Hi Noorul,

First of all, a very happy new year to you and your family. Indeed nice to be in touch with you after all this while. I frequently see your updates / photographs on Orkut, including your swanking new car, and it really is heartening to know that you have done so well after ISM.  

With regards to the issue below let me respond in this way……. 

1. Day before yesterday was Moharram. I especially mention this because I still remember the day when you were in my room in Diamond hostel and explained to me the battle of Karbala and the martyrdom of Imam Hussein. I distinctly remember that near the end of the story you had tears in your eyes. This convinced me that day, that you were a very devout Muslim. It also told me that you were a true follower who believed in the righteous teachings and virtues of ISLAM. Had, I not been, so convinced, I would not have marked a copy of the email forward to you. 

2. The emailer was a forward which  I received and forwarded further like people generally do on net. However, since it went under my email, I owe full responsibility. 

3. I am really impressed by your scholarly arguments and deep knowledge. 

4. I agree with you that much of the finer points made in the forward, were mere propaganda and exaggeration, like the ones common on net. 

5. However, I disagree with you on the broader point. Let me explain why. 

Mumbai attackers 

Consider the terrorists who attacked Mumbai on 26/11.  Recent transcripts of the phone conversations published reveal that they were instructed to identify Muslims and spare them, while kill anyone else in sight. This they could not do in CST, since there was too large a crowd there and it was impracticable to segregate people in such short time. But this they did in every other place including the Taj, Oberoi, Cama Hospital etc. That is why although 48 Muslims died tragically, yet almost all of them at died at CST and just none at any other place (except TOI food critic at Taj, and that too because the terrorists did not know her identity.). Infact Muslims were stuck in both the Oberoi and Taj and they all escaped. 

I raise this point in response to your “one person’s terrorist is another person’s freedom fighter” argument.  Infact this argument of yours has disappointed me most. The terrorists were freedom fighters for at least some body as per the argument. But if they were fighting against India and probably for Kashmir, why did they specially spare Muslims? Were the Muslims stuck there not Indians? If they were, why spare them??? Why this special affinity for certain citizens of a country, a country against whom they are fighting for freedom (freedom by at least someone’s definition). If the fight is against the country and its oppression, then why spare some citizens of that country? If such so called freedom exhibit religious profiling, is it unfair to profile these terrorists by their religion? 

You brought out the example of Bhagat Singh, Netaji etc. They did employ violent means against Britishers. But there was no hint of religious preference in their opposition. So they did kill Britishers, as they did their Indian supporters. That is why people like Bhagat Singh and Ashfaqulla Khan are freedom fighters for all and terrorists for none!! But can you say the same thing about the present so called freedom fighters? 

Kafeel and Glasgow attacks  

You are well aware of the conspiracy and the issues involved in this. I raise the point in a different perspective. Kafeel was born in India. He was well educated and earned a scholarship to UK. 

Now give a thought to this question. Why do people leave their motherland and go to a foreign country? Why do people leave India and go to US, UK anywhere? Presumably because the conditions offered to their talent there is better. Right? The opportunity could be better in terms of better education, better jobs, better pay, better life style, etc. Some people also migrate because their home country is oppressing them, or does not offer equal chance to them or discriminates against them because of religion, caste etc.  

But consider the turnaround in Kafeel’s case. Kafeel goes to UK from India. The reason could be any of the above identified. Yet in an amazing turn of events, he starts feeling oppressed in UK too!!!!  And decides to take revenge. Who invited him to UK? Was it the British government? If he made the choice on his own free will, then surely he would have known beforehand what UK was offering him. Yet he made the choice to go there, and on his own free will. 

Is it not unprecedented, that one chooses a foreign country as his new residence, utilizes its infrastructure, its education, its money, and then says sorry……..you are too bad a country so I will bomb you? Consider the sheer hypocrisy here. A shameless sense of gratitude. Absence of any morals. If you did not like the country and its ways, why did you go there? And even after you went there and found it not as per your liking, why did you not simply return? Instead you choose to bomb the country.   

Kafeel and his motivation 

Now lets look at Kafeel’s motivation to maybe understand his psyche. Kafeel did, what he did, because he disagreed with British policy in Iraq, and Israel-Palestine issue. This is the kind of motivation that most people in the world have a problem with, and that is why sometimes Muslims get branded.  

You know most people, including me, can understand at least in some way, a Palestinian bombing Israel. He is oppressed, his family might have been killed, or if no harm has come to him and his family, at least his country is under subjugation. Infact sometimes I also understand Kashmiris bombing or killing Indians. They are the direct party feeling oppressed and subjugated. Therefore, although we might not agree with them and their methods, at least we understand the reason. That is why India and such other countries, who do not endorse violent means, still support the cause of Palestine. 

What I, and people like me cannot understand is, what was Kafeel’s relationship to the sufferings of people in Iraq /Palestine? How was he in any way related to these people? Was his family ever affected by policies of Britain and Israel? Were his relatives affected? Was his society affected? Was his country affected?  Was he in any way opressed by any means whatsoever? Infact Kafeel had as much to do with Palestine as I have. Which is zero? 

Oh yes, he had one thing in common with them. He shared the religion with the people of these lands. And for this reason alone he decided to Bomb his new country of choosing. All his loyalties were superseded by his loyalty to his religion. Therefore, when it came to choosing between his country and his religion, he chose his religion.  

Think of it like this. Kafeel says – I will enjoy all the benefits that my new country (UK), which I have chosen on my own free will,  has to offer, I will selfishly use all its facilities created by its citizens over centuries of hard work.  I will fight for the right to earn its citizenship. But if my new country (UK) goes to war with another country (Iraq), whose citizens happen to be of my own religion, then I will betray my new country (UK) and fight on the side of the enemy (Iraq).  You know what is this kind of behaviour called? At least treachary if not more.

End piece 

I raise the above point only to answer the argument, as to why Muslims are sometimes labelled. Because frankly, no other religion and its followers exhibit this trait. A trait where there is para loyalty to their religion above every thing else. A person who has been born and bought up in UK for 25 years ( the 2005 metro train bombers) choose to turn against their own country and murder fellow citizens. Not because Britain had harmed them in any way. Infact, quite the opposite. They had only gained from Britain’s way of life. They killed scores of people not because their loved ones have been killed. Not because they have faced oppression. Not because they have been discriminated against (the usual dfefences of such acts). 

Had any of the above happened, we could have at least understood, if not accepted, the reason. But they choose to murder fellow innocent people, of their own country, because some people in Iraq were killed in a war. And what relationship did they have with those people in Iraq, that made them more loayal towards them than their own countrymen –  None whatsoever, except that they shared the same religion.  

Many people opposed the Iraq war. There were indeed many legitimate reasons to oppose the war. International law, strategic calculations, human rights, proper justification, and myriad other reasons. And  a vast majority of people did indeed oppose the war in legitimate ways. But these terrorists opposition had only one reason. Shared religion.  And the manifestation of their opposition – mass murder of fellow innocent citizens. Were they freedom fighters for anyone? Anyone?

Muslims are also labelled because of another reason. Perfectly normal people, who are living otherwise very normal lives, choose to use all kinds of arguments to defend such actions. That Muslims are oppressed. That they are alienated. That they are demonized. 

Is it not unprecedented that Muslims are alienated in India and in US and in UK and in Australia and in Spain and in France and in China and in Russia and in any other country of consequence? Ironically, and not by coincidence, these countries are considered as the most open, free and just socities. 

However, I also agree with you, that not only a majority of Muslims but a very vast majority of Muslims are peace loving and have nothing to do with the actions of these terrorists. But what is most disappointing is that many educated individuals are not part of this majority. Because educated individuals, like the one I am addressing in this email, use arguments and language skills to defend acts of violence.  

Hinduism had over the middle years been plagued by many vices like sati, dowry etc. But it was rescued by educated leaders of the religion like Raja Ram Mohan Roy and Swami Vivekananda. These people fought against the clergy and dogma of those times, and did not defend the self serving actions of the entrenched order, but tried to change it. And that is the reason that Hinduism reinvented itself. 

The other great religion of the world, Christianity had similar movements across many countries which rescued it from the medieval vices and grip of the papacy. And it was also led by the educated class of that religion.   

When will this happen to the only other great religion of the world – Islam? We are awaiting that educated leading light, who will admit the there are problems in the way the religion is being practised and not always blame others for it. He will be revered because he will show to his people that Islam is a great religion. But he will also show to his people that like other religions, some of the followers of this great religion have twisted it during the middle ages and many distortions have crept in. And trust me, he may well be recognized as the greatest personality of that era. I hope it will be in my life time. 

Post Script 

I had marked the copy of the forward email to you, although it was controversial and provocative, only because I remembered that day in Diamond Hostel. And I remembered that you were such a true follower. And thus I had full confidence that you will understand the reason why I forwarded it. Although we have disagreed on many things but yet the tenor of your reply has only reinforced my belief.  

Only a true and genuine person could have been so polite, in face of such provocation. We disagree. But it is indeed heartening that we are not disagreeable. This alone gives me immense hope. 

Regards,

Akhilesh Mishra 

With reference to the situation in Israel, I just want to repost a quote from Benjamin Netanyahu.

Regardless of your feelings about the crisis between Israel and the Palestinians and Arab neighbors, even if you believe there is more culpability on Israel ’s part, the following two sentences really say it all:

‘If the Arabs put down their weapons today, there would be no more violence.  If the Jews put down their weapons today, there would be no more Israel‘ -Benjamin Netanyahu

The title of this piece may surprise some people, who otherwise know my leanings on issues and therefore, my interests. My answer to them is —- don’t be surprised, because after all, a leopard cannot change its spots,. The trigger that has affected this article is the same – politics.  But it has manifested itself in a somewhat curious way. An email forward !!

Recently I received a forwarded email on the Israeli actions in Gaza. As is wont of forwards these days, it was high on rhetoric and exaggerations and used some highly inventive ways to make its central point. In some ways it was funny too ( although I am sure many would disagree with me on the funny bit ). Like a faithful netizen I forwarded the email further to a large number of friends, not necessarily because I agreed with whatever was said in the email but more as a ritual. All the recipients of my email were my friends, some of whom happened to be Muslims. And therin lay the pitfall.

A good friend of mine, from college days, incidentally a Muslim, was one of the recipients. And he replied to the forward. A long, well argued and probably a pained reply. I am presuming that he was pained by what was implied in the email forward. He was, although, very deferential in his reply, a throwback to my college days, where he was a year junior to me. And yet, I could not agree with the broad strokes of his reply, as much as I might have disagreed with exaggerations in the original forward. I had no other option but to frame a response.

