stated long-term goals of the Muslim Brotherhood, the implications for Israel’s security and the future of the Camp David Accords are obvious.

To even the casual observer of Egyptian politics, Morsi is now fully in the driver’s seat as president. As such, Horowitz’s continued observations of the “Bokra, Insha’allah, Malesh” anthem seems entirely, metaphorically, relevant:

“Egyptians undergo an odd personality change behind the wheel of a car. …But put an Egyptian in the driver’s seat, and he shows all the calm and consideration of a hooded swordsman delivering Islamic justice.”

John Fenzel • June 13, 2012

In private sideline conversations between
principals during the G-8 summit meeting at
Camp David, some significant decisions were
made that will impact the long-term fate of the
European Union over the coming weeks and
months.

Those conversations centered on the decision
to plunge ahead with the bailout of the
European banks in an effort to save the Euro
system, with Greece still inside. The prime
influencers behind this decision were Managing
Director of the International Monetary Fund
Christine Lagarde and President Obama. Both
Lagarde and Obama are concerned that if Greece
leaves the Euro, the contagion will spread to
Spain, Portugal, Ireland, and, perhaps, even
Italy. President Obama’s unspoken motivation
in preventing a financial meltdown of the Euro
system is the possibility that it would almost certainly
spill over into Wall Street and adversely
affect the U.S. economy.

Christine Lagarde put the IMF squarely
behind a bailout of the European banks, with
the full backing of the U.S. Federal Reserve and
Treasury to boost the leveraged lending of the
European Central Bank (ECB) to prop up the
European banks. The ECB will likely take junk
bonds and other vastly over-priced assets as collateral
for loans to the Spanish, Greek and other
European banks—a move that will offset an
additional estimated $500 billion in new writeoffs
by bondholders of Greek debt.

So, the IMF, the Obama Administration
and the ECB appear to have colluded to further
delay the reality of the financial and banking
crisis through what are–by any measure–very
risky, hyperinflationary measures. From the
Obama Administration’s perspective, however,
the strategy will have succeeded as the crisis is
effectively postponed, taking many months to
fully play out (versus days or weeks), well past
the November elections in the United States.

In his sideline meeting with new French
President Francois Hollande, President Obama
reached a full agreement on this perpetuation of
the Euro. This is an area where Hollande and
German Chancellor Angela Merkel will agree
to disagree. They both want to defend the Euro,
but Hollande will continue to insist that austerity
must be limited and a growth program initiated.
While the feasibility of such a dual-track program
is questionable at best, it is nonetheless the
growing agenda of the Euro-socialists, including
Hollande, Germany’s Social Democratic Party
and the Italian Socialist Party. A majority of
Greek voters are in favor of staying in the Euro,
so long as the austerity is reduced.

Hollande will make continued efforts to push
for Euro bonds as one way to implement this
bailout plan. Merkel will continue to oppose and
block the Euro bond argument. Merkel recently
told her party that “under no circumstances”
would she agree to a Euro bond strategy.

“A Euro bond would take a few years to
implement because there are lots of technical
issues to solve and also implementation of the
Euro bond procedure would take several years,”
Finnish Prime Minister Jyrki Katainen says. “So
Euro bond[s] are not a solution for this current
crisis,”

The total amount of assets on the books
of the US Federal Reserve and the European
Central Bank, combined, fall well short of the
currently estimated 4 trillion Euro liability of
the European private banks—something that
U.S. Treasury Secretary Timothy F. Geithner is
acutely aware of.

Treasury said, in a written statement, that
Katainen and Geithner recently met and “discussed
the global economy, including the United
States’ economic recovery and the plans of
European leaders to reinforce the institutions
of the Euro area.” Federal Reserve Chairman
Ben Bernanke, conspicuously absent from the
Treasury statement, also was also present and
participated in the same discussions.

Both Bernanke and Geithner are said to be
extremely worried about the worsening trajectory
of the Euro crisis. While they know they are
in a position to delay a breakup of the EU, they
may well be powerless to prevent it if the downward
spiral continues unabated. Geithner’s
message has been a clarion call to EU leaders to
address their core problems now, not later. With
unemployment at depression era levels, and the
periphery of the EU experiencing zero growth,
the massive deficits of countries like Greece,
Italy and Portugal are simply too large to bail
out, even with U.S. help.

