By Steve Schifferes
Economics reporter, BBC News, New York

The scale of the losses that will hit Wall Street banks could approach half a trillion dollars as large numbers of sub-prime home loans go bad.

And the carnage in the financial markets could cause a credit squeeze that will dampen economic growth for years to come.

The US sub-prime crisis is leading to a wave of foreclosures across the US that is having a devastating effect on the US housing market, and is likely to lead to the halving of the US economic growth rate in the next six months.

At the root of the problem is the breakdown of the new model of mortgage lending, when instead of giving mortgages directly to their customers, banks borrowed money from credit markets to fund a growing volume of mortgages.

SUB-PRIME LOSSES SO FAR
Citigroup: $11bn
Merrill Lynch: $8bn
Morgan Stanley: $3.7bn
Bear Stearns: $3.2bn
UBS: $3.4bn
Deutsche Bank: $3.2bn
Credit Suisse: $1bn
Wachovia: $1.1bn
IKB: $1bn:
Source: Company reports

Show and tell

But its biggest impact is likely to be on the financial sector, which made billions of dollars in profits in the past few years by betting heavily on the sub-prime market.

Already the big Wall Street banks have revealed losses totalling $50bn (£24bn), and the head of the biggest bank - Chuck Prince of Citigroup - and the biggest investment firm - Stan O'Neill of Merrill Lynch - have departed.

But experts estimate that the total losses facing the financial sector could amount to between $150bn and $450bn, and that many of the banks have hidden losses that have been concealed in off-balance sheet instruments like "special investment vehicles".

The big Wall Street banks and investment houses who are most exposed could find their profits, and much of their capital base, wiped out.

To restore their profits, and indeed in some cases to remain solvent, they will be forced to sell off many assets and lay off many workers, as well as cutting the bonuses of their remaining staff and limiting their future lending.

The size of the financial sector in the US economy - with banks making up 30% of the profits of all US companies last year - means that the effects will be felt both in the real economy and on the stock market.

And with $2.8 trillion in distressed mortgage bonds, including $1.3 trillion in sub-prime bonds, there is enough distress to go around.

Dick Syron, the head of Freddie Mac, a government-sponsored agency that also trades mortgage-backed securities, reckons he has never seen circumstances so bad, and that the credit crunch is having a "dramatic effect" on the US housing market.

Investors strike

But even that impact could be dwarfed by the effects of the credit squeeze spreading beyond sub-prime loans to other sectors of the bond market.

Since 9 August, bondholders have effectively gone on strike, refusing to buy some $2.8 trillion worth of sub-prime, Alt-A, and other types of securities not guaranteed by government-sponsored agencies.

Meanwhile, the value of sub-prime mortgage-backed bonds has plummeted, with most types losing between 60% and 80% of their value since the beginning of the year.

The fear is that the whole of the $27 trillion bond market, which funds everything from government debt to company borrowing to credit cards and car loans, will begin to dry up as investors worry about undisclosed problems.

According to US Federal Reserve chairman Ben Bernanke, "although it was the problems with sub-prime mortgages that initiated the financial turmoil, credit concerns quickly spread into a number of other areas".

"In the short term, these events do imply a greater measure of financial restraint on economic growth as credit becomes more expensive and difficult to obtain."

Already there are signs that it is getting harder to sell bonds linked to credit cards and car loans, and there are worries that spreads on corporate bonds are tightening.

The tightening of credit will hurt economic growth because in the US consumers have borrowed heavily to fund their consumption.

The latest figures indicate that consumer and business confidence is slumping both in the US and Europe as worries about the effects of the credit crunch grow.



How big are the potential losses?

The credit markets are frozen because of uncertainty and lack of information.

No one knows how much mortgage-backed securities are now worth, and no one wants to sell them to find out.

Also, no one knows where these losses are hidden among the banks and other financial institutions.

The gargantuan scale of potential losses is terrifying investors in banking stocks - which have fallen by 30% - as well as mortgage-bond investors.

There are three ways to estimate the size of the possible losses from the sub-prime crisis.

1) Estimate how many sub-prime mortgages will eventually end in foreclosure
2) Look at the current market valuation of sub-prime mortgage bonds
3) Look at the books of the major banks and estimate the size of their potential liabilities and the proportion of those which will turn into losses

The first method should give the best estimate of the long-term cost of the crisis.

The range of plausible estimates goes from $150bn (US Federal Reserve) to $450bn (Moodys.com worst-case scenario).



POTENTIAL SUB-PRIME LOSSES
Sub-prime mortgages: $1.3 trillion
Distressed sub-prime mortgages: $625bn
Foreclosed sub-prime mortgages: $220bn-$450bn
Percent sub-prime foreclosed: 15%-25%
Current market value of sub-prime mortgages: $300bn - $900bn
Sources: Federal Reserve, Moodys.com

According to Mark Zandi of Moody's, there are $1.3 trillion-worth of sub-prime and other distressed mortgages that were issued in 2005, 2006 and the first half of 2007 that will see their terms change for the worse in the next two years.

He estimates that about half of these, $625bn, are likely to go into arrears leading to court action, and that after reschedulings and foreclosures, about $220bn is likely to be lost, net of the auction sales of such properties.

Other organisations, such as the Center for Responsible Lending, also estimate that about 20% of sub-prime mortgages will go into foreclosure.

But, as Mr Zandi points out, both his estimate and the Fed's are very sensitive to changes in house prices.

If house prices were to fall by 20% rather than 12% as Mr Zandi's model currently estimates, he says that the total losses could double to $450bn.

And if the US goes into recession, or if the Fed raises interest rates to combat inflation, then the losses would also increase dramatically.

Meanwhile, fear has led the bond markets - through derivative trading - to cut the value of sub-prime mortgage bonds by even more than this.

Since the beginning of the year, sub-prime mortgage bonds issued in early 2007 have dropped in value by between 20% and 80%, depending on their bond rating.

Using an arithmetic average, and assuming that other mortgage bonds are equally distressed, this implies they have lost at least half their value, or $625bn.

Truth or consequences

Measuring the likely losses faced by individual banks is an even more difficult task.

But what is clear is that most financial institutions have not begun to reveal the full scale of their potential losses.

"The reality is that most financial institutions have barely started to recognise the lower 'fair value' of their impaired securities," says Professor Nouriel Roubini of New York University.

"The credit crunch is getting much worse and its financial and real fallout will be severe."

Some estimates suggest that banks may have vastly under-estimated their potential liability, especially in connection with off-balance sheet activities.

One look at Citigroup, using SEC data, suggested that their potential liability could be $343bn rather than the $55bn they declared.

Another issue is how much of the potential liabilities may eventually have to be written off. In recent announcements, Citigroup wrote off 20% of its admitted $55bn liability, while other banks have written off between 10% and 40%.

Another measure of potential losses is how much Tier 3 capital the banks have - indicating loans that cannot be valued except by a model because there is no market.

By that measure, the big investment banks like Goldman Sachs and Morgan Stanley are much more exposed, relative to their capital base, than Citigroup or Merrill Lynch.

Hidden losses

Changes in US accounting rules which come into force on 15 November, known as FASB 157, may force the big Wall Street banks to come clean on the scale of their losses - especially when accountants have to sign off their annual accounts in January.