Produced in the accompanying pieces ( part – I  & part – II of the article with same name)  is the conversation in full. That is, the original forward, my friends reply to the forward and my response to his reply.

Why do I produce it here? – Because I think the conversation raised some very pertinent points which needed wider dissemination. 

Have I taken his permission to reproduce the conversation here? - No I have not.  But I believe, there is nothing in conversation which is private. It is a conversation between two individuals in writing, ( as opposed to verbal debates) and therefore  well thought out and from deeply held beliefs. 

Do I reproduce my friends name here? – This is the question that I had most difficulty in deciding on. Should I let his name out to the whole world, or just reproduce the conversation minus his name.  After an agonising few hours, I have decided to let his name out. For the sake of authenticity and and also for the reasons outlined in response to the previous question.

I am aware that some people, not least my friend himself, may feel appalled at what I am doing here. The reason for doing it is simple. Dialogue.  A dialogue at this stage, embarrassing as it may be, is better than future acrimony.

Regards,

Akhilesh Mishra

Arun Shourie’s Speech in Rajya Sabha on 11Th DEC 2008 – Mumbai Attacks Debate

Mr. Chairman, Sir, the Prime Minister and my dear friends, Sir, I think, I can speak for everyone that the entire House is with the Government in the effective steps that it may take in fighting terrorism; and it is wonderful, Sir, you have suspended the Question Hour today to alert the country about the urgency of the matter, and the appeal which the State Home Minister has made for unity in the country in fighting this menace is entirely welcome…..and all of us endorse that appeal. But, Sir, the effective steps have to be taken. The Minister of State for Home Affairs has just read out a Statement in which a number of steps, which were required and which have been urged time and again, have, at last, found a mention and an endorsement by the Government. I welcome that, and I will supplement that list, Sir. I hope that you will proceed on those lines as you do, and I am sure that you will find the entire House with you. 

Before I come to making suggestions, I very much want to compliment the Government on the initiative which has yielded fruit just now. I have just seen, Sir, through Mr. Jaswant Singh’s office, a report of rediff.com that ‘because of the initiative that has been taken, the United Nations Security Council has placed sanctions on the Pakistan based Jamaat-ud-Dawa, which is just an altered name of Lashkar-e-Toiba, and the four top leaders of LeT, including Hafiz Mohammad Saeed whose vituperations against India have not been acceded by anybody. He and three others, including Lakhvi, have been declared ‘terrorists’ by the Security Council, and their assets have been frozen. In all such initiatives, Sir, the entire House, indeed the entire country, will be with you.

Sir, nine facts stand out in much of what the Minister of State has just read out. Those are, actually, things that are already known. But there are nine facts which stand out about this incident. The first of these is exactly what our attention has been drawn to by my friends from Assam, and to which the Prime Minister has so graciously responded just now. Sir, this is a sort of thing which is happening every month, every two months. In the count that Mr. Jaswant Singh and I made of the incidents that have happened only in 2008–I am not going to blame the Government, and so on, but please see this as a national problem–in 2008 alone–I could have picked up any other year–there were 49 such incidents in 19 cities; about 2,525 people have been killed in these incidents.

Sir, the second fact is that this is happening right across the country. Now, we have seen that these actual incidents have happened everywhere. But there is another telling fact which the people who follow terrorism, and this is what the Government reveals from time to time, know that in just two years, from 2004 to 2006, 81 modules were busted by our intelligence agencies. These were ISI modules in the country, all over the country; 81. These exclude the modules in J&K and the North-East. So, you can see their reach which they have been able to get. Now, we compliment the intelligence agencies, and I am sure that, because these modules were busted, many such incidents were prevented. But the fact that they were busted is a testimony to the fact that they exist, and that one of the most lethal espionage and terrorist agencies in the world, ISI, has been able to get that penetration into India.

The third fact that stands out in that, Sir,–and the Minister has just read out the Statement in which he also said that–is that the finger of suspicion points to Pakistan or to actors within Pakistan. But the first point to remember in that, Sir, is that of its 60 years of existence, Pakistan, for 50 years, has been under the heel of the army.

I think that none of us, in India, can realise the terror and the pervasiveness of ISI in Pakistani state and society. Therefore, to imagine that Lashkar-e-Toiba or any other agency could do things without the knowledge, patronage, guidance, training and equipment of ISI, is to live in a fool’s paradise.

Sir, Mr. Jaswant Singh has always been emphasising it and the Americans have said, not particularly they are dependent on the Pakistanis, that the attack on the Indian Embassy in Kabul was the handiwork of the ISI and the attack on our Embassy is an attack on the country. You will see the operational significance of this when I just come to what the Government has been doing, without criticising the Government, what India has been doing.

The fourth fact, Sir, is that in these circumstances to ask Pakistan to help nail the masterminds just does not make sense. To ask Mr.Zardari, the Pakistan President, to do anything like this is meaningless. On the one hand, we are being told that Mr. Zardari is not in control of these agencies and, on the other, we are being told that we are appealing to him, “Please help; please send the Director-General of the ISI here”. This is the Zardari who, for getting the killers of his own wife identified, did not trust the Pakistani investigators. He got the Scotland Yard there. He appealed to the United Nations. And we are appealing to him! This is only to set up India in this manner and to put faith in the statement of such persons. It is a pathology in India to look for some straw of a statement on which to hang our hopes. Mr. Musharraf came here. He said, “mai is baar nayaa dil le ke aayaa huuN”, and all sorts of acclamations to that. Similar is, just now, the statement of Mr. Zardari that the fellows causing all the trouble in Jammu and Kashmir are terrorists. Again, great acclamations and hope, and the moment these things came in India, Ms. Sherry Rehman, the Minister of Information there, immediately issued a statement that the President had never called the legitimate struggle of Kashmiris an expression of terrorism and she reiterated that support for Kashmir’s struggle for selfdetermination has been a consistent position of the Pakistan People’s Party for 40 years. Therefore, in these circumstances, to invite Pakistan to come here for even discussions to put hope in the so-called joint mechanism for fighting and investigating terror is to fool oneself. Actually, it is worse than fooling oneself, because it means that you put them in the place of judges. They will say whether our evidence is adequate or not.

Sir, the fifth point that comes out is that no one in Pakistan has suffered for the 50,000-60,000 people who have been killed since the early eighties in India by Pakistan-sponsored action and what the Minister of State for Home Affairs has just read out has to be seen in the light of the fact that his very Ministry has been placing in Parliament papers saying that infrastructure for terrorism in Pakistan has not been rolled up at all. “Dismantled” is the precise word. There is a Status Paper on internal security situation which was presented by Mr. Shivraj Patil to the Parliament on 30th November. It says that the terrorist infrastructure in Pakistan and PoK is yet to be dismantled and is being used by Pakistan-based and Pakistan ISI sponsored outfits like Jaish-e- Mohammad, Lashkar-e-Toiba, Al Badr, Hizb-ul-Mujahideen, etc., and they want to do nothing about it. Why? Because these organisations are the instruments of the ISI and the Pakistan Army. When there was international pressure on them, they made a show of it. Mr. Musharraf banned these organisations, and the Pakistani newspapers immediately published the old name and the new name.

Their offices continued in the same way and their meetings for collection of donations for terrorism continued in the same way.

[And it wasn't as if they were operating from some bank account that could be freezed] So to repose hope is to put ourselves in for difficulties. The sixth point that comes out is local help. Yes, these are ISI inspired; they are ISI orchestrated. Their principal instruments are Lashker-e-tayeba, etc. But none of this could have happened without local help. Just see what the Home Minister has revealed. They come to Colaba. They must know something about the coastline. They immediately know where to go for the targets, which he has just listed out. Within the hotels, as everybody has said, they knew the entire layout. They went into the Taj Hotel, precisely to the place where the Manager’s wife and two children were. How could that be known from satellite photographs or to somebody sitting in Karachi? So, it was because of the local help. And we are politically hamstrung in pursuing that and talking openly about it.

The seventh point is — it is a very important point — as you have just said about the Coast Guard and so on, it has been established, time and again, that these agencies abroad and these networks abroad like Lashker-e-tayeba, use existing channels, for instance, of smugglers. I only have to remind you, because we are talking about Mumbai, that in 1993, it has been established by the Government that 1,800 kilograms of RDX and other arms and ammunitions also were smuggled into India by using those smuggler’s networks. Just to get a ban there is a wonderful first step, but unless we get at these networks and the existing channels — I will come to that as to what we are doing in this regard a little later — we will never get anywhere.

Sir, I completely endorse what the Home Minister has said that the entire nation feels grateful for the bravery and the sacrifice of our poor NSG people and the other security personnel. The fact of the matter is, if you look at the institutional response to the attack, there was much to be desired, not because of the fault of any individual in the Forces. In the first account, when the poor Mumbai policemen and the Mumbai Anti Terrorist Squad got there with their exemplary courage, you should have seen their arms and unpreparedness. I have tried to make a timeline of the whole sequence. Even the Naval Commandos, who were in Mumbai, were not called and did not come to the scene till two hours after the attack. Everybody, who has studied terrorism, knows that whatever you have to do to neutralise the terrorist plans can only be done in the first few minutes. After that they have already succeeded. I am very happy that the Home Minister, at last, has acceded to requests and entreaties from many quarters for many years that there must be many NSG hubs. What has happened, Sir? Sir, from the timeline that I have been able to establish, it took three hours for the Government to decide to deploy the NSG. Whether it is because of the late request from Mumbai or because of decision-making here, I do not want to cast any aspersions. But it took three hours. After that it took five-and-a-half hours, a total of nine hours, before our specialised Force was able to reach there. When they reached there, after nine hours of the beginning of the assault, they were blind. They did not have maps of the hotels and targets.

The ninth fact, which has now been acknowledged here on page 3 of the statement, which the Home Minister has read out, is about Intelligence reports actually having come. There are many qualifications to what has been acknowledged. But if you see para 12, it says: “Intelligence, regarding a suspected LeT vessel attempting to infiltrate through the sea route, was shared with the Coast Guard…” And then, of course, what the Navy did or did not do.