So, while EU politicians sit on their deck
chairs, discussing ways to achieve deeper integration
in the 17-nation euro area, Germany,
Austria, and the Netherlands are privately donning
life vests, preparing for the EU ship to sink
in cold, unchartered waters.

When that happens, the well-practiced
S.O.S. call will go out to U.S. rescue ships in
the area, as always, only to find out that they’ve
run out of gas.?

John Fenzel • May 30, 2012

J.P. Morgan’s $2-4 billion trading blunder has reignited the debate of whether our banking industry should remain the oligopoly that it is, or be subject to a broader array of regulatory reforms and restructuring.

The media’s focus on the several billion dollars in bad derivative trades, while replete with shock value, misses the real lessons of the incident. While significant, the losses were hardly catastrophic for the bank. With $2.3 trillion in assets, J.P. Morgan’s loss represents only .1 percent of its total assets and 1 percent of its equity. Clearly, the bad trades represent a failure of risk management, yet the fact remains that J.P. Morgan remains fundamentally well managed. Chances are, the bank will still be profitable in the second quarter.

In the midst of the ongoing media feeding frenzy, J.P. Morgan will do what any well-run organization would do: analyze what went wrong and fix it. Ina Drew, the J.P. Morgan chief investment officer who ran the department behind the massive trading loss, has left the bank with a $32 Million severance package. Other heads will roll in the coming weeks as the forensics behind the bad trades become more apparent.

Jaime Dimon, J.P. Morgan’s chairman and chief executive once praised for adeptly navigating the bank through the 2008 financial crisis shares the blame. His biggest mistake, perhaps, was his lack of humility and his reflexive—if not extreme—resistance to enhanced regulation of the banking industry. On April 13, Dimon downplayed the rumors of the massive losses by referring to it as “a tempest in a teapot.” But after the extent of the losses became clear, and when Dimon was forced to announce the losses on May 10, he explained, “In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored.”

To even a passive observer, the incident highlights that Dimon and other megabank CEOs, supported by a government sanctioned and licensed oligopoly, dominate trading flows and market making, particularly in the “over the counter” (OTC) markets.

What exactly does that mean?

The term, “Oligopoly” comes from the Greek, “Oligos” and “Polein.” “Oligos” translates to “few”; “Polein” means “to sell.” Simply defined, an oligopoly is an economic condition where there are few sellers and many buyers. The few sellers who dominate a market exert control over their competitors’ prices or their ability to freely compete. In an oligopoly, the market is also particularly vulnerable to the mistakes and fates of those few dominant influences.

When Citigroup or Bank of America experience massive losses, the government invariably comes to their rescue with billions in taxpayer dollars quite literally because they are “too big to fail.”

The 2008 financial crisis was largely caused by an overconcentration of derivative instruments in the hands of a few banks. Today, the top six megabanks hold 95 percent of the entire $1.2 quadrillion derivatives market. J.P. Morgan has 44 percent of that market. Those statistics alone constitute an oligopoly in that particular market. Alarming? Now, consider this: today, those same banks have assets that exceed 60 percent of our national GDP.

While the CEOs of the megabank club know the risks of overconcentration well, those whispered conversations normally occur behind closed doors or on the back nine. Their interest, understandably, is in turning massive profits for their shareholders. Each bank, therefore, contributes millions to both political parties, and employs an army of Capitol Hill’s best lobbyists to ensure their advantages are preserved.

Over a century ago, President Theodore Roosevelt confronted the financiers (J.P. Morgan among them) and industrialists head-on with antitrust suits. Despite the accusations of his critics, Roosevelt’s objective was to regulate the giants, not to destroy them. Roosevelt’s direct approach was politically courageous and effective in 1907. Created to safeguard against undo risks by improving accountability and transparency in the financial system, the Dodd-Frank Act was the closest we’ve come to TR’s method yet. But even that “big stick”has, by most accounts, fallen short.
The lessons should be abundantly clear. Mitigating against risk requires sufficient capital. Because J.P. Morgan is a healthy bank, the losses they announced last month, while uncomfortable, were nonetheless manageable. Banks should, therefore be required, by law, to hold ample equity capital to cover any potential losses. That is something regulations can’t do.