In particular, it may force them to reveal some of the hidden losses which they have concealed through the use of off-balance-sheet funds (such as special investment vehicles, or SIVs.)

These are bank-sponsored financial funds which buy up mortgages - using money borrowed from the short-term commercial paper markets - bundle them up and then sell them to the bond markets.

Thus the banks charge two fees - one at each side of the transaction - and officially have no risk, as they never owned the mortgages.

But in practice, when these funds go bad, the banks are liable either to continue to fund them, or to repurchase the underlying mortgages.

Currently the banks have an estimated $340bn in such SIVs, and since the market in short-term asset-backed commercial paper (ABCP) has dried up completely, they are forced to put up the short-term funding themselves.

Citigroup, JP Morgan Chase, and Bank of America are the most exposed by this measure.



Rescue fund

The big banks are hoping that they can rescue about $75bn of this debt, which they say is perfectly sound, by putting it in a special super-SIV, a plan endorsed by US Treasury Secretary Hank Paulson in the hope that it will calm the credit markets and help restart their normal functioning.

But even Mr Paulson now admits that the fund will do only a little to reassure investors about the broader mortgage-backed securities market.

And others are clear that the only thing that will restore confidence in the markets is the full disclosure of all the potential losses.

Dick Syron, the chairman of Freddie Mac, says he has experienced many financial crises during his work at the Federal Reserve.

"You don't begin to get resolution of these questions until you get price discovery," he says.

"The problem in the market is not just liquidity. The problem in the market is lack of certainty and lack of information."

Why did the financial sector get it so wrong?

But why did it take so long for the banks and the mortgage bond market to realise the scale of the problem that sub-prime lending would cause?

The main reason was that the new system broke the link between the lender and the borrower.

The institutions who owned the loans - the people who bought bonds - had too little information about how dangerous they were.

They relied on the ratings agencies to reassure them that the complex mortgage bonds they were buying were indeed investment-grade.

But those ratings agencies did not understand how, under conditions of "stress," i.e., falling house price, those bonds would fall in value.

And since most pension funds are managed by several different fund managers who all compete with each other to get the best quarterly rate of return, there was a strong incentive to buy as much as they could of these supposedly safe yet high-yielding bonds.

According to David Pitt-Watson, who manages the pension fund business at Hermes, the pension funds failed to exercise their rights to find out enough about what they were buying - or question the way the banks were run.

And he says the system did not give the right financial incentives to encourage lenders to be careful.

Wrong incentives

The system created challenges at the other end as well.

"Gone are the days when a homebuyer only went to the corner bank to take out a mortgage," says US Treasury Secretary Hank Paulson.

"Today the mortgage system is disaggregated and less personal... a homeowner having trouble making payments does not know who to turn to for assistance."

In addition, the new system of mortgage finance did not give the right financial incentives to ensure that proper checks were made on the individuals who applied for sub-prime mortgagees.

The banks who offered mortgages and sold them on did not care as much whether the loans went into foreclosure. They were paid a fee for selling the mortgage on, and another fee for servicing (collecting the loan payments), and even got additional fees if they had to foreclose.

As the banks who sold on these mortgages were not putting up their own money as collateral, they no longer used their own in-house bank managers to assess the income of their borrowers and check the real value of the house they were giving a mortgage on.

Instead, they increasingly turned to mortgage brokers to sell them even more mortgages.

And there is evidence that the poorly-regulated mortgage brokers - whose job it was to check the income of potential mortgagees - and the home appraisers, who had to value the property - began to exaggerate both the income of their clients and the value of the homes, thus getting higher fees themselves.

"The sub-prime mortgage market in recent years was also accompanied by a deterioration in underwriting standards, says Fed governor Randall Kroszner.

"In some cases, abusive or fraudulent lending practices resulted in homeowners taking on mortgage obligations they could not afford, with terms they may not have fully understood."

It is now up to the regulators and policy makers in Washington to correct the broken mortgage system - before the damage to home owners, banks and the US economy becomes too great.

But whatever is done, it is bound to be painful.

"We can't make all the pain go away," says Mr Syron.

""We can ameliorate it and most importantly we can try and prevent it happening again but we can't eliminate all of it."

Further articles in this series will explore the attempts in Washington to repair the damage caused by the sub-prime mess, and its effects on the world economy.

THE NEW MODEL OF MORTGAGE LENDING

I would like to report on violation of human rights by officials from Jabatan Agama Islam Pulau Pinang (JAIPP).

At about 10.15 pm, 01/11/07, at house no 15, Lintang Sg Ara 1, Taman Desa Ara, 11900 Bayan Lepas, Penang (the house is rented by Mr Asmady Sulaiman 660720-07-5021), a Hari Raya gathering-cum-dinner attended by staff, employees and guests of Rufaqa Corporation Penang was interrupted by around 6 - 7 male and 2 female JAIPP enforcement officers, accompanied from behind by several policemen. Rufaqa' is a private limited company owned by Ashaari Muhammad, former leader of the banned Darul Arqam movement, and Rufaqa' employs mostly former Darul Arqam members as its staff in economic projects all over the country. The Penang branch has existed since 2001. Present in the gathering was Khadijah Aam, wife of Ashaari Muhammad. Khadijah was thanking Rufaqa' Penang for inviting her to the function, coupling the words of gratitude with spiritual remembrances (tazkirah) on the subject of 'life after death' at the precise time when the raid started.

The JAIPP spokesman, Pegawai Penguatkuasa Agama (PPA), Mr Aqim, announced that those who were at the gathering had violated sections of Islamic enactments which had purportedly gazetted Rufaqa' as an illegal organisation. JAIPP officials then conducted an intense search of the bodies and belongings of those present (around 50 altogether, excluding children). Confiscated were personal belongings which allegedly proved intentions of the gatherers to adhere to teachings of Rufaqa' (which is nonsensical since Rufaqa' is a commercial company, not a religious organisation) and / or to revive Darul Arqam. Among things confiscated were photos of Ashaari, big and small, even those
kept in the purses of the gatherers.

Notwithstanding theological disputations which have so long driven a wedge between the legalistic state-sanctioned official Islam and the sufistic Islam of Darul Arqam (possibly continued by some employees of Rufaqa' on an individual basis), adherents of the latter deserve to be treated as human beings who possess rights which cannot be trampled upon. I wish to report on the following possible violation of human rights that possibly occurred during the operation:

1. After the body search and confiscation of personal belongings, 51 individuals were ordered to report to the Bayan Lepas police station to sign surety letters to grant them bail on a personal basis. They were not given clear instructions whether they could leave their children (under the liable age for prosecution) behind or not. Apparently, some said that children could be left behind, some others said that children had to be brought along. As a result, some brought small kids along. Understandably, the crowded conditions of the vicinity in which the alleged offenders were hounded into, caused extreme discomfort to them and led to them shedding tears. This sight did not arouse sympathy from the JAIPP officials or the police, until one of the gatherers took the initiative to call a friend to come to the police station and transport the children back to the place of gathering at Sg Ara, where some adults (not the original gatherers) had been stationed to take care of the children. No sympathetic offer came from JAIIP and the police to transport the children, despite it being their mistake in giving unclear instructions. The process of signing letters of guarantee, releasing the gatherers on bail, ended at 3 am.