There have been earlier reports, and the Home Minister says that it is not right for him to comment on them. But the fact of the matter is that it has been leaked by intelligence agencies that there were intercepts that these two hotels would be among the targets. The third factor, which has now been acknowledged, is that the coordinates of this vessel were given the information. You say now that, at that moment, it was in the Pakistani territory. But you also say that it was two days earlier. Do you mean that nothing happened after that? Somebody has said, “Here is the Lashkar-e-Toiba vehicle. Hijack it.” And we can just forget about it, [ke abhii to Pakistan ke waters meN hai..that it is still in Pakistan waters]

So, intelligence was given. Yet what was our response? Again, I am not blaming anybody. I am requesting everybody to kindly look upon it as an institutional matter of what we have to strengthen and what we are up against. And the fact that the Intelligence has been saying all these for a long time is evident from very, very high, and I say, heavy quarters. I will read out to you how much advance warning the Government has been giving to other people. In the annual meeting in November, 2006, — the Home Minister has an annual meeting with the Director-Generals of Police and the Inspector General of Police — which the Prime Minister also was kind enough to address, the Home Minister tells them, “Our coastal areas are coming under increased threat from terrorist groups which have decided to use the sea route to infiltrate into India. They also plan to induct arms and ammunitions through the sea routes.” That was in November, 2006. Then, he says: “Some Lashkar-e-Toiba operatives are also being trained specifically for sabotage, etc. There are plans to occupy some uninhabited islands of the country’s coastline to use them as basis for launching operations on the Indian coast.” What I want you to remember in this is that these things could not have been said off-hand. I will come to several of these; [koii alhaam to aa nahii rahaa thaa], that by a certain revelation, the Ministers were saying all these things. 

As everyone knows, from ground intelligence, things must have gone upwards, and then, it made it, through the bureaucratic ladder, into the Home Minister’s statement. This was in November, 2006. Then, on 8th March, 2007, the Home Minister was asked in the Lok Sabha: Whether intelligence agencies have warned about the possibility of terrorists trying to infiltrate through the sea route and trying to target offshore installations.” The answer was: “Yes, Sir. There are reports about terrorists of various tanzeems being imparted training and likelihood of their infiltration through sea routes.” He was then asked: “Whether maritime terrorism, gun-running, drug-trafficking and piracy are major threats which India is facing from the sea borders of the country?” His answer was: “Yes, Sir.” Then, we come to 9th May, 2007, what he said in this very House. On 9th May, 2007, the Home Minister was asked in the Rajya Sabha: “Is it a fact that there are strong apprehensions of terrorist threats to the country through the sea route?” He says: “As per available reports, Pak based terrorist groups, particularly LeT, have been exploring possibilities of induction of manpower and terrorist hardware through the sea route.” Then, on 8th December, 2007, the National Security Advisor, Shri M.K. Narayanan, was educating the world at Manama, in the Middle-East, at a Security Conference. He says, “According to our intelligence reports, there are now certain new schools that are being established on the Pakistan-Afghanistan border which now specialise in the training of an international brigade of terrorists to fight in many climes. According to our information, recruits from 14 to 15 countries have come.”

Then, he says, “The sea route, in particular, is becoming the chosen route for carrying out many attacks, even on land. References to this are to be found replete in current terrorist literature. I would like, therefore, to sound a note of warning” — he is telling other people — “that there is no scope for complacency.” Sir, that is in 2007, December. Now, on 11th March, 2008, Mr. A.K. Antony, the Defence Minister, also addresses the same thing. He is addressing the International Maritime Search and Rescue Conference in Delhi. He says that the dangers of terror attacks from the sea in the region are now mounting, and he says, what you are now acknowledging, Sir, that you are taking steps, he says then, a year ago, that the Coast Guard has deficiencies, but as bureaucrats say, all necessary steps are being taken.

Then, Sir, I come to the Prime Minister himself, and his alertness in these matters. On the 13th November, 2008, just a fortnight before the assaults, he is educating the BIMSTEC leaders that terrorism and threats from the sea continue to challenge the authority of the State. But, that is just a fortnight before the assaults. But, on the 22nd November, 2008, four days before the assaults, the Home Minister is addressing the Directors-General of Police again, and he says, “To control terrorism in the hinterland, we have to see that infiltration of terrorists from other countries does not take place through the sea route.” [Arre, aap kisko kah rahe ho? Hey, who are you saying this to?

"Or through the borders between India and... you can't say Bangladesh, friendly countries. The coast lines also had to be guarded through the Navy, the Coast Guard and the Coastal Police." I am reading this because that is the context in which we must now see the new assurances which have been given, whether they will also become like this. "The States' Special Branches and the CID should identify the persons forming part of the sleeper cells and lodging in cities and towns and studying in educational institutions" -- they got those fake passes of educational institutions -- "and working in industries and professions." Sir, they are not consultants to the Government; they are the Government. †Ö¯Ö ÙêüË™üÃÖ ÛúÖê ÛúÆü ¸üÆêü ÆüÖê… But, it is the IB's job to identify these. Uncorrected/Not for publication - 11.12.2008 644 Sir, I want to supplement this by drawing the attention of the House to the fog of unreality in which all this is being done. [I just read out the statement of the hon home minister that he had given on November 22, 2008. Now look at the facts of that day.] On the 25th and 26th November, 2008, that is, very literally on the eve of these attacks, our Home Secretary and his entire senior team was in Islamabad for a Joint Conference with the Secretary, Interior of the Pakistan Government. In their joint statement, what do they say? Now just see what is our psychology? This Joint Statement is issued on 26th November, 2008. Just now, Sir, you said that the terrorists came in those inflatable boats between 8.00 and 8.30.Now let’s see what statement was given there, after gol gappas

“The meeting was held in a cordial and friendly atmosphere. Both sides discussed the issues related to terrorism and drug trafficking and reviewed the implementation of decisions taken during the last round.” Now, see, “Both sides noted with satisfaction the progress made and identified ways to further promote cooperation in a number of areas. Both sides condemned terrorism in all its forms and manifestations.” [And they are organising!] “Both sides condemned terrorism in all its forms and manifestations and affirmed their resolve”, as just now we have been asked to affirm our resolve, “to cooperate with each other to combat the menace of terrorism.”

Exactly these are the words that have been used for Assam.

“It was agreed that terrorism must be prevented and as directed by the leadership of the two countries at the meeting in New York on 24th September 2008, severe action be taken against any elements involved in terrorist acts.” And, that very day, using that very sea route, the terrorists come to those very targets. [Sir, there is a line from Vinobaji: hamaare yahaaN baat hii kaa kaam hai, kaam kii baat nahii hai. This is the problem. You have issued a very good appeal for unity. It is a very good thing. We are all with you. But it has to be done. You just now said:] India is in the eye of the storm of these terrorist onslaughts. I narrated to you that there have been 49 massive assaults, not incidents; and, 49 times, cyclostyled statements have been issued, ‘cowardly, dastardly’. Just now, when the session commenced, you read out just such a statement. It is routinised.

I want to tell you, before coming to specific things that the situation is definitely going to get worse for six reasons. First, Pakistan is not going to suffer at all as it has not suffered for killing 50-60 thousand Indians already. Second, not just the infrastructure within Pakistan remains, the infrastructure that is used for and within India remains exactly as it was–the smugglers’ routes, the hawala networks and the perverted discourses with which we are saddled. Third, there is a great pressure on Pakistan. We must see what is happening in Pakistan. You knit your eyebrows a little bit, what do they put out? “We will have to withdraw our forces from the Western border.” Immediately blackmailing America, U.S.’s main problem.[We are asking America to tell them something! We only hope that Condoleeza Rice has come, perhaps she would say something. What would she say? Her term ends in five weeks. She would be gone then. But apart from that] America is dependent on Pakistan  and Pakistan just reminds it of these things from time to time. The fourth fact is that actually speaking, Pakistan having nurtured these extremists, now if it keeps deflecting them in Afghanistan, it is in trouble because of NATO pressure, American pressure. If it keeps them at home, it is in very severe trouble as we have seen. Therefore, the option of choice that they will exercise is to deflect extremists once again into India. Fifth and very important, that in the coming months, the U.S. will retreat in defeat from both Iraq and Afghanistan and this will be a great boost to the extremists, ‘That we have made the great Satan run away’, and they cannot get to America easily. They can get somewhat more easily to Europe. But, we are the open and open target.

Sir, the sixth point, which is the point our Assam friends were also emphasising, that this is just one of the assaults that we are facing. Those who mapped these districts and so on, will realise, Sir, of the 608 districts, today 231 are affected by extremist violence or insurgency of one kind or the other. [Leave aside Assam,] even a peaceful State like Arunachal Pradesh, the three districts of Lohit, TIRAP, and Changlang have now started getting affected by the terrorist recruitment drive there! Gill Sahab knows that very well.

We must remember that, Sir, it was just four years ago that the Maoist rebellions started in two small patches in Nepal and within two years it was in every part of Nepal and within four years it had completely conquered Nepal. We must realise that. Finally, the point is that not only, Sir, is the finger of suspicion there, but your intelligence reports, I can say from my personal knowledge, because I have reproduced many of them, say, they record, that actually the ISI is now knitting together Indian insurgence extremist groups even in the North East.

Therefore, things are going to get much worse. So, Sir, what should be done, I will now just come to that and these are in a constructive spirit and I do hope that the Government especially the Prime Minister with his knowledge of what had happened in Punjab, he has the firsthand knowledge of what is happening in the North East, which is a matter of great concern to him because he represents the North East in the House, and, I hope they will be taken in that spirit. My first point, Sir, is, please stop running to ‘mummy’. This business of putting faith that somebody else will do our work for us – ['Condoleeza Rice would come' … 'There is a statement from Barack Obama'].  Nobody will do it for the reasons that I have already outlined to you in the case, for example, of America. The same is the case with China. China is the prop of Pakistan. They have a strategy, they say ‘murder with a borrowed knife’, find a natural enemy of your adversary, arm it, encourage it and it will do your job for it. This is what they have been doing on nuclear proliferation or any other matter. 