Second, the Department of Justice as well as federal regulators should both be empowered and instructed to preemptively break up large financial institutions that pose a threat to the nation’s financial stability. Currently, Dodd-Frank empowers regulators to intervene “only as a last resort.” Dodd-Frank also requires banks to have a “living will” to provide for a managed dissolution in the event of a bankruptcy. This provision remains ill-defined and untested, and offers little reassurance that our economy won’t be driven into the same kind of crisis we experienced in 2008.

Today, the banking system is even more concentrated than pre-2008. Because the largest banks have the implicit backing of U.S. taxpayers, their cost of capital is artificially low. As a result, the megabanks are incentivized to take outsized, irrational risks—and smaller banks are challenged to compete with them.

That is the textbook definition of an oligopoly.

John Fenzel • May 17, 2012

In a little-known Aesop’s fable, a number of flies are attracted to a jar of honey that is overturned in a housekeeper’s room. Placing their feet in the spilled honey, they eat greedily, happily gorging themselves. Their feet, however, become so smeared with the honey that they cannot use their wings, nor release themselves … and they slowly suffocate.

It was this fable that came to mind as I watched the garish coverage of the White House Correspondents’ dinner a few weeks ago pop up on entertainment shows, newspapers, blogs and social media sites. As an annual event, Hollywood celebrities flood to the nation’s capital for a three-day period of pre-dinner receptions and post-dinner parties at mansions in Georgetown, hotels or museums downtown and embassies around Massachusetts Avenue that are often more lavish than the dinner itself. Journalists, politicos and celebrities flock to each party and each reception … like flies to honey.

As star-struck reporters trip over themselves to gain often lop-sided, fuzzy iPhone photos with Kim Kardashian, George Clooney, Reese Witherspoon and Uggie the Dog to post on their Facebook pages, all journalistic pretense is gone for those three days or more, surrounding the last Saturday in April.
It’s become known, euphemistically, as the “Nerd Prom.” Begun in 1920, the ostensible purpose of the dinner is to “acknowledge award-winners, present scholarships and give the press and president an evening of friendly appreciation.” To outside observers (we, the uninvited masses), however, the White House Correspondents Association dinner is anything but. Instead, the event has become the most obvious symbol of a mainstream media that has abdicated its responsibility to the people, for a chance to preen and rub elbows with Hollywood and political elites.

The criticisms of the dinner as spectacle of sorts are not new. After the 2007 dinner, then-New York Times columnist Frank Rich characterized the event as “a crystallization of the press’s failures in the post-9/11 era…[because it] illustrates how easily a propaganda-driven White House can enlist the Washington news media in its shows.” A few Sundays ago, Tom Brokaw appeared on NBC’s “Meet the Press” and remarked, “Look, I think George Clooney is a great guy, I’d like to meet Charlize Theron, but I don’t think the big press event in Washington should be that kind of glittering event, where the whole talk is Cristal champagne … who had the best party, who got to meet the most people.” Brokaw went on to say, “That’s another separation between what we’re supposed to be doing and what the people expect us to be doing, and I think that the Washington press corps has to look at that … It’s gone beyond what it used to be.”

After the festivities, we’re expected to believe that the press and White House will go back to their business-as-usual adversarial relationship, like Ralph E. Wolfs and Sam Sheepdogs, punching their time clock in the famous Looney Tunes cartoon.

Don’t get me wrong: the same issue exists with the White House’s official state dinners, where Tom Hanks, Barbra Streisand and Steven Spielberg are provided open access to the White House’s compound along with media figures like Katie Couric, PBS’s Charlie Rose, Washington Post’s Jonathan Capehart. As the nation’s gentry gather, many members of the press have proven more than willing to assimilate themselves into exclusive affairs without regard to perceptions from the outside world.
During his tenure, WHCA President Steve Scully countered the critics by saying, “An evening of civility does not mean we are selling out … [and] if people want to criticize the dinner, then don’t come.” Scully, of course, had little to be concerned about. The rest of us—the uninvited “everyman”—never do.