2. The JAIPP officials had prohibited the gatherers from going to the police station with their own cars, instead, they had to board JAIPP vehicles, driven by JAIPP officials. Some officials guaranteed that the gatherers would be transported back to Sg Ara (where their respective cars had been parked) once the bailing process was completed. This promise was flouted. Thus, at 3 am, some of them with their children away at Sg Ara, were left to their own devices as to how to get from Bayan Lepas police station back to Sg Ara. The police showed apathy to the gatherers' plight once the official process was
over. The gatheres had to call some friends at 3 am to fetch them at Bayan Lepas.

3. Some gatherers reported that when faced with the letters of surety, they were urged (intimidated?) to sign them even before they had read the conditions as stipulated in the letters (ie. words like, "Sign je lah cepat, ramai orang lagi tu." JAIPP officials had treated the alleged offenders as offenders whose rights were of trivial concern to them. Throughout the operation, they showed the impression that they wanted to get everything settled quickly, obviously as they wanted to go home to the comfort of their wives and kids, ignoring altogether that the gatherers had similar wants as well.

4. Throughout the operation (10 pm - 3 am), the gatherers were not given any food. The dining part of the function had not begun at 10 pm. Some of them had fasted in the day (part of the post-Ramadan 6-day optional fasting), meaning that they had only little food after Maghrib (dusk) as the big dinner was coming at the end of the function. At the police station, they were given only small bottles of mineral water to quench their thirst; even these had to be shared among the gatherers. Although the gatherers had hinted about their hunger and thirst throughout the procedure, both the police and JAIPP officials were oblivious to their concern.

As a member of the Muslim community, I am ashamed of how JAIPP religious officials (all supposedly ustaz and ustazah) treated their co-religionists with impunity. Whatever the offences that might have been committed by the gatherers, they should be treated as innocent until proven guilty, and even then, they should be given all rights due to them under both the law and human concerns. On the whole, the JAIPP officials' behaviour throughout the operation smacks of the behaviour of licensed henchmen. The conduct of the police was slightly better, some of them apologised for the discomfort that had to be undergone by the gatherers. None of the JAIPP officials did.

(The following section, chronicling the experience at JAIPP, the syariah court, and in prison, was written on 8 December 2007)

We were made to understand, on the night of our arrest (01/11/07 until the wee hours of 02/11/07), that we were to report to JAIPP anytime between 9 am. and 5 pm., 05/11/07, for the purpose of recording of recording our statements (51 statements overall). Some, including me, chose to come early. At around 9.20 am., those present among us were instructed to gather in the JAIPP meeting room to be briefed by a JAIPP official. He claimed that instructions had been given to all of us to arrive at JAIPP at 9 am. sharp. I checked with my friends who had arrived; almost all had understood JAIPP’s past instructions as meaning that we were given room to report at JAIPP anytime between 9 am. and 5 pm., not necessarily at 9 am. But now JAIPP officials were arrogantly denying their mistake, intentional or not, and ordering us to call all of our remaining friends to come to JAIPP promptly. We were horrified to read a report in Harian Metro that morning that we were going to be hauled to the syariah court that very day. JAIPP was obviously concealing from us vital information which affected our own lives and movements, but divulged that same information to the media. JAIPP officials never informed us that prosecution would immediately follow the interviews at JAIPP. We came to JAIPP on the anticipation that we would be released once our respective interviews were over and summoned to the syariah court on another date. JAIPP officials seemed to enjoy the fact that we were under their mercy.
The interviews varied in length and nature from person to person. My whole life story was related to the JAIPP investigating officer in a two and a half-hour interview. At times, I felt my arguments had defeated his, but this was of no consequence as he would record only statements which suited JAIPP’s intent of filing allegations against me. Arguments which had him on the defensive were left as unrecorded exchanges of opinions, which the officer ostensibly appreciated. Some other interviewees were shown a list their previous SMS messages which were allegedly evidence of past mischievous communication among plotters of a ‘Darul Arqam revival’. Our private lives had obviously been intruded by a collusion between state institutions (JAIPP, police special branch) and private telecommunications companies (Celcom, Maxis, DiGi), who might or might not have been coerced. My interviewer took away my original surety letter issued on the night 01/11/07, promising that he would photocopy one for my retention. He broke his promise. The letter had stated the sections of Penang’s Syariah Criminal Enactments (1996) under which I was to be charged.

By around 1 pm., most of the interviews had ended. After zohor at JAIPP, we were not allowed to leave the building until the arrival of a bus chartered to transport us to the syariah court. By the time we were ordered to board the bus, we realised that some interviewees had been released by JAIPP for reasons unknown to us. From what we knew, they had certain official or unofficial connections to the state. One Mrs. F was the wife of an UMNO strongman who, prior to the gathering on the night of 01/11/07, had warned her that raids on Rufaqa’ functions in Penang were about to be launched. Another Mrs. R, who was freed with her husband Mr. J, was on JAIPP’s payroll as a Kelas Agama dan Fardu Ain (KAFA) teacher in Balik Pulau. From the gatherers of 01/11/07, one Mrs. Z who came with her 3 children, had mysteriously escaped action from JAIPP officials, although she came along to the Bayan Lepas police station upon arrest. Her IC was not confiscated that night by JAIPP officials. She did not even have to turn up for the interviewing session at JAIPP on Monday. She turned out to be a teacher at a religious school whose staff were on JAIPP payroll. He appeared to have known some of the JAIPP raiders of 01/11/07. Were there double standards operating in the procedures of the Islamic bureaucracy at state level in Malaysia?

We arrived at the Penang syariah court at about 2.45 pm, to be greeted by a throng of photographers and journalists at the entrance. This time, we were given packed lunches. Proceedings started at 3.30 pm. JAIPP’s prosecuting officer, Khairul Azman Azizan, called upon our names and read out the sections under which we were to be charged. Upon mention of our names, we moved from the spectators’ seats to face the judge, Mohd. Ridwan Ghazali, at the front. None of us pleaded guilty, and only one was represented by a lawyer. All had appealed to the court for a grant of bail lower than the amount demanded by prosecutor. Most of us had large families, certainly by modern standards. In leaving our children behind at the morning, we did not expect the day’s proceedings to drag on until the evening. Other reasons cited included past services to the country in the capacity of a civil servant with an unblemished record. All reasons cited seemed to have had little effect; the judge did reduce the amount of bail, but only a little. The court proceedings ended at around 5 pm., when the court office accepting payments for bail was near extended closing time. Only 6 (including 4 in a family) managed to post bail in time. Even then, according to witnesses, the counting of the cash money was done slowly, perhaps intentionally, in order to deny the majority of us from gathering money and guarantors for the bailing process. Apparently, JAIPP was intent that the majority of us got thrown into jail, even for a day. Altogether, 36 of us (20 men, 16 women) who did not post bail in time were hauled into a chartered bus headed for Penang jail.