Second point, Sir, is please stop this miscalled peace process because one of the very unfortunate statements that was agreed to by the Indian Government, in this case by the Prime Minister, was terrorists will not be allowed to come in way to derail the peace process. What did this mean — Pakistan then had both options, go on doing terrorist attacks and the onus of keeping the peace process going would remain on India. That is it. Shed this. You know there is always an argument that is made to us when Musharraf was strong, ‘no, no, he is there, he is strong, you have to make some concessions on Kashmir.” When he was weak, ‘no, no, he is your best bet, you must make some concessions to him, and you strengthen him.’ Now there is so-called democracy, you say, ‘Democracy, therefore, you must strengthen democracy, you must make concessions and you must keep the peace process going even as we are badgered everyday. There is a line from Josh Malihabadi: [zulm kartaa hai dushman aur ham sharmaaye rahte haiN--the enemy oppresses us, but we are in a state of feeling shy]

Sir, third, shed denial. I will tell you, every time in this House from November 2004 there was a debate on internal security, in December 2005, there was a debate and four days before this terrorist attack in Mumbai, the Home Minister was in total denial['No, no, the figures aren't correct'. He got the definitions of 'districts' -- which were by the home ministry -- denounced and got them changed. Now, let's see what the director general of police is saying. Just now you said you'd fight the menace of terrorism, but let's see what the home minister is telling the police on behalf of the government:] “Fortunately, the number of incidents and casualties that have occurred…” Sir, this business is not UPA versus NDA. [but it's a fixation in his mind]´ “Fortunately, the number of incidents and causalities that have occurred in the last fourand- a-half-years are much less than those that occurred in the four-and-a- half-years before the present period.” It is BC versus AC, Before Christ versus After Christ. What consolation is it? [Aage dekhiye] Yet, the impression created is that terrorism has increased and has not reduced. Please contrast that with what has been said just now. “Even if one incident occurs and one person becomes a casualty it should cause us concern and should make us alert. However, it should not demoralise us and give a wrong impression to the uninformed sections of society.” Sir, what about the informed sections? So, shed denial. 

The fourth point is, implement it.

You have again read out a set of measures. One, on page 3, you have said [what would be done about the Coastal command. Sir, let me tell you what happens.]  I will say this with complete sense of responsibility and this is what I quoted four years ago. [Sir, just now the statement came from the home minister. You must have perused it] Now there is a plan to stage things from unoccupied islands. Now, Sir, in Lakshadweep, there are 36 islands. The Godbole Task Force set up in the wake of Kargil in 2000 reported that for all these 36 islands Intelligence Operation is only on one island, Kavaratti. There, the entire Intelligence gathering is carried out by one inspector, one sub-inspector, one head constable, three constables. For all the other 35 islands, Intelligence operations are carried out by one constable/head constable. So, after the Mumbai attacks, I contacted the senior most people in Intelligence. [So what happened to it?] They said, Sir, all these people reported to a person called officer-in-charge in Kavaratti. They said it is still one inspector, one sub-inspector, one head constable, three constables, and one constable/head constable reporting now, not to an officer-in-charge but — because of the grace of Pay Commission — he is the same man now re-designated as Deputy Superintendent of Police and it was recorded then, that unidentified helicopters and turbo planes have been landing in these islands. Are we serious? Now, you are saying that coast guard etc. will be put under this. The Coast Guard-Navy coordination is not good enough. The Coast Guard should be put under the control of the Navy and accountability fixed is a recommendation seven years back. Sir, my suggestion there is, please implement what you have now resolved to do. 

[Sir, you said about the marine police. It was mentioned in the state papers as well that so many crores are given to the state government. But was it ever checked what happened to the money? Let me tell you what happens, Sir] This business of setting up a Marine Police Force, as you have in the Andamans, for Lakshadweep this recommendation dates back from December, 1996. I am not mentioning UPA or NDA. [You can say what did NDA do? Even if they did nothing], should we wait for assaults of this kind to be awakened to the things we have not implemented? So, I greatly compliment you, Sir, for the things you have now resolved to do on page 3 regarding the Coast Guard etc. but for heaven’s sake do them. Fifthly, prepare for the next form of assault. We are always preparing for the last. In all of Chinese literature, which your National Security Adviser keeps referring, they said they have outmoded this kind of operation. We must get to the acupuncture points of the other society through integrated networks. What are these? Air traffic control, Railway traffic control, power grids, banking transactions, broadcasting facilities, all are to be done in two minutes through cyber warfare.

My good friend, Mr. Raja, is sitting here. I am very distressed to report to the hon. Prime Minister that the initiatives that were started, in collaboration with our Defence Forces for setting up of fire walls on our infrastructure and by the Armed Forces for them, have not helped at all. We remain as vulnerable. I would be very happy to be wrong in this when Mr. Raja will assure us. But the fact of the matter is, those who are supplying such software and the work that was being done in the Ministry and the Defence Forces, I feel that country is as vulnerable to that kind of operation by terrorists and, please remember, how sophisticated they are. In this case, they use not just mobile phones, not just satellite phones and they use voice over Internet protocol.

Why did they do it? Sir, because it is then difficult to locate the person I am calling. So, they are far ahead in technology. It is now being said that they use GPS. And, it is now established by the best intelligence sources in the world that within the coming five years terrorists will use non-conventional weapons. They use biological weapons, chemical weapons, sub-nuclear weapons in their miniature form, etc. So, please, instead of waiting for the next statement after one of those attacks, review our preparedness. It is my entreat to you, to the hon. Defence Minister, hon. Prime Minister and everybody, please review our preparedness today for those new forms of attacks which will definitely come.

Sir, the sixth one is: Please stop seeing these incidents, whether in Assam or anywhere else, as single discreet isolated incidents.[Oh, now there is an attack in Assam. Now there is one on Mumbai...] They are part of a sequence for a war of attrition. That is my seventh point. It is a war. The one strategic thinker in the Sub-Continent who has succeeded — only one — is Zia-Ul-Haq. He was the man, 35 years ago, who identified proxy war to bleed India and break India. He believed in death by thousand cuts. The fact of the matter is, for 35 years, he has kept India busy and bleeding and [not even a hair on anyone's head has gone out of place in Pakistan]. That is the success of their strategy. So, it is a war. It is a war to break India. These are not discreet isolated incidents.

Sir, the eighth point is: Please do not go by the Joint Statements that their leaders sign with you and with great satisfaction the Home Secretaries exchange with each other. By Mr. Zardari’s new statement, please look at the nature of Pakistani’ State and society. In the Pakistani State the pervasiveness of the ISI, the power of the Army depends only on hostility with India and with successes against India in these operations. How will they give it up? As far as the society is concerned, Taliban is not the cause of what is happening. Taliban is the result of the Talibanisation of Pakistani society. I have had an occasion to quote a comprehensive thick study by Pakistani academics of the Institute for Sustainable Development Policy in Islamabad on the instructions given and the textbooks used not only in Madrasas but in Government schools of Pakistan. From Kindergarten when the child is just 5 or 6 years old the instructions from the Central School of Secondary Education and Primary School Education says that he shall be judged by the fervour with which he gives speeches on Jihad and Shahadat. This is a 200-page report. Please download it and read it. That is the society which you think that you can deflect it with your sweet words.

My point number 9 is that no war can be won with a strategy of permanent defence. You must make those who control and orchestrate such a war to pay. If you cannot make them pay individually, then, you must make the country realise the cost of doing all this to India.

Ten, please realise — this is a point for the liberals also — whenever we are pushed into such a situation we say that [no, force should not be used. Only minimal force should be used]. But no war is won with minimal force. It is won by overwhelming the enemy. As it has happened in Mumbai now. [Sir you asked how many terrorists were there. Ten? You mentioned nine..] and 200 commandos only from the NSG were sent, plus reinforcement, plus naval commandos. That is the scale at which you have to overwhelm. You can’t do it with minimal force. That is why, Sir, when you look at this figure, [you try and kill six people in China and see what happens. Here you can kill 60,000 people and nothing happens to the killers!].  Not an eye-for-an-eye, not a tooth-for-a-tooth.

That is completely wrong. For an eye, both eyes! For a tooth, the whole jaw! Unless India has that determination and that clarity, we will continue to bleed like this all the time.

Eleven, the time when large armies could be sent across the borders — [it is said a lot that we should attack Pakistan]– that time has gone. The time when large bodies of armies could be sent across the borders has gone. There are no training camps to bomb. But Pakistan gives us the clue what we should be doing to make them register a cause, that is, look at the violence in Kashmir in the last year-and-a-half that has gone down because Pakistan has been preoccupied in its own problems. So, keep it preoccupied in its own problems in Baluchistan, in Gilgit Baltistan, in PoK.

Then, Sir, my next point, point No. twelve, is shed all inhibitions for collaborating with armies and intelligence agencies of other countries that have expertise in these matters.

Thirteenth point is a very good point that has been made by the Home Minister just now that you are thinking of a National Investigative Agency and of amending and tightening the laws. The Prime Minister also said this after the Mumbai blasts. I appeal to all sides that please do not make this a prestige issue because, on the one side [we all used to say, bring back POTA, but you had an allergy with it. You say there would be an investigative agency but it would not have teeth. Many states say that if it goes under the federal government] it will be misused against us, in this way things that are desperately needed by the country will not get timed. I will tell you the way out. It is very good that the Government is thinking on these lines. But the way out is shown by a Congressman-headed commission’s report, that is, the Moily’s Report of Administrative Reforms Commission of June 2008. 

He has devoted an entire chapter, that is, chapter 4, on dealing with terrorism. It says that clearly there is a felt need to strengthen the hands of security forces in the fight against terror even as human rights and constitutional values are protected. It lists several provisions that are weak provisions, several judgements that are coming in the way. Friends, you will be shocked to learn, many friends there would have forgotten that in the case involving the assassination of no other person than Shri Rajiv Gandhi, the Supreme Court held that it could not be regarded as a terrorist act. And throughout that whole portion none of those provisions of the Terrorist and Disruptive Activities Act could be applied. There are pages and pages that are quoted. “Terrorism and low intensity warfare have imposed new challenges on law enforcement that we are yet to accommodate even at the conceptual level.” The Report says this. Then, they give many details. “From these it is evident that most countries have been adopting tough anti-terrorism measures, whereas the provisions of similar laws have been diluted in India over a period of time.” Your spokesman, the chairman of your commission is saying this: “The existing penal laws in India were not enacted to deal with the situation, and, there is ample evidence to indicate that terrorists have been able to escape the law either by exploiting the loopholes in the ordinary law or by intimidating witnesses to subvert justice. There is, definitely, a need to have stringent provisions to deal with terrorists.” It goes on. Sir, it is really worth reading. [Now, what is sensitive?] And, again they have said this: [ok, so you don't want a separate law, no problem,] but the changes that were made by the then Home Minister, Shri Shivraj Patil, in the Unlawful Activities Act, 2005 — [this Act is of 1967 and the changes were done in 2005]  – have proved to be toothless. And, this is said by the Administrative Reforms Commission also.