So, Aesop’s story about the flies and the honey jar represents a cautionary tale for the press and for all of us. The fable itself concludes, as the flies are expiring from their foolish escapade, with their collective lament: “O, foolish creatures that we are, for the sake of a little pleasure we have destroyed ourselves.”

John Fenzel • May 3, 2012

“The present situation is as dangerous as if the United States decided to outsource the design of bridges, electrical grids and other physical infrastructure to the Soviet Union during the Cold War.” ? —The Intelligence and National Security Alliance

Cyber-attacks on large banks have never been anything new, but the FBI special agent noticed that the attacks this time are different—large banks in Charlotte, New York and Chicago have reported some kind of virus that has taken control of their computer systems. By midnight, cyber-forensic teams have identified the culprit as a stand-alone malware program– a computer worm.

In the morning, an FBI spokesperson announces “highly sophisticated,” coordinated and targeted attack against banks in Charlotte, New York and Chicago. The attack is well-timed to occur during the holiday season when banking operation centers and response teams were thinly staffed. The machines bombard government and Wall Street websites with incessant network traffic, crashing or partially disabling them.

Media reports that the attack has destroyed hundreds of thousands of computers, and initiates a panic from account holders that has caused the Federal government to impose a sudden semi-freeze on all accounts, with a $500/day individual account withdrawal limit until further notice.

Despite thousands of man-hours, mitigation efforts are only partially successful. U.S. law enforcement and commercial researchers attempt to determine the origin of the attack and find that the worm received its commands from servers in 26 countries. Researchers have seen this kind of sophistication before in attacks on the defense industry, but never in the commercial sector. Investigators still aren’t certain who launched the assault, although many suspect North Korea.

Although this is a fictional scenario, recent testimony on Capitol Hill from a host of cyber-defense experts and national security officials has made it clear that such an event is not only possible — it may very well be inevitable.

It is widely recognized that a strong and well-protected U.S. banking information infrastructure is critical to maintaining our nation’s economic security. But are we prepared for a deliberate and concerted cyber-attack on our financial system?

The cyber domain provides unprecedented opportunities for catastrophic attacks against the banking and finance sectors. Because of the banking community’s heavy reliance on networked information systems, both of these sectors are extremely vulnerable.

The secure networks that banks use every day are the target of persistent hostile activities. To an adept hacker, they are anything but secure. The intrusions are being conducted by a host of adversaries with a wide range of capabilities and objectives. Whether state-sponsored or otherwise, these attacks threaten the integrity and safety of the nation’s financial infrastructure.

To effectively defend itself, the banking industry requires a systemic method not only to defeat these threats, but to also exploit them. Such a method has proven elusive, however. Instead, our financial institutions gravitate toward standard technical cyber security tools that provide a passive defense — but not an active one.

Standard cyber security measures, while always prudent, are largely irrelevant to the most significant threats facing the financial sector today. The prevailing approach of searching for vulnerabilities and applying updated security patches is much like plugging leaks in a badly constructed dam … with a large city situated squarely downstream.

A better approach incorporates some timeless counterintelligence methods that the CIA has long-used to ferret out spies at home and abroad. Using cyber-forensics, these techniques can neutralize cyber-attackers, isolate, manipulate and interdict them.

Behind every virus, mole, worm and cyber intrusion, there are faces — faces of real people who wish to inflict damage on carefully selected targets. But do we know who these people are and what motivates them?

Whether the objective of an attack is theft, money laundering, extortion or indirect warfare, fast-moving attacks are best handled by cyber-forensics, international law enforcement and counterintelligence experts who are empowered to move quickly and seamlessly through the interagency and commercial arena.

Any effort to understand who these actors are, will also ask who they are allied with, the nature of their activities, the purpose behind them, and what can be done to protect against them. A counterintelligence approach, properly applied and adapted can both produce information on cyber-attackers and protect networks in a proactive, targeted way while protecting our national financial networks.

Today, invisible battle lines are being drawn between banks and cyber-attackers. While traditional cyber-security measures against hackers have become commonplace, very little has been done to address the threat of systemic attacks to the banking industry conducted by state-sponsored and transnational actors. Until a comprehensive approach is adopted, scenarios like the one above will be more possible than anyone in the banking industry would like us to believe.