We arrived at the Penang jail at twilight – Maghrib time. Procedures upon entering the jail as a new inmate were so lengthy that we were compelled to perform Maghrib together with Isyak prayers during Isyak time (using an allowance whereby prayers’ times can be combined in emergency circumstances), at the lock-up near the recording department of Penang’s jail. We were given prison food in special prison trays for dinner before being hauled deeper into the jail, the men separated from the women, to our destined lock-ups designed for remand prisoners. At the men’s section, two under-20 year old youths were separated from us. The remaining 18 of us occupied 2 lock-ups, each with 9 of us. We had on us only what we were wearing and blankets given by the prison authorities. We were not allowed to bring into the cells our money, telecommunications devices and reading materials. A cell was only about 3 metres in length and 3 metres in width; one can imagine such a space being occupied by 9 healthy adults, who had to share one open lavatory (without walls), a bucket of water and a pipe. Bathing and ablution had to be done within the limited space just enough for one to squat in the manner of defecating. As we were not used to clean up ourselves openly in the bare, 2 of us shielded one who was answering nature’s call or bathing. The environment was dark and eerie – it was near the cell which used to be the venue to hang people to death. There was no arrow to show us the direction of Mecca; for our prayers, we had to ask for this from prison guards. We relied on the calls for prayers from the nearby surau (prayer house) to tell us the prayer times. Big rats, perhaps as large as kittens, passed openly in front our cell during the night. Everything was hygienically unfit for the performance of Islamic worshipping rituals, but we had to bear with such deplorable conditions. Ironically, it was the Islamic authorities who put us there. Were they concerned that we had not been able to execute our Islamic rituals properly since they began their crackdown on 01/11/07?

Throughout the next day (06/11/07), we joined in the daily prison chores, which included a medical check-up (with our wrists handcuffed) at the prison hospital, meals and occasional reports to the prison master outside our cell. It was a revelation to us when we got to mingle with other inmates. Most were Malays, many were held for drug-related offences, some had been held in remand for many, many years and suffered seemingly unending postponement of court hearings. They could not see any prospect of release in the near future even though they had not been convicted in a court of law. They wondered how ‘decent’ people like us also got ourselves into trouble with the law. Conditions in the prison were not conducive to making them better citizens if ever they were released. They told us not to trust prison guards, who had actually treated us better than they treated hard crime offenders. They overheard prison guards’ conversations on how we, as a group with supposedly many professionals, was in a position to divulge the true nature of dehumanizing conditions of prison cells. This would expose their abuse of powers within prison walls. At 3.30 pm., one Malay and 3 Chinese inmates, back from the court, entered our cell, making it altogether 13 of us in the now crammed cell. Toh (not the real name) disclosed to us the shockingly true picture of the goings-on in the cells. In Toh’s own words, they were treated like animals, without human rights. Unlike our cell, most cells were filthy. For their bath, they were allowed only 4 small bucketfuls of water. They were given rough, sub-standard blankets, unlike ours. Prison guards rode roughshod over them at will, to the extent of using physical intimidation. In my opinion, there was innate racism as well, as most prison guards were Malay. If that was how they treated non-Malay prisoners, how could non-Malays ever respect the Malays’ religion and race? We found these non-Malay inmates to be surprisingly tolerant. There was no hassle in their acceding to our request to make little room for our Asar prayers.

At around 4.30 pm., news arrived to us that we had been bailed. We thanked our fellow cell mates for the brief acquaintance, left the cells and commenced procedures to leave the gaol. Outside, JAIPP had prepared a bus to transport us to the Balik Pulau syariah court, where our bail had been posted. The movement there was not smooth as it should have been. Our bus encountered technical problems and stood stationary at the roadside at Sungai Nibong. 2 police trucks had to be called to continue our journey. By the time we reached Balik Pulau, it was already nearly 8 pm. We performed our prayers at the syariah court’s surau and signed our bail papers. I was astounded to find out that I had to sign 3 papers (one for each accusation) when in the court the previous day, only 2 accusations were read out against me. What ploy is this? But we were all fatigued; my adamance in not signing them would delay procedures for all of us. Out of sympathy for my friends, I reluctantly signed all 3 papers. I enquired on the discrepancy, and the court officer in charge simply assured me that the matter would be looked into. But of course it was never brought up to me later, indicating that the matter had been put to rest. Circumstances had forced me to deny myself my own human rights. On 06/12/07, I am to be tried on an offence which the prosecutor did not even file and mention in front of the judge. My trust in Malaysia’s religious bureaucracy and the administration of syariah justice in Malaysia has truly been shattered.

After signing the papers, matters were still not over. We were transported to Balik Pulau police station for interrogation by special branch officers. My interrogation took more than 2 hours. The special branch kept on apologizing to us for the raid, which was at the instructions of JAIPP. The special branch merely assisted JAIPP, which had a shortage of manpower. By 12 midnight, most of us were eventually released. The Balik Pulau police did prepare some packed dinner, but those of us who finished our sessions late did not get our ration. I left the station with my wife on a friend’s car to get our car which was parked at the parking lot facing the Penang state legislative assembly, a stone’s throw from JAIPP. I remember the parking attendant asking on the morning of 05/11/07, whether we were going to park there for long. We confidently answered, “No.” How wrong we were going to be. It proved to be the longest 2 days of my life, with a lot of drama. How relieved it would be if I suddenly woke up to find out that it was all a nightmare. But this was not to be. After all these years of servicing the country via a public institution, this is what I have received in return from the state: denial of my basic human rights, manipulation of my ignorance of the law, humiliation, and now possible conviction in an Islamic court.

In plaintive mood, I wonder to myself, “Is this Islamic justice?” For years, I have researched and written about Islam in Malaysia, sometimes in glowing terms, at other times critically. I never imagined that one day, I would be at the receiving end of state Islamic authorities’ heavy-handedness, and to boot, in such a degrading manner. My humanity was consistently violated throughout JAIPP’s treatment of me and my friends, who had innocently agreed to attend a company dinner on the night of 01/11/07. We have been treated as deviants even before our cases are heard in a court of law. I have lost faith in Islamic institutions in Malaysia, particularly in those which are supposed to administer justice and solve society’s problems in a loving and caring way. If these are the types of institutions that are to be created by Islam Hadhari, I sincerely wish that we all do away with Islam Hadhari. Such an Islam Hadhari is not only unIslamic, but it is also oppressive. Such an Islam Hadhari cannot be Islam, because Islam dispenses justice to all, regardless of ethnicity and religion. If even we Muslims have to undergo such despicable treatment at the hands of the coercive apparatus of an Islamic state, what hope do non-Muslims have of being dealt with justly by the state?

The author is an academic in a public university in Malaysia.

Anwar Ibrahim, Malaysia’s fallen son, is attempting the greatest political comeback in Malaysian history. Traitor or saviour with a ‘New Agenda’? Trapped between the Charybdis of his political past and the Scylla of political obscurity, Anwar Ibrahim attempts the seemingly impossible. Face to Face examines the undeniable ‘Anwar Factor’ in this exclusive interview.



1. Imran Imtiaz Shah Yacob: You’ve have been accused of being a traitor by high-ranking Umno officials. That’s a damning accusation that still resonates with some party members. What would you say to them?

Anwar Ibrahim: The credibility of these people and their leadership must first be considered before giving much credence to accusations they level at me or anyone else who breaks from the party line. Their accusations are simply an attempt to deflect from the central issues raised, namely corruption and the abuse of power.