So, they reviewed all the provisions and they suggested changes.[All right,  if you don't want a new law, then as he has said, please strengthen the National Security Act. At least do that much. Is this a question of prestige? Then you'd change the federal agency, institute it] then, it will make sense. And, we will appeal to all States also not to get frightened. [Today, it is your party. Tomorrow it could be another party in power. If it is another party, then poor Congress states would say, no, we should not give them the federal agency as it could be misused against us.]So, a thing which is necessary for the country should not be delayed. Please do these things together. My friend, Shri Arun Jaitley, was just telling me this. [Just now Shri Jaiswal told us what all they learnt from the terrorist, apart from what you learnt through intercepts. Information about Lashkar-e-Toiba etc has been obtained from the terrorist itself.]  But do you know that under the existing laws his confessional statement is not admissible as evidence in the court of law? You can’t then link it  with Pakistan. [Now, isn't it something? And although I do not want to take its name, that provision was there in POTA. That is why it was effective. Now, let's see this. This fellow was caught in Mumbai. Supposing he escapes to Chhatisgarg, Gujarat or Rajasthan. What would happen? There is no law!]

[A member intervenes to ask if MCOCA has been applied in the current case]

MCOCA is not in use. That is the next point. But, the law also would not exist because you are not approving it. [It is a matter of prestige that we would not use it! I am reminded of what Mrs Gandhi once said.] “What is the use of having a paper soap?” The next point is, after you pass these laws, after you set up these agencies,  please use them. If there is attack on Parliament, you would not decide on Afzal Guru. All this is very necessary. Sir, I am heading towards the conclusion. The next point is this. Actually speaking, terrorism cannot be fought by NSGs and so on. [Mr Jaiswal, Mr Chidambaram, even if you make four regional hubs, even if you reach in four hours instead of nine hours] actually, terrorism is fought by the first responder. 

The Prime Minister said the other day — I remember his statement; it is an odd word to be used, but he said — we cannot fight it unless the constable is brought in the vortex of our counter-terrorism strategy. [What is the situation of Constables? There is a deficiency of above 20 per cent in the IPS officers. Constables are in an even worse condition. Do we even know about their training?] Just see the technology these people used and the training that we are giving to the persons who are to fight them. Please remember that IB also consists of these very fellows. What is their training? Their qualification has now been reduced to eighth class. They are barely literate and they are going to meet high technology challenges! What facilities are they given? About 20 per cent of the police constables in Delhi have not been given family accommodation and are living in illegal slums. And we want them to be motivated to fight terrorism! We want to bring them in the vortex of our counter- terrorism strategy. So, you cannot have first-class antiterrorist operations without first-class policing; you cannot have firstclass policing in metropolitan areas without first-class policing in the hinterland; and you cannot have first-class policing in the coastal areas unless the Bangladesh borders open. So, it has to be a comprehensive solution and at all levels. You cannot have first-class counter-terrorism strategies by the NSG and a third-class court system, in which the 1993 accused for the Mumbai blasts have yet to be convicted and their appeals are still in process.

Unless we get that kind of a society, it is all a matter of great distress. Ultimately, poor government would go and prosecute somebody. But if top quality lawyers agree to defend them, we would be back to the normal procedure of our courts. How can you fight terrorism in this way?

Sir I am very distressed to report this. Just now you said that all necessary steps have to be taken to gather about these intelligence business. But your own paragraph shows the condition of the intelligence agencies. Reports come and are filed. It goes from here to there, and everyone passes the buck. And worse than that is, as you know, that the civil war which has broken out in the intelligence agencies is in the Press. Every single day, some agency is feeding information that, [look, we had passed it on!] This shows the condition to which intelligence agencies have been brought. [Talk about IB. Everyone says that the IB has been set after us,] but the fact of the matter is that for a country of 1.2 billion people, facing all these threats and actual executions, do you know the operational strength of IB on the field gathering intelligence? It is 3,500 persons. How can you monitor this? And, Sir, the worst thing is– [Ramjii sahab chale gaye hain] — but till today the Government has not been able to explain why they have not acted on the recommendations that were made by the Girish Chandra Saxena Task Force on Intelligence. Sir, various agencies were set up. The multi-agency centre was set up; the National Intelligence Data base was set up; the joint Task Force on Intelligence was set up under the same IB and they remained on paper.

[Interruptions, as many Congress members felt Mr Shourie was taking too long] Sir, seven years after these agencies were set up nominally, as new agencies are going to be set up, they remain, to my personal knowledge, merely ‘paper’ organisations. That is why, Sir, I will conclude with my one appeal. The entire country is with you when you take effective steps. But there has been gross neglect, there has been gross reversal which is evident in many of the things that have happened; and if you act — Buddha’s phrase was ‘with the urgency of a man whose hair are on fire’. If you act with that clarity about the war, if you act with unrelenting determination, then, Sir, the entire country is with you. If not, — Mr. Chidambaram will remember — if you fail to do that, this time it will not be only share prices which will go down, but the country would have been let down and would have been exposed to even greater danger than it is in now today because of things that have happened. Thank you very, very much for your patience.

A recount…………..

There is something which is eerie about my hunches, especially when they pertain to events such as the one underway in Mumbai right now. It all began at around 10:30 PM IST, on the fateful night of 26th November 2008.

I was watching the cricket show on NDTV 24X7 which begins at 10:30 PM, and that day it was covering the Indian win over England in the 5th ODI.  As is my wont, I was also channel surfing, although only news channels. Some Hindi news channels were reporting on a gang war in Mumbai and how gunshots were heard from some very prominent places, including the Taj and Oberoi hotel. Other channels, albeit English news channels, were having the same story in tickers. I thought that there was no other big news happening around, and so I returned to the cricket show on NDTV.

Sonali Chander and Ajay Jadeja were in full flow on the live show. However, it did sound a bit strange to me that NDTV did not have the gang war news even in the tickers.

Then something happened at approximately 10:46 PM. Sonali Chander had just asked an interesting question to Jadeja in her inimitable style, which is always half smiling-half laughing, and Jadeja had answered it with some wit. Both were smiling and grinning when suddenly Sonali announced that she was interrupting live programming to return to News!!! Her mannerism implied that this was only temporary intergnum and things will be usual soon!!

I, however, thought that news at 10:46? In the middle of a programme. This was unusual. In India, scheduled programming is rarely, if ever, interrupted for breaking news. Live programming being interrupted – at least I had no recollection.

However, the news on NDTV was also the same. Gang war in Mumbai. My initial reaction was that this is not something so news worthy as to interrupt scheduled programming.  Something inside told me that this was much bigger, possibly the scale of which we have never seen. And so began the series of my hunches.

Of course the rest is too well documented. The moments rolled on into minutes and minutes into hours and hours into days and still rolling on as I write this. That night I sat glued to the News till about 4: 45 AM IST. I had to go to sleep for at least sometime, although I did not want to, since I had to get up again at 6:15 AM to receive someone from New Delhi Railway Station.

It was also the night that I saw the true character and grit of some of the known faces of Indian journalism. Vasu of NDTV 24X7 was anchoring the news from studios almost since the beginning until I slept at 4: 45 AM.  When I woke up again at 6:15 A.M. he was outside Taj, reporting live!!

Arnab Goswami was anchoring the news on Times Now. All night. He was the first person at Editor level to get into the fray and of course was followed by others.

My second hunch was about the death of Hemant Karkare, the much in news Maharashtra ATS chief.  I first heard it on CNN-IBN. They were reporting that he had been injured. But the moment I heard the news, a thought buzzed through my head, that he will not survive. He was too much in news in the last few days, to survive?

Maybe this was what was willed for his deliverance, I thought, form the various allegations that had been hurled at him in the last few days. Tragically this turned out to be true. Times Now was first to report of his death when other channels were still reporting that he had been injured.

And so the night became day, 27th Nov dawned on us. Of course I had to go to office. But in these days of live streaming TV news on web, I was glued almost to the minute.

It was during the day on 27th, that probably it dawned on the country that this was much bigger than anything ever imagined. And for this reason alone, each time the news channels reported that the final assault was underway, I almost always thought that this will continue. And it is still continuing.

The final hunch…..

It was during that evening of 27th that something struck me. Here were terrorists who were engaging the ATS, the NSG, The MARCOS (Marine Commandos) and the Indian Army Special Forces for now almost 20 hours and still fighting.

The GOC for Maharashtra Area of Indian Army had revealed that they had 10 companies in total on duty in batches of 5 each. Why in batches? So that they can be deployed in rotation and tired soldiers can be relieved. Relieved? Indian Army soldiers were being relieved. But who was relieving the terrorists? No one.  And yet they were engaging the best of the elite forces that India had for then  close to almost 24 hours. 

NSG - It is universally recognized as amongst the best special force and commando service in the world.

MARCOS- they are so elite that they have never been deployed, at least in memory!  That’s because ,never has been the need being felt, that the threat was so big that they needed to be deployed. Last I remember they being used, is in 1987 to repulse the coup in Maldives. Yes, when a foreign government had pleaded help from India. And Rajiv Gandhi had complied. And the MARCOS was spectacularly successful.

Indian Army – of course it’s the Indian Army.

And yet these terrorists were engaging all of them for now over 24 hours. They could not have afforded to lower guard for even a second. No sleep for at least 30 hours till then (considering the travel time from Karachi port to Mumbai in boat). Immense skill in modes of combat. Amazing levels of motivation.

And then I realised something. Either they were trained to operate as special forces, or were themselves an elite special force. Which meant they were a Pakistan Army unit. No other level of terrorist group could have achieved such levels of sophistication and engagement skills.

And now, as I write this the operation is in its 39th hour. This means approximately 50 hours since the terrorists first set sail. And now I read news, that military intelligence is saying that these terrorists were trained by Pakistan Army!!

The latest hunch…….

Contrary to expectations, I now have a hunch that even this incident will not change the ways our country functions. The government will continue to waffle with the bumbling show of Shivraj Patil on air. Politics will continue to play and the ineptitude of the politicians will continue to show. The debate will still continue that whether we need stronger laws or a federal agency. No one will say lets have both and move on. And vote bank vultures will continue to have a field day. Professional secularists will get another week on national television to expound their theories.

And next target will be Delhi.  As some media is reporting—-on 13th Jan 2009.

Any bets that at least this hunch will prove wrong?

Regards,

Continued from previous post……………

With investment banks and financial institutes sitting on stockpiles of toxic mortgage backed securities and credit default swaps, the same instruments that Warren Buffet had dubbed “weapons of mass financial destruction” (with the only point to note is that unlike the “weapons of mass distraction” and Santa Claus, these really existed), lenders were as eager to loan these people money as anyone would be to leave their kid alone with Michael Jackson.

Money market mutual funds are considered to be some of the more conservative (i.e. safest) investment instruments. Just as a normal index fund is a distributed investment in a bouquet of companies and a mortgage-backed security in a collection of mortgages, a money market mutual fund is an investment in a basket of short-term loans. It is this well of money that investment banks and businesses in general tap into as sources of short-term financing.