John Fenzel • April 4, 2012

“The gunman entered … and opened fire on ‘everything that moved… How can they attack something as sacred as a school?’”

This witness account, from the school shootings in Toulouse, France is reminiscent of the countless other incidents we have experienced across the United States, most recently at Chardon High School in Ohio.

When a shooting incident occurs in any of our nation’s schools, news travels instantly.  Coverage of the incident dominates our television screens—images of students and faculty streaming outside, parents rushing to police lines, stacks of SWAT teams preparing to enter school doors, media vans lined up on roadways—all of it creating an all-too-familiar scene. So familiar, in fact, that the images and details of each incident have become largely indistinguishable from others.
 
As the discussion has become garbled, so have our strategies for dealing with shooting rampages in our nation’s schools.
 
Following an incident, we’re riveted for a period of a week or so to the news coverage.  We’re systematically guided through the stages of grief by network anchors and pundits: through our guilt for not having recognized the signs earlier…through our anger at the perpetrators…and finally, to our collective view of the incident as an anomaly—something that “could never happen here.” 
 
Months later, another school shooting occurs. This one seemingly disconnected from the one preceding it. And yet, the shooters’ characteristics are remarkably similar:  chronic truancy, religious or political fanaticism, a preoccupation with weapons, someone socially marginalized…on “the fringe,” who is struggling with addiction…and who has announced his intent to kill.  The symptoms and signs remain constant. And in our collective quest to better understand a shooter’s motives, the media narrative often conveys upon us a societal guilt-by-association for the carnage he inflicts.
 
Defining the Problem

On occasion, we take a few steps back to gain perspective rather than catharsis.  And in those moments, it’s possible to transcend our complacency and to see school rampages for what they are: acts of terror.
 
Defining the problem in these terms is a crucial first step toward effective defense—but that step has proven to be surprisingly elusive as we tend to focus instead on the psychology and motivations of the shooter in an incident’s aftermath. But the problem has remained constant:  our children are at risk from those who seek media attention through acts of mass murder.
 
The problem of active shooters in our schools is not new. The first school massacre incident occurred in 1764 at a schoolhouse near Greencastle, Pennsylvania, when four Delaware warriors killed ten children and their schoolmaster. In 1927, a school administrator bombed the Community School in Bath, Michigan, killing 38 people—mostly children.  Numerous other incidents have occurred through the years. The well known and often discussed, like Columbine and Virginia Tech, eclipse those that occurred decades ago, but are no less deadly, like South Pasadena Junior High School (1940) and University of Texas at Austin (1966).
 
What Can be Done?

Identifying students who display at-risk behavior remains key to stopping a school shooting before it occurs.  Homicidal ideation is perhaps the most obvious indicator that a teen may be considering such an act, but there are a host of others, to include: cruelty to animals, suicidal tendencies, and abuse or neglect at home. Reporting comments and observations in advance have prevented many attacks; however, forecasting a school rampage is not always achievable. 

There will be more attacks. As youth addiction to point-and-shoot video games grows, and as weapons become more powerful, a perfect storm of entertainment realism and lethality has gathered, making the potential consequences of future school attacks even more catastrophic than the last.
 
Defending against school rampages is a sensitive topic—far more so than preparing for tornados or fire.  Active shooter drills involving all parties—students, faculty and first responders—are rarely conducted for fear that the visual of the drills alone will be met with cries of outrage from school commissions and PTAs. 

The great irony is that school rampages are responsible for far more fatalities in our schools than severe weather, earthquakes or fires, combined.

So, rather than shrink from tabletop exercises and rehearsals, perhaps we should be insisting on them? Even the simple act of identifying the locations for staging areas, police command posts, media cordons, and reunification sites expedite incident response.  Exercises also give faculty and students a reflexive understanding of school lockdown procedures, and how to effectively respond should they come face-to-face with a gunman. Drills and rehearsals have the added benefit of building relationships with local law enforcement before an incident occurs.  The time for police, first responders and school administrators to be introduced to one another should never be in the midst of a crisis.