I joined the opposition because it is clear that the system of UMNO-dominated BN politics is failing to serve the interests of the people and the nation. These leaders who oppose me are the ones most averse to change and reform of a system that grows increasingly corrupt and detached from the aspirations of the Malaysian people.

If we are to ascribe treachery to anyone the first in line should be those who are complicit in the theft of our nation’s wealth, the squandering of resources and the mismanagement of our economy that has led to Malaysia’s decline in competitiveness and national income. We have adduced evidence of this corruption but it is being ignored by the mainstream media and covered up by the authorities.

2. Imran Imtiaz Shah Yacob: Has six hard years in prison altered your thoughts or outlook towards issues affecting the nation? If so, in what way is your political campaign different this time?

Anwar Ibrahim: The period of my incarceration did nothing other than to strengthen and intensify my resolve to pursue the cause of freedom and justice. Now, this could be a dangerous thing because it could induce one to commit what Alfred North Whitehead called “the fallacy of misplaced concreteness”, in other words, substitute models for reality and artificial constructs for real life. That would be recipe for disaster and one of the reasons why many of the socio-political schemes of the last century eventuated in bloody disaster.

On the contrary, my time in prison and the company of the great books of Eastern and Western literature facilitated a prolonged period of solitary reflection and meditation on the fundamental principles which I believe in and support. After a 30-year quest in which my evolving worldview was subjected to the rough-and-tumble of the political arena, I was presented with the unique opportunity to withdraw into splendid isolation. After re-examining my worldview, its premises and postulates, and modulate it with the experiential wisdom culled from time spent in struggle, I believe I emerged with something of the sense of serenity, which Albert Camus observed as the distinctive property of great works of art.

This calm reconciles you to awaiting what William James called “the receptivities of the moment” upon which effective leadership is dependent. You know more about pacing your purposes to events that predispose the public to support them.

This is all very pertinent to the political campaign of keADILan. Its content, execution, pacing, and calibration have all the wisdom of the mastered tribulation my colleagues and I have endured and will continue to endure in the face of an oppressive system that is stultified in its own inertia. What you are seeing in our campaign is the mature fruit of our travail in quest for a more egalitarian Malaysia that is still a place where the hard working, resourceful, and dedicated citizens can compete and thrive.

In a practical sense, we are focused on public education and outreach. It is a new thing for Malaysians to consider opposition politics not merely as a peripheral phenomenon but rather as a movement that is very much an integral part of the mainstream. We are assuring the people that in light of the failures of the existing system they need not fear the prospects for change and reform. This new landscape is one in which their concerns will be addressed and their rights will be safeguarded, indeed more so than is currently the case.

3. Imran Imtiaz Shah Yacob: Let’s talk about your ‘New Agenda’ vis-à-vis the National Economic Policy (NEP). This is a one-way ticket to unpopularity as far as the Malay electorate is concerned. Comment?

Anwar Ibrahim: Before we talk about the Malaysian Economic Agenda let us consider for a moment the current state of the Malaysian economy.

We were once peers with Singapore, Taiwan and South Korea. But now our national income is 1/5th that of Singapore and lags behind Taiwan and South Korea.

Let us then consider the relative income levels in Malaysia. The core motive behind the NEP is that the bumiputera must be given special status to promote a gradual but deliberate levelling of the playing field and reduce income disparities among the nation’s ethnic groups. This is, we are told, critical to ensuring stability and harmony among the races.

But, in the name of the bumiputera, the government is awarding contracts and stock allocations to family members and cronies, a clear perversion of the NEP’s original intent.

A few have been enriched while the general population derives no benefit from this policy. Inequality is in fact quite substantial in Malaysia if you look at income distribution and the widening gap between the rich and the poor, an issue that the NEP does not address. On this, Malaysia ranks the worst in the region. Its Gini coefficient, the standard measure of income inequality, is far worse than neighbouring countries that are much poorer.

If the nation’s wealth is not being equitably distributed then we have to ask whether the NEP is really achieving its objective? Furthermore, is the UMNO-led government, which claims to champion the cause of the Malays, failing to fulfil its promises to the population?

The Malaysian Economic Agenda represents a clear way out of this malaise. It has been incorrectly portrayed, by UMNO in particular, as an anti-NEP platform to incite fear among the Malays who have been led to believe the NEP is the only safety net protecting them from an economic catastrophe. But what the Malays have not been told is that, as a nation, we are lagging far behind our neighbours and that the economic cake in real terms is shrinking. Whatever growth that is occurring is improving the lot of the upper echelons of society where cronyism and nepotism rule. Other gains in personal income are being eaten up by rising prices. The government may faithfully adhere to the rhetoric of distributive polices but its mismanagement of the economy and the nation’s finances are hurting the people.

The Malaysian Economic Agenda is about sustained economic growth with price stability and distributive justice. In my experience, as I meet Malaysians from all walks of life, when given the facts and the unbiased data, they have responded positively to the Agenda.



4. Imran Imtiaz Shah Yacob: Critics are of the view that you have failed to clearly outline a workable blueprint to the ‘New Agenda’. Do you agree?

Anwar Ibrahim: We must not put the cart before the horse. There is still much work to be done in inducing a fundamental shift in thinking and our approach to the management of the economy. Once that new paradigm is firmly in place then the formulation of policies will flow naturally.

Consider the NEP itself. Tun Razak did not create the policies and programs that we now know as the NEP. He planted the idea of aggressive state intervention in economic affairs as a means of achieving more equity in the distribution of national wealth. The challenge of his time was to promote interracial harmony and quell the currents of racial discord fuelled by inequality among communal groups.

Our current reality presents new challenges and requires a profound shift in thinking to see the outcomes and effects of the NEP today. After 30 years of implementation our population has tripled and the entire landscape of the global economy has transformed.

Meanwhile, our economy is lagging and crippled by corruption and the abuse of power. Our workforce cannot compete with the higher-skilled labour force found in our to our region and our educational system has not risen to the task of creating generations of hard-working, creative and entrepreneurial minds imbued with strong ethical values.

The data on this are compelling. Malaysia is five times poorer than Singapore in terms of per capita income, and lags well behind Taiwan and South Korea. We have lost out on foreign direct investment (FDI), which used to be the engine of our economy. We cannot survive as a nation unless we adopt the right strategy to change this.

Yet our leaders and economists are not even talking about how to close this gap and bring the nation back to a competitive position vis-à-vis Singapore, South Korea and Taiwan. They are stuck in the past with obsolete ideas while publicly they convey a sense of false optimism in their pronouncements and prescriptions.

Therefore, we will proceed with purpose and resolve to change those hearts and minds who are imprisoned by the false sense of security that the NEP created and we will win over those who can grasp the challenge of the moment and envision a more prosperous Malaysia from now and not twenty, fifty, or one hundred years from now.

5. Imran Imtiaz Shah Yacob: Furthermore, as you are clearly opposed to the NEP what would you institute in its place?

Anwar Ibrahim: The legacy of state intervention in the economy has inhibited the development of a more competitive and adaptive economy. It has rewarded those who have political connections with lucrative contracts and access to markets while the vast majority struggle hard to earn an honest living.