Let us assume that Shankar, the main protagonist of a company named “Gunda”, runs a coolie agency in an airport. In a typical month, his assets are tied up in his various investments like the hotel in Ooty (a hill resort) he is building and advance payments for rocket-launchers that he uses to get rid of evil men.

However, he still needs a steady supply of liquid cash to keep the business running— pay his employees (back-up dancers) and creditors, buy fresh inventory and also to make fresh investments (like in increasing the fleet of auto-rickshaws he owns). How does he get this money? By taking out short-term loans from money markets. In brief, money markets (the markets for money) serve as the grease that keep the wheels of the financial world spinning.

Now however, with investor panic, this grease was drying up. And fast. On a single day in September, nearly $90 billion dollars of cash flowed out of the money market.

Not just money market mutual funds but people were moving their money out of Banks also. Now the FDIC (Federal Deposit Insurance Corporation) insures for every person $100,000 dollars of his investments in every account type (single, joint) at each bank . So as long as investments were below that amount, there should be no reason to withdraw. So why then the obscene rush to move money out of savings and checking accounts?

That’s because most people, because they have believed normal banks to be solid as rock, had left deposits in accounts that had gone way over the FDIC limit. They now realized how risky that was in the present economic situation and had started moving their money out and redistributing it to the banks perceived to be stronger, leaving the weaker banks, already under credit pressure, gasping for air. In addition, because no one trusted anyone any more, some investors were skeptical whether facing a series of massive bank failures, the FDIC would be able to make out the payment to which they were committed to in a timely manner (not much good being compensated for your money years later). Better to move the cash out.

This hemorrhaging of deposits from banks and money markets is what is known, in common parlance, as a “run on the bank”, considered to be possibly one of the most catastrophic national consequences of loss of investor confidence. While “runs on the bank” have historically been associated with a bunch of rioting people outside bank branches trying to withdraw whatever they could before it folded, with electronic withdrawals, the run, while not so visible, was still as insidious and as potentially damaging to not only the credit markets but also to the economic security of the country.

This was serious stuff. The financial equivalent of a 9/11.

The government reacted by announcing a guarantee program for money market funds. (by extending a FDIC-like assurance of the government “covering” your investments for period of time in money market instruments). That was however trying to put a band-aid on a shotgun exit wound.

In order to stem the downturn, the federal government imposed a temporary ban on short-selling, a form of speculative bet that people place on the decline of a company’s value. This was because short selling is considered to be something that destabilizes the market artificially and contributes to driving stock value even further down. (For those who want to know what short selling is, read the following paragraph. Else fast-forward over it, as you would over an “item song” in a Hindi movie, as the paragraph does not affect the rest of the narrative.)

[Say Kundan is a short seller. He is convinced that Shankar’s Airport Coolie (AC)

business is going to go bust. He devices a plan to profit from his hunch. But what can he do— he does not own any stock in Shankar’s AC company. Kala Shetty however does. Kundan takes as a loan from Shetty 10 shares of the AC business, with the guarantee that within a week, he will give Shetty his shares back and also $100. Kundan now sells the stocks at $100 (its current value) a share and makes $1000. A week later, due to the fact that Shankar has been sent to jail by Inspector Kale and also because of the fact that Kundan has just dumped a large quantum of AC stock (10 is considered to be a large number as per this example) on the market thus increasing supply and creating a resultant value drop, the stock value of AC crashes to $10 a share. The sly Kundan buys 10 shares of AC back, spends 10 times 10 = $100 on the transaction, gives the shares back to Kala Shetty and also $100 as promised and has now made a profit of $1000 in a week. Which Kundan now presumably spends on bottles of Chandan which he gifts it to his girl-friend from London? ]

The root cause of investor loss of trust needed to be handled. Namely how to dispense of the billions of dollars stuck in stinking mortgage-based securities. “Put on the ghungroo on my foot and watch the deramaaaaa”. No that perhaps was not United States Treasury Secretary (the equivalent of the finance minister) Paulson actually sung but the point is that his 3-page recipe to rescue the economy (with the innocuous title of Troubled Asset Relief Program) was a trigger for much drama.

According to the plan, the US government was to spend $700 billion to buy out troubled mortgages, thus providing financial institutes with much needed liquidity (i.e. real “instruments of transaction” they could use as opposed to worthless pieces of junk paper with numbers on them) and thus restore normal flows of capital through the financial system. In other words, a by-pass surgery to make blood flow again to the heart of the economy, gasping for oxygen from toxic asserts blocking all the arteries.

The $700 billion, we were assured, was not going to go into a bottomless hole. Since the MBSs were backed by actual assets (houses) on some of which mortgage payments were still being made, the MBSs bought from the banks through the $700 billion investment would be earning money right away and later on when the housing market comes back to normal, the MBSs could even bring in revenue for the taxpayer’s, thus making the $700 billion payout sound less bad than it actually was.

Paulson stopped short of saying that this government action would pay for itself (i.e. realize the $700 billion investment fully) as that spin of “paying for itself” had already been used for the Iraq war. And we know how that turned out.

An additional provision of the bill was that this buy-out was going to be affected by the US Treasury Secretary and his staff under a process which was going to be above scrutiny by elected officials and the courts effectively making Paulson the economic dictator of the US, free to take whatever decisions he deems fit without any kind of oversight or threat of prosecution. In other words, Paulson wanted to turn the US into Dongri-La and himself into Dong with the proposed Bill asserting, as clearly as possible, “Uparwala wrong ho sakta hain, par Dong kabhee wrong naheen hota” (God may be wrong, but never Dong)

Greeted with guarded optimism by Wall Street, the proposed piece of legislation unleashed a tidal wave of public anger at what Paulson was proposing. The Bill (initially referred to as the “bailout package” and then changed to the more politically apposite “rescue package”) was widely seen as the federal government’s plan of diverting tax payer’s dollars to pay for Wall Street’s excesses, effectively telling Wall Street “When you guys make a profit, it’s yours to keep. When you make a loss, the whole nation shares the financial grief”.

Public resentment against the Wall Street types, (i.e. the ones in long black coats and mufflers with a Starbucks latte in hand earning a million in bonuses on average) perceived to have brought about this economic cataclysm as a result of unbridled greed was at a historic high. At this time, the message of forgiveness and support for Wall Street was needless to say, extremely unpopular. The resentment against the Paulson plan was magnified when the popular press kept reminding everyone as to how the very same people had lobbied extensively (euphemism for “paid off politicians and decision-makers”) for reduced government oversight under the umbrella principle of “free markets solve everything”, were now asking for the most blatant form of socialistic financial interventions in order to save their asses.

A further contributory factor to the public outcry was that, thanks to their record over the past many years, not many in the US trusts the government to do anything other than benefit their paymasters (lobbyists, special interest groups).

Paraphrasing one of the greatest prophets of the modern era:

(Today Wall Street and political leaders are the bastard twins of the same father)

If the deficit of trust had led to the freezing of financial markets, a similar lack of confidence was responsible for the fact that Americans were unable to believe anything that the administration told them. The problem is indeed systemic—there is an undisguised animus that many Americans feel towards the political system, something that was exploited by Obama with his message of change and even to an extent by Palin with her cultivated image of a bumbling, but good-at-heart Washington outsider, reflecting the values of common middle-class Americans as opposed to those of the Columbia-Harvard business school gasbags who had run the country to the ground.

And one could not blame the Americans for being anything but skeptical of the plan considering the people who were endorsing it. First of all, considering the esteem with which President Bush is held in by the general public as of now, his throwing his weight behind the Paulson plan was a huge blow for it.

After the blatant lies of the weapons of mass destruction, torture and wire-tapping, the mismanagement of Hurricane Katrina and the complicity in financial scandals, the present Republican government’s ability to be even moderately truthful to the nation, manage a complicated process and safeguard the interests of the common man (as opposed to the upper crust of the financial world who were historically their biggest financial donors and backers) was seriously in doubt. To put it mildly, lest it be assumed that the Democrats were the knights in shining armor (because of the fact that while Republicans are known to represent big businesses, the Democrats are perceived as the party of the common man), it should be said that they were as deep in the mud of public mistrust as the Republicans.

It was Democrat hero, Bill Clinton who had, under pressure from Wall Street, signed the repealing of the Glass- Steagall Act that had been instituted during the Great Depression to prevent commercial lenders from making certain risky investments. With its repeal, banks were now free to trade in instruments like MBSs, thus increasing both their risks as also their profits. Also it was President Clinton who had aggressively pressurized Fannie Mae/Freddie Mac to promote home-ownership among weaker economic sections by relaxing restrictions on what kind of mortgages they were allowed to buy, a presidential directive that was enthusiastically followed by Fannie Mae/Freddie Mac as they started guaranteeing mortgages taken out on risky sub-prime loans. Now whether their enthusiasm about sub-primes was because of the social commitment of the Fannie Mae/Freddie Mac management or because of the higher rate of return that sub-primes brought in (the higher rates promising higher executive payouts) I leave the astute reader to judge.

People with Freddie Mac/Fannie Mae links had always held influential positions inside the Democratic party hierarchy—be it the person who decided Obama’s running mate to the deputy attorney-general under Bill Clinton.

And the top four people who had benefited from Freddie Mac/Fannie Mae campaign contributions were

1) Chris Dodd , 2) John Kerry, 3) Barack Obama and 4) Hillary Clinton

(do we see a pattern in 2, 3 and 4—hint: all prospective presidents at some time or the other).

Chris Dodd you ask? Why him? We do not know but the fact that he is the chairman of the Senate Banking Committee that has jurisdiction over, among other things, public and private housing and banking and federal monetary policy, may have something to do with it. Or not.

And the final nail in the coffin of lack of public trust in the whole bail-out process. Paulson, who was asking for dictatorial power and freedom from all oversight, was an ex CEO of Goldman Sachs. What were the chances that he would look after the interests of the common folks as opposed to those of his old friends on Wall Street?

What were the chances of Mamata Banerjee and Ratan Tata doing the “funky chicken” dance (this explains the dance) together?

It was not just the trust factor that made the bill such a turkey. It was clear that the bill, cobbled together like a homework assignment, had little details of how exactly the buyout was going to be performed. Perhaps because Paulson himself did not know. Perhaps Paulson did not want to tell us. For instance, how would mortgage based securities be valued? Say the paper value of an MBS is $100. The actual market worth, as of today, is $2. What is the value at which if the government bought it, it would benefit both the bank as well as provide the government the opportunity to make a profit later? Should the government buy it at $3? If it did, that won’t really increase the institutes’ liquid assets defeating the bill’s purpose. Should the MBS be bought at $90? The financial institutes would be ecstatic but the government would now be holding a grossly overvalued asset with no chance for profit.

Since the valuation of toxic securities was not a straight-cut thing, the question was who would do it? Experts from Wall Street would be paid a consultancy from the government to use their “expert” knowledge to determine a fair value! Which means that Wall Street fat cats would collect once again, from the pockets of taxpayers, while wiping the detritus of financial excreta from their own soiled bums. Not to speak about the unacceptable conflict of interest that exists in the whole transaction.

So if the proposed legislation was flawed, what were the alternatives? A section of conservative and libertarian economists were opposed in principle to any kind of government intervention. They argued that banks that were weak should be allowed to go under and file for bankruptcy. The owners would be wiped out, and the debtors (to whom the bankrupt organization owned money) would be free to sell the company’s assets or take controlling equity in the company. In this way, the markets themselves would rectify the anomalies. The problem with this is that this whole process of self-stabilization often takes a lot of time and the existence of normal economic conditions to work out. In the present situation, a quick fix was needed and the conditions of the general economy were anything but normal.

The other alternative proposed by more liberal economists was that since the basic problem was the stoppage in the flow of liquid assets, the government should deal directly with that problem rather than try to buy deprecated assets like mortgage backed securities. They argued that the federal government should pump in money to the tottering institutes in exchange for shares (i.e. a portion of ownership) and options (the rights to buy stocks in the future at low prices) so that the government not only has share-holder control over the organizations that took aid but also stands to benefit when they finally make profit and their value rises. As a matter of fact, this was precisely how the federal government had done the AIG insurance bailout because even they were not fool-hardy to pay for toxic credit-default swaps.

However this measure was opposed by Wall Street (which still had more than a bit of influence) who wanted their toxic investments off-loaded but did not care to give government a role in running their business. And also opposed by conservative experts who were dead-set against the concept of government owning equity in major financial institutions as this was nothing but “nationalization”—-something that is, to true blue free-marketers, a nightmare of the proportion of having Hugo Chavez as son-in-law.

Amidst the confusion of multiple voices—-some of which were saying that the US economy was a few days away from apocalypse and some of which were saying that the magnitude of the problem was being magnified by spin-meisters in order to bail out powerful agents in Wall Street (the same way in which the bogey of WMD’sled the country into another quagmire a few years ago)—presidential politics added to the drama.

With the presidential elections a little more than a month to go (the time that this bailout was being discussed, in last week of September) and both parties eager to at least postpone the economic collapse, should it happen, to at least after the elections, it was assumed that the House (the lower house of parliament) and the Senate (the higher house) would pass Paulson’s plan after some modifications of course.

In order to take credit for the passing of this plan, McCain suspended his campaign and jetted to Washington DC. There in a meeting with Bush and Paulson and Obama, McCain, whose arrival in Washington had been cheerled by Fox as the game changing moment in the crisis, did what many had done many years ago in the internet logic viva. He froze, staying silent through most of the meeting. Obama took the initiative and the contest which had been effectively tied till then, opened up with Obama sprinting ahead.

The final version of the bill that went to the floor of the House had gone from 3 pages to 110 pages. Paulson’s Dong-like powers were removed for one. Secondly, the government would acquire equity stakes in the firms that were being helped so as to let tax-payers get their money back through future profits. Thirdly, banks would work with authorities to avoid foreclosures and give relief to people struggling to make payments (after all if the Lamboo Attas were being bailed out, why not the Bullahs [reference last post]) Fourthly, to calm public anger, limits were put on executive compensation in the institutes that would benefit from the bailout.

The bill was put to vote on the House. While most people expected the bill to pass, albeit by the skin of its teeth, in a surprising turn around, the Bill was defeated as House Republicans, whether it be because they were scared of public disapproval or whether they felt they were personally not getting anything out of the deal, engineered a sudden revolt in the ranks and the Bill fell. The Dow Jones fell over 700 points, the single largest drop in twenty years. Investors rushed to move their money into gold and government-issued Treasury bonds. Over more than a trillion dollars in assets were wiped out in the ensuing carnage.

All however was not doom and gloom. Warren Buffet, the financial prophet of our

times, announced his investment of $3 billion in troubled General Electric to follow his $5 billion investment in Goldman Sachs. In exchange for his investment, he would be getting stocks and options (i.e. equity stakes) of the two companies. The move was clear—following the immortal principle of “value investment” championed by his guru Benjamin Graham, Buffet was buying equity in companies whose current market value he considered was less than their net value. In other words, he was betting that these companies were better off than the market thought they were and so their stock values were bound to rise.

Now would Buffet’s decision convince skeptics that if played right, the government too, on the back of its equity stakes, could come up with a profit under Paulson’s plan? The vote went to the House again. This time, the 110 page bill swelled to 400 pages. Included in it was a direction to the president to propose a law that would ensure that financial institutes would reimburse the taxpayers for any losses on their investment after five years. (Note the way the reimbursement to tax-payers is not mandated directly by the Act but is merely postponed for another bit of legislation—a bit of legislation that is likely to be quietly defeated once the spotlight shifts awayfrom the economy !)

An important addition was the measure to raise FDIC insurance from $100,000 to $250,000 (i.e. the government will give back $250,000 of your money per account type per bank if your bank fails), a move that was expected to soothe the frayed nerves of ordinary investors.

However bizarrely, along with some of the most critical legislation of modern times were tagged on items that guaranteed government spending for critical infrastructure items such as children’s wooden arrows and wool research (politicians pulling the wool over people’s eyes?) and a tax break for that thing that can restore liquidity, albeit in a very different way—Puerto Rican rum.

No I am not kidding. These were the sops that were added to the bill as “incentives” to House members so that they can turn their votes from “No” to “Yes”. And nothing makes politicians happier than when special interest groups that support him/her are happy. The Bill was then passed by the Senate and the President signed it into law.

And how does Wall Street react to the bail-out? By firms expressing their disinclination to participate in the bail-out because executive salaries are capped if you take help. Yep that’s Wall Street !

If there is one thing that the whole fiasco teaches us (not that this lesson is anything new) is that while the concept of free markets are good and that of government controls very bad, the operation of free markets almost without any kind of oversight or control (which is what happened on Wall Street where government restrictions were over the years subverted by lobby-driven legislation) is doomed to lead to catastrophe. This is not the first time this has happened— in the 90s unbridled capital flows caused by uncontrolled market operations (what Jagdish Bhagwati called “gung-ho capitalism” in his book “In Defense of Globalization”) brought down the economy of many of the South Asian tigers. I dare say it will not be the last.

So what happens now? Experts believe that $700 billion is a ball-park figure and the actual cost to fix the market would run into trillions. Will inflation run wild in the meanwhile? Will the US sink into a severe recession? Will the housing market go south for two-three more years?

Will the economic crisis be looked upon as the historic event that eventually influenced the US presidential elections decisively and created the space for the first non-white president?

With the massive cost-cutting measures that will be put into place at financial institutions sure to affect IT spending straight-off (the first people who get fired at investment banks are the IT guys), will US banks abandon their unconditional love for closed-source proprietary vendors like Microsoft and Oracle (this love is because of the supposedly high levels of security these companies provide) for so-called “riskier” but orders of magnitude cheaper open source computing infrastructures and will that decision bring about a re-alignment in the IT industry?

And why, oh why, does Rahul Mahajan ask Ashutosh in  a movie being made titles “Big Boss”: ” “Kyon tu baraf peeta hain whisky main daal ke?”? [Why do you drink ice after pouring it in whisky?]

I wish I knew.

Warning number 1: This is a long post, part of a multi-post series on the crisis in the financial markets.

Warning number 2: I never took an Economics or Finance course in my life. I will not quote economists or provide citations and statistics. Not because I want to be simple and lucid. It’s because my knowledge of finance is extremely limited. All that follows is based on my understanding of the present financial situation, an understanding formed by reading the popular press.

Warning number 3: Which means that everything I say below may be wrong. But what’s wrong in that? At least, I didn’t get half a million dollars bonus and an apartment in Manhattan as reward for being “wrong”. Right?

The Backdrop

In a land far away (the United States of America) a long time ago, there was a great housing boom.

Okay wait. I am getting a bit ahead of myself.

So first a little perspective.

In the US, buying a house is considered to be one of the best investments one can make. This is particularly true because the government, as part of long standing policy, encourages people to own their own homes by allowing tax-deductions on mortgage interest payments. This means if you took a loan to buy a house and is making monthly payments towards the mortgage as well as toward property taxes; the government puts some of that money back into your pocket by allowing you to deduct a percentage of those expenses from your federal taxable income. In other words, a certain portion of your house-ownership cost is written off by the government from your tax bill.

Since the US government does not consider providing any such relief to people who rent (though such people are generally worse off than home owners), the financial incentive to own a home is that much greater.

So yes. Where were we? Yep. The housing boom. For the last few years, prices of houses were going up and up in the US driven by ever-increasing demand. So much so that people, many of them in fact, started thinking like Mr. Bullah below:

“Hey this house is worth $500,000. In a year it will be $600,000. So if I can sell it then, I can get a 20% return on investment. ”

Of course there is a small problem. Bullah’s net worth, in terms of his savings, is $10,000 (2% of the house’s cost). And just to make things worse, he has a bad credit history having defaulted on his credit card bills a few times. In order to make the very basic minimum down-payment for the house (usually 20% of the cost), he needs $100,000 i.e. $90,000 more straight away.

He goes to the bank.

Now in normal situations, the loan officer would look at Bullah’s bank statement and his credit history and show him the door telling Bullah politely (after all his name is Bullah) that he just does not have the equity to make such an expensive purchase.

However these are not normal times.

What happens is that on seeing Bullah’s loan application, the loan manager smiles, shakes Bullah’s hand and provides him the loan on his down-payment. Yes the full $90,000. Plus the loan manager also provides as loan the rest of the house cost (i.e. loans him an additional $400,000) enabling Bullah to take possession of the house right away with zero-down payment.

So what does Bullah provide as collateral? Nothing.

The only catch is that in exchange for the high (and unreasonable) risk the bank is taking on giving this loan, it expects a very high rate of interest from Bullah. This transaction between Bullah and the banker (let his name be Lucky Chikna) is what is known, in common parlance, as “subprime lending”.

Lucky Chikna is happy because he is going to get a lot of money as interest for his investment (albeit more than a bit risky), which, in turn, is going to translate to a higher commission for him.