We must resolve this by promoting free markets and rewarding entrepreneurial activity. The rule of law must be seen as sacred and inviolable so that foreign investors feel that their activities in Malaysia will be protected from illegal state intervention and those vested interests who buy judicial and political influence.

At the same time, social safety nets must remain in place to ensure that those who are marginalised and lack education and proper skills continue to receive the assistance that they need irrespective of ethnicity. We will help them to achieve the confidence they need to be self-sufficient.

In the 37 years since the advent of the NEP we cannot deny that there are people from all of our ethnic groups who are facing serious hardships under the present regime. While the special status of the bumiputera is enshrined in the Constitution there is no reason why we cannot, as a nation, make the necessary adjustments to deal justly and fairly with all groups.

6. Imran Imtiaz Shah Yacob: You have stated your ambitions of running for Parliament in 2008. If at all that’s possible and you win, that’s still a long way from being the Prime Minister. What would you do then?

Anwar Ibrahim: People talk about elections in Malaysia as if they were actually conducted freely and with a modicum of integrity. Every election cycle we adduce evidence of massive fraud, phantom voters, gerrymandered districts and voter intimidation. I have proposed a thorough review of the Election Commission and its procedures and called for the government to allow international observers and advisors skilled in the execution of proper elections to assist. But the government continues to deny access and to fails to admit that there is a problem.

My goal has always been to see that the principles of justice, freedom and equity be reflected in this society. My involvement in politics is guided by my commitment to those principles.

In the coming elections the opposition will solidify its role as a mainstream movement based on these core principles. Once in power we can begin to apply our vision of a nation that governs itself according to the Rule of Law. This is a process and our goals will require more than one or two electoral cycles to be realised. The damage that has been done to Malaysia by corruption, nepotism, the fanning of racial tensions, and restrictions on personal freedoms has taken place over several generations. Resolving these issues will take time.

Today, we need great leaders who can transform people’s thinking and restore our dignity in the eyes of the world. Once in power as Members of Parliament, keADILan’s representatives will clearly and decisively outperform their counterparts on the BN side. There is no doubt about this. When it comes to issues of price levels, quality of education, healthcare, and crime, we will be at the forefront of the wave of change. KeADILan’s voice will be heard because it will be loud and coherent and consistent, and will, for the first time in many years in the Parliament, shed light on the vested interests and the cancer of corruption that has become pervasive and endemic.

7. Imran Imtiaz Shah Yacob: Would you be willing to give up the prize to be Prime Minister and play the role of the leader of an emboldened shadow government much like that in the UK?

Anwar Ibrahim: The politics of Malaysia and the UK are different and I do not think the comparison is a valid one. Here, to be a political force, keADILan must have seats in Parliament. Otherwise the prevailing system of cronyism and nepotism and the disproportionate control that the ruling party has over the media and civil society virtually preclude the possibility of change.

Once in power keADILan will have a mandate from the people to pursue a reform agenda. The principles of justice and equity reflected in the Party’s manifesto will resonate with Malaysians once they are given an opportunity to hear our message and a fair chance at the polls to elect their government.

Therefore, the notion of an opposition confined to the peripheries or looming in the shadows is a remnant of Malaysia’s past. We envision nothing short of a total transformation in the way that people perceive their government. We believe that a free and fair election is the instrument that will bring leaders with vision and conviction to power.



8. Imran Imtiaz Shah Yacob: You say that Malaysia is losing its competitiveness. Yet the latest United Nations report point to an increase of 52.8% (2006) of foreign direct investment into the country. Please elaborate....

Anwar Ibrahim: It’s true. According to the UNCTAD data, in 2006 Malaysia’s FDI increased from the previous year. But let’s keep things in their proper perspective.

In terms of FDI and market capitalisation we used to be the leading country in the region. Now, Malaysia, a nation of 27 million people, has attracted about $6 billion in FDI in 2006. Singapore, a nation of only 4 million, attracted about $24 billion in FDI in that same period of time. Indonesia attracted almost $6 billion and our neighbour to the North, Thailand, attracted almost $9 billion. Whatever marginal increase we achieved is offset by outflows and the overall loss is standing and stature.

The overall trend gives us further causes for concern. Whereas Malaysian FDI inflows have been generally flat since the late 1990s, our neighbours in the region are showing more dramatic percent increases.

If we look at the domestic data we find more cause for concern. Singapore, Taiwan, and South Korea, once our peers in terms of economic activity, have long since surpassed us, and in all three cases at alarming rates.

Our labour force is unable to compete with those of our neighbours, yet another reason why foreign corporations have taken their investment dollars to neighbouring countries. In spite of this, our government has done very little to improve the quality of education that our citizens receive in the university system and has not provided additional job-training programs and initiatives that will ultimately attract the outside investors.

Our judiciary is and is seen to be compromised. Few Malaysians believe our system works and members of the international community know that when they do business in Malaysia they must proceed with extreme caution. In fact, many have opted to litigate disputes in Singapore and Hong Kong knowing full well that the deck is stacked against them here. The possibility of facing a biased and corrupt judiciary in a country that already shows little respect for the rule of law is a red flag that will dissuade most international corporations from planting roots here, particularly when there are significantly better options in the region.

So there should be no illusion about the state of our competitiveness in the region, and anyone who claims otherwise is using smoke and mirrors to divert the peoples' attention from reality.

9. Imran Imtiaz Shah Yacob: I put it to you that you have practised restraint in your criticisms of the Honourable Prime Minister of Malaysia despite attacking the establishment at large. What do you have to say to that?

Anwar Ibrahim: The Prime Minister and I are from the same state in Malaysia and our localities were not far from each other’s. Growing up, our parents were friends.

With those family ties reaching back several decades and each of us coming from localities where people are imbued in such a way that feeling counts for more than rational thought. My criticism of the government in general and Prime Minister Badawi in particular are confined to questions of policy and the failure of our current leaders to honour promises and commitments they have made to the people.

Abdullah’s four years in power had a bright beginning, followed by a period of stutter, drift and vacillation. The platform on which he arrived in 2003 has now virtually collapsed in a miscellany of earnestly stated intention papering over botched action and implementation, and riddled with the excesses of corruption, nepotism, and political in-fighting.

The upshot is that Abdullah’s Administration has become one in which there is strong speculation he is not really in charge. He is viewed as weak and indecisive and in some quarters not as clean as he is made out to be. Give it a little more time and even those Malays in our localities who would frown upon my criticism against him will now say that his grace period is over and it’s open season.

10. Imran Imtiaz Shah Yacob: Do you have a message for the Honourable Prime Minister at this stage of impending elections?

Anwar Ibrahim: This month marks the beginning of Mr. Badawi’s fourth year as Prime Minister. When he entered office he made promises to the people and thus far it can be reasonably argued that none of those promises have been kept. His party is beginning to plant the seeds of another great ruse on the Malaysian people. The Vision 2020 heralded by the previous Prime Minister is being extended to Vision 2057. Our people must wait another generation.

Meanwhile, corruption is on the rise. The economy is still weak and real income is declining as prices rise and are expected to increase in 2008. Our judiciary has lost the confidence of the people.

So my question to him is where are we headed? Why have the promises not been fulfilled? Under what mandate is your government still leading this nation?