And Bullah—he is only too glad to get any loan. As he tells his worried brother Chutiya: “Don’t worry about the high rate of interest. In a year, we will recovered our money and quite a bit more. So no problem.”

And so this came to pass that thousands of such “sub-prime” loans are written by greedy creditors out to make a fast buck on the high interest rates and then accepted (often many loans at once), with glee, by equally greedy common citizens who think, based on advice given by “pundits”, that the housing market would be the golden goose that would keep on giving. Year after year.

The Federal National Mortgage Association, nicknamed Fannie Mae, and the Federal Home Mortgage Corporation, nicknamed Freddie Mac, are special private corporations that have strong government ties. Fannie Mae and Freddie Mac were started by the US government so that they may provide credit to the banks (i.e. the primary lenders who loan money to people to buy houses). This was to enable primary lenders to provide more mortgages to common people and thus promote home ownership.

In short a Baap ka baap. 

Let me explain how I think this works (the actual process is a bit more involved). Say I buy a house for $500,000. The total amount I have to pay back to my bank at the end of thirty years (my mortgage period) is $600,000 distributed over monthly payments. The bank however has to pay the seller of the house $500,000 right away and then wait for 30 years before they have their full principal and interest back. In other words, the money would be “stuck” for that period of time.

This is where Fannie Mae/Freddie Mac comes in. They go to the bank and if they believe that the bank has followed sound lending practices, they buy the mortgage from the bank for say $520,000. Which means that the bank gets its $500,000 back immediately along with $20,000 interest without having to wait for years. It has thus not only made a profit but it has recovered its principal leaving it free to re-invest this amount into another mortgage. Now Fannie Mae/Freddie Mac will be the party responsible for collecting on the $600,000. Since the mortgage was bought for $520,000, at the end of the mortgage period it will have made a $80,000 profit.

Now where did Freddie Mac/Fannie Mae get this $520,000? Why doesn’t it worry about the fact that its money will be stuck for 30 years? That is because Freddie Mac/Fannie Mae sell what are known as mortgage-backed securities to investors.

Just like an index fund allows an investor to invest in a bouquet of companies with the spread of companies reducing his risk of betting his money all on one horse, a mortgage-backed security (MBS) allows an investor to own stakes in a large number of different kinds of mortgages.

So when Freddie Mac/Fannie Mae make the $80,000 profit on its $520,000 investment, it can keep a percentage of the $80,000 as its commission and passes on the rest as dividend to the MBS- holders i.e. all those who made an investment in that particular mortgage.

Now as is evident, higher the rates of interest are on the mortgages that form an MBS, more are the payouts to the investors in that MBS. With financial experts betting on the housing market to grow and with the consistently high returns on such securities, the prices of MBSs appreciated greatly with investment banks, institutional investors like pension funds and hedge funds all rushing in for a piece of the action. And added to the fact that securities issued by Freddie Mac/Fannie Mae had an implicit backing of the federal government (i.e it was “expected” that the government would cover the investment in case of financial downturns) and one can understand the craze for Freddie Mac/Fannie Mae MBSs.  

Now were Freddie Mac/Fannie Mae head honchos well-aware of the shaky foundations of the MBSs they were peddling? You bet they were. But then why should Bullah and Lucky Chikna be the only greedy ones when Lambu Atta, the big boss of Freddie Mac/Fannie Mae is also in the game? Buoyed by the high returns on MBSs, the management of Freddie Mac/Fannie Mae helped themselves to obscene bonuses and vulgar pay-increases. Of course, in the midst of all the excesses, they conveniently forgot that their charter officially stipulated that they were to use their profits to buying more mortgages, increase capital flow in the housing market and thus push down mortgage interest rates.

Money as they say does strange things to memory.

In the lucrative business of buying mortgages, Freddie Mac/Fannie Mae were not the only players in the town, though they were the largest. Different kind of financial institutions like insurance companies and even normal banks were falling over themselves in order to buy sub-prime mortgages from the primary lenders and sell them as part of their investment products. Yes those very loans that had been given to credit-unworthy people like Bullah who had no assets to cover the huge amounts of money they had taken out.

Something was bound to give. With a financial disaster of a war, rising national debt, falling dollar, job losses and out of control oil prices, those people who had taken multiple mortgages out on their $10,000 bank account no longer had the money to make the high monthly payments.

The buyers they had predicted would buy their houses at a premium—well they were no where to be found.

So thousands and thousands of home-owners just threw up their hands and declared bankruptcy. Houses were foreclosed and seized. People were evicted.

But then the question remained: who would buy these seized homes?

No one. Because people had no money—a state technically called “Loot gayee Laila”. Banks, once they realized that the housing bubble had popped, had tightened their lending policies (after the horses had all bolted) and so loans were no longer easily available. Houses stayed on the market forever. Their prices nose-dived. And mortgage-owners were left holding non-performing, fast deprecating assets on which they had to pay property tax in order to keep holding onto them till a buyer could be found. Remember that $600,000 payment Freddie Mac/Fannie Mae needed in order to pay the dividends to the MBS holders and also take their commission, the expectation of which had forced MBSs to stratospheric levels?

Well the news was that there was no $600,000 coming.

MBSs , once bought at high premiums, had started losing their value rapidly.

Disaster was now at the gates. For banks who had invested in mortgages themselves. For Freddie Mac/Fannie Mae. For people who had bought MBSs. For anyone who had guaranteed a mortgage or bought one. In short, ruin for most of the economy as black suit bankers sat on a mountain of useless MBSs that was often not worth the piece of paper written on. Was that all? 

As the line from Bombay Boys goes “Abhe khatam naheen hua chutiye”.  

I made one gross oversimplification in my preceding narrative. (Well more than one. But bear with me.) When greedy banker Lucky Chikna gave the loan to Bullah, he told him that Bullah will get the loan only if he takes out insurance on his mortgage so that if in the (unlikely) case that Bullah cannot make good on his financial commitment, the insurance company will pay the remaining amount on the mortgage.

Bullah now has to make monthly payments for his mortgage insurance (over and above his mortgage payments) but Bullah doesn’t care. Cause he has the pot of gold at the end of the rainbow. The fact that the mortgage is insured is also good for Lucky Chikna as he has covered his bases, should someone ask him what kind of risk mitigation steps he has taken.

Now let’s consider the situation from the point of view of the insurance company. Ibu Hatela, the big chief, suddenly gets all these house-buyers who want mortgage insurance and are ready to pay a nice premium for them. Ibu thinks to himself :” This is good. With the way the housing market is, there is not much chance of the house buyer going bankrupt–he will always be able to sell his house and make a lot of money. So no chance of him defaulting. Let me keep on selling these insurance products.”

And so he keeps selling. Because his company is well-known, the insurance-buyers never ask him “Do you have assets to cover all your insurance liabilities?”After all, when we buy car insurance from ICICI  or Tata AIG, do we ever stop to ask them if they actually have the money to pay $25,000 for damages, if I total someone else’s car? No we do not.

And so insurance companies kept on making out these insurances far beyond their covering capacity.

The premiums were like “free money”, insuring (as one expert opined) cars in a country where there were no car crashes. Why just housing? Companies started insuring any kind of big loan with the guarantee of coughing up the cash should the loaner default. Just like mortgage-backed securities, these “I shall pay up when you cannot” instruments (technically called credit default swaps) were being bought and sold on the market at high premiums and companies who were dealing in them were raking in the profits.

What that meant was Ibu Hatela would sell the rights to collect premium from Bullah to another guy, say Ballu Bakra and Mr. Bakra would in turn sell that credit default swap to someone else. The market for credit default swaps were red hot —AIG, one of the biggest names in insurance had $78 billion worth of swaps !

Again, all this was fine till the day the housing market went boom. Thousands of people began to default on their loans. All the cars in that crash-free world had just run into each other. The insurance companies and the buyers of credit default swaps, needless to say, did not have the cash to cover the claims. With the housing market going down, different other kind of business deals started going sour. Even more debt insurance claims were made. And the more they were made, the deeper the owners of credit default swaps sank into the swamp.

Then of course there were the investment banks—the Bears and Sterns and the Lehmans of the world.

They had their proverbial finger in each of these superhigh yield pies be it the mortgage-backed securities or the credit default swap markets. As a result of years of high-paying lobbying initiatives, the investment banks had made sure that they operated under the minimum of controls and oversight, freeing them to take unreasonable risks while investing. Initially it all went according to plan. Even better than the plan as a matter of fact. The more they raised the stakes and the more outrageous the risks they took, more money they got. Income forecasts were manipulated by taking into account the so-called “value” of the credit default swaps whereas in reality it was nothing but “funny money” that existed only in an optimistic future, a tomorrow that would ultimately never come. And with such rosy forecasts and on the back of its great current “performance”, Wall Street paid out record performance bonuses across the board.

Till of course disaster struck. The MBSs sunk to junk and people started calling in the credit default swaps. The banks did not have enough assets to cover even a fraction of its liability. When angry young man Amitabh Bachchan says on screen: “”Main paanch lakh ka sauda karne aaya hoon, aur mere jeb mein paanch phooti kaudi bhi nahin hai!” (I have come to conduct a deal for 500,000 but I do not have even 5 paise in my pocket) it sounds macho and cool.

Now when investment banks are shown to have followed that same principle, it’s quite horrifying. To put it mildly. No wonder then that investor confidence and their overall credit-worthiness suffered.

The only way for the Lehmans and the Bears and Sterns to be able to survive would have been to raise money from the market and use it to discharge their obligations. But the credit market had frozen up. No financial entity in Wall Street was trusting anyone else with their resources. Starved of its cash flows, an investment bank like Lehman Brothers that had survived the Great Depression and two World Wars went belly-up. So did Bear Sterns before it was acquired. AIG and Freddie Mac/Fannie Mae were in danger of coming to their knees but since they were considered too critical to fail , they were given federal life-lines through infusion of tax money to keep them afloat.

Two of the biggest banks–Washington Mutual and Wachovia were not so lucky and was taken over by other corporations.

And most importantly, the High End Girlfriend Index, the true indicator of the value of Wall Street fatcats, collapsed spectacularly.

The face of the financial world had changed within a few weeks.

But the drama..that was just beginning.

To be continued…………………………………………………

Hello All,

Considering that the present financial crisis has been variously described as the most challenging after the “Great Depression” of the 1930’s and certainly the greatest of our generation, I thought it would be fitting if the issues involved could be put in perspective. So here is my take…and I especially recommend it to the uninitiated.

Warning: Since the article is going to be long, it will be in the form of a series. So if the reader wants the complete picture, he is advised to read the entire series.

Regards,

Akhilesh