11. Imran Imtiaz Shah Yacob: Let’s move away from local politics and look at the problem in Myanmar. Do you agree with Malaysia’s foreign policy on the issue?

Anwar Ibrahim: Malaysia’s policy towards Myanmar is supine. We have to recognise that the military junta is not going to cede ground to the pro-democracy movement led by Nobel Laureate Aung San Su Kyi. We have to lead ASEAN to pressure the junta, diplomatically, and if that doesn’t work, economically. We cannot confine ourselves to rhetorical appeals to the junta to negotiate with Su Kyi.

The United Nations special envoy Ibrahim Gambari has called on ASEAN to apply more pressure on the regime. We have yet to make common cause with Gambari since ASEAN’s constructive engagement policy is a dismal failure. The junta has been given enough time to shift the country towards civilian rule. Their corruption and incompetence have brought a resource-rich country to ruin. This is their worst crime.

The argument that if the junta yields to civilian rule soon it would lead to chaos as in Iraq is an excuse to prolong the military’s control. There is no doubt that continued military rule means continued impoverishment of Myanmar. There must be a transitional government composed of military and pro-democracy representatives for some years before a constitution can be agreed upon and free and fair elections can be held.

12. Imran Imtiaz Shah Yacob: The west hails you as a moderate Muslim that could link Muslims to the west on a common platform of ideas or beliefs. How do you see Muslims fairing in 2008 and beyond?

Anwar Ibrahim: One must not generalise on such a broad issue. Just as one cannot say the west is largely Christian when in large part it is actually post-Christian there are a variety of expressions of religiosity and positions throughout the Muslim world. These nuances make for marked differences in the stance and approach of each. To tar each other with a monolithic brush runs the risk of closing the door to dialogue and purposeful engagement.

The chaos that has engulfed Iraq, and the ongoing failure to reach a just resolution to the Arab-Israeli conflict, will continue to create instability in the region. Because of the United States’ conspicuous role in these conflicts it will continue to lose ground in winning allies among the Muslim peoples. The belligerent stance being taken by the Bush Administration against Iran is eerily reminiscent of the type of rhetoric that preceded the invasion of Iraq and we would expect any such pre-emptive strike on Iran to have disastrous consequences on the region and the world.

The East-West dichotomy, however, is not the only lens through which we should understand the condition of the Muslim world. The myopia with which the West tends to view Muslims, particularly after the 9/11 attacks, does a great disservice to the historic changes that are taking place in Asia, home to the majority of Muslims.

The largest Muslim nation in the world is Indonesia. 250 million citizens living in a democratic, stable and peaceful society. Turkey provides another example of substantial import. The consolidation of democratic forces in Turkey as demonstrated by the summer 2007 elections represents a seminal victory of the forces of freedom and democracy which serves as an example for the entire Muslim world.

I believe that in this grand scheme the proponents of dialogue on each side can seek each other out to air common perspectives on the problems facing humankind and I for one have dedicated much of my time in the past two years to ensuring that these conversations do take place.

I see Muslims fairing well in 2008 and beyond so long as they move their countries towards democratic forms of governance and resist the resort to militancy when dialogue and engagement, democracy and debate, are the superior means to solution of their problems. I would urge Muslims to remember that the brightest periods of Muslim history were ones when their libraries were filled to overflowing with the books and thought that have helped speed the progress of mankind. Those were periods of symbiosis rather than seclusion, curiosity rather than petrifaction, and belief in the value of intellectual and moral enlightenment rather than in solipsism and soliloquy. We have to reach out in quest of our common humanity. Failure to do so is the sure road to perdition.

Thank you Anwar Ibrahim for taking the time to talk to Face to Face.

ARCHIVES

Face To Face: Raja Petra Kamarudin

Face to Face: Marina Mahathir

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Al Jazeera

As part of People and Power's Asian season, Aloke Devichand looks at the complexities of race and politics in Malaysia.

Outside the prime minister's office in Kuala Lumpur, protesters risk imprisonment in order to voice their frustration at policies they say favour Malaysia's Malay majority.

The demonstrators are mainly from the country's Indian minority and believe Muslim Malays, known as Bumiputras, or "sons of the soil", enjoy privileges which are not extended to them.

Discontent among Malaysia's Indian and Chinese minorities has been simmering since 1971, when the ruling UMNO party brought in its New Economic Policy (NEP).


Indian and Chinese Malaysians say they are discriminated against

The government believed that an affirmative action policy was needed to address the perception that Malays were marginalised at the time.

But 36 years later, many Indians say their lives are still bound by an affirmative action policy which favours Malays over the other races.

"We buy a house and the Malays buy a house. Why are they given a seven per cent discount when we poor Indians don't get any?" Vellay Mundiandy asks.

"They are human beings and we are human beings too. We are also Malaysian citizens just like them. They are Bumiputras and we are merely citizens."

The Muniandys say such discrimination is already affecting younger generations and say that it is more difficult for non-Malay students to gain access to public universities.

'Meritocracy'

The government denies such allegations and says its policies help families from all backgrounds, not just Malays.

"I think it would be wrong to consider the NEP as purely a Bumiputra agenda. It is national agenda – it must be seen as a national agenda," Najib Tun Razak, the deputy prime minister, says.

"Public universities for example – we have departed from the quota system. We've gone for a meritocracy system. And as a result of that, the non-Bumiputras have a larger share of entries into the public universities."

But critics argue such changes are cosmetic and the NEP allows ongoing discrimination.

"This issue of race and how it manifests itself is clear," Charles Santiago, a political economist and activist who has campaigned against the NEP for years, says.

"If you are Malay and if you are interested in securing loans from the government – you will be given priority because you are Malay.

"If you have a situation where more then 90 per cent of the civil service is Malay – then it must be a product of some kind of discrimination. So the very fabric of this society is race based."

The government says it is trying to recruit more non-Malays into the civil service, but that, at the same time, private-sector firms – many of which are owned by Chinese Malaysians – should reciprocate.


The race riots of 1969 remain a sensitive subject in Malaysia

Segregation

In this climate of mutual mistrust, Malaysia's races remain deeply divided.

"The state of affairs of integration amongst students is pathetic," Santiago says.

"It's pathetic because if you go to local universities or even public universities or even factories – you will see a group of Chinese on one side, Malays on one side and then you have a small group of Indians on the other side."

In order to tackle this alleged polarisation of Malaysian society, the government launched a National Service training scheme in 2003.

Lee Lam Thye, the head of the scheme, says a recent survey proves it is succeeding in bringing young Malaysians closer together.

"About 86 per cent of trainees said when interviewed that NS had brought them closer together – in terms of in-racial and inter-cultural understanding," he says.

Violent past

But some argue that if these students are to enjoy a future free of distrust and division, their country must first deal with its past, namely the race riots of 1969 that still cast a long shadow over Malaysia.

The violent clashes between Malay and Chinese Malaysians claimed almost 200 lives and, decades later, people remain divided about what caused the riots.

Najib says the violence "was triggered of by some of the demonstrations that were conducted by the opposition parties.

"During which they taunted the Malays and they were quite abusive of the Malays – some of the words and language used was uncalled for. That really set the Malays against them and triggered off the racial riots".

Kua Kia Soong, the head of a Chinese higher education college, alleges that records kept by the British high commission at the time raise serious doubts about the official history of the riots and says the country would benefit from an independent investigation into what happened.

"I think what's important is for there to be a national commission of inquiry – and for there to be true national reconciliation in this country I think that history of May 13th has to be put right," he says.

But Najib disagrees saying the incident is something that happened in the past and that Malaysians simply want to look forward.


Hishammudin Hussein brandished a traditional dagger at the UMNO assembly

Politics of race

The ruling UMNO party at the time argued that by reducing inequality between the races, the NEP would help create a more harmonious society.

However, some say that its benefits never reached the people who needed it the most and that the UMNO hijacked the policy in order to purse its own interests in the country.

On the other hand, Chandra Muzaffar, a prominent academic, says statistics prove the NEP has significantly reduced poverty amongst Malays.

"In 1969, 49.3 per cent of the population lived below the poverty line. Today it is 5.8 per cent - I think it is a stupendous achievement. Which I think goes to show the NEP has reached the bottom people."

But Muzaffar argues that this could have been achieved without a policy which discriminates along ethnic lines and that removing ethnic bias is difficult in a country where politics and race are so intertwined.

In 2005, and again last year, Hishammudin Hussein, the leader of the UMNO youth wing, brandished a traditional Malay dagger known as a kris during a speech at the party's general assembly meeting.

This gesture has been interpreted by some as a threat to anyone who questions special rights for Malays although members of the government claim he was unfairly criticised.


Vellay Muniandy was praying when he was attacked

New fears

But some Malaysians fear that that while race relations remain tense, there could be fresh outbreaks of violence.

As an example they cite several days of aggression in March 2001 when five ethnic Indians were killed and scores of people were wounded, the vast majority Indian.

Vellay Muniandy was at his Hindu temple when a young man, armed with a knife, attacked.

"The assailant struck the temple chief first. He said they are slashing us, run for your life. I ran and later tripped and fell," Muniandy says.

"I realised the injury only after I got up and started running again. I saw the three fingers dangling from my palm."

When Muniandy could not be present for work, the company told him to stop and he lost his job.

'No-one to help'

The government says that the violence was not racially motivated, but was provoked by Indian gangs operating in the area.

Others say that the victims were not linked to gangs and were people from ordinary Indonesian families like Vellay Muniandy.

"The persecution of Indian minorities took place on March 8th 2001 and now we are in 2007," Charles Santiago says.

"We have made five complaints to the Human Rights Commission. They refused to touch it."

Even if the truth does come out, it may be too late for Muniandy.

"Especially after I was slashed, I thought they don't values us anymore," he says.

"I told my family that we should just go back to India. We are on our own in this country, we have to struggle for survival. There is no one to help us."

By Martin Hutchinson
Asia Times Online

There's a mystery on Wall Street. Merrill Lynch wrote off $8.4 billion in its subprime mortgage business, a figure revised up from $4.9 billion, yet Goldman Sachs reported an excellent quarter and didn't feel the need for any write-offs. The real secret of the difference is likely to be in the details of their accounting, and in particular in the murky world, shortly to be revealed, of their "Level 3" asset portfolios.

Both Merrill and Goldman have Harvard chairmen - Merrill's Stan O'Neal from Harvard Business School and Goldman's Lloyd Blankfein from Harvard College and Harvard Law School. Thus it's pretty unlikely their approaches to business are significantly different - or is a Harvard MBA really worth minus $8.4 billion compared with a law degree? (The special case of George W Bush may be disregarded in answering that question.)

We may be about to find out. From November 15, we will have a new tool for figuring out how much toxic waste is in investment banks' balance sheets. The new US accounting rule SFAS157 requires banks to divide their tradable assets into three "levels" according to how easy it is to get a market price for them. Level 1 assets have quoted prices in active markets. At the other extreme Level 3 assets have only unobservable inputs to measure value and are thus valued by reference to the banks' own models.

Goldman Sachs has disclosed its Level 3 assets, two quarters before it would be compelled to do so in the period ending February 29, 2008. Their total was $72 billion, which at first sight looks reasonable because it is only 8% of total assets. However the problem becomes more serious when you realize that $72 billion is twice Goldman's capital of $36 billion. In an extreme situation therefore, Goldman's entire existence rests on the value of its Level 3 assets.

The same presumably applies to other major investment banks - since they employ traders and risk managers with similar educations, operating in a similar culture, they probably have Level 3 assets of around twice capital. Citigroup, J P Morgan Chase and Bank of America may have less since their culture is different; before 1999 those institutions were pure commercial banks and a substantial part of their business still lies in retail commercial banking, an area in which the investment banks are not represented and Level 3 assets are scarce.

There has been no rush to disclose Level 3 assets in advance of the first quarter in which it becomes compulsory, probably that ending in February or March 2008. Figures that have been disclosed show Lehman with $22 billion in Level 3 assets, 100% of capital, Bear Stearns with $20 billion, 155% of capital, and J P Morgan Chase with about $60 billion, 50% of capital. However those figures are almost certainly low; the border between Level 2 and Level 3 is a fuzzy one and it is unquestionably in the interest of banks to classify as many of their assets as possible as Level 2, where analysts won't worry about them, rather than Level 3, where analyst concern is likely.

The reason analysts should worry is that not only are Level 3 assets subject to eccentric valuation by the institution holding them, but the ability to write up their value in good times and get paid bonuses based on their capital uplift brings a temptation that few on Wall Street appear capable of resisting. Both Goldman Sachs and Merrill Lynch are reported to have made profits of more than $1 billion on their holdings of Level 3 assets in the first half of 2007, for example, profits on which bonuses will no doubt be paid at the end of their fiscal years. Given that we have had five good years on Wall Street, years in which nobody has known the amount of Level 3 assets on banks' balance sheets, and no significant media waves have been made questioning their valuation methodologies, it would not be surprising if many banks' Level 3 assets had become seriously overstated, even without any downturn having occurred.

When Nomura Securities sold its mortgage portfolio and exited the US mortgage business in this quarter, it took a write-off of 28% of the portfolio's value, slightly above the 27% of the portfolio that was represented by subprime mortgage assets. Were Goldman Sachs's Level 3 assets similarly value-impaired, it would result in a $20 billion write-off, more than half Goldman's capital, leaving the bank severely damaged albeit probably still in existence.

Defenders of Goldman Sachs and the rest of Wall Street will insist that less than 27% of their Level 3 assets are represented by subprime mortgages yet that is hardly the point. Subprime mortgages, estimated to cause losses of $400-500 billion to the market as a whole, though only a fraction of that to Wall Street, have been only the first of the Level 3 asset disasters to surface. There is huge potential for further losses among assets whose value has never been solidly based. These would include the following:

Mortgages other than subprime mortgages. With the decline in house prices accelerating, the assumptions on which even prime mortgages were made are being exposed as fallacious. As house prices decline, debt to equity ratios increase, and for mortgages with an original loan-to-value ratio of 90% or more, quickly pass the 100% at which a mortgage becomes uncovered. If the value of conventional mortgages decline many securities related to them, currently classed as Level 1 or 2 assets, will become un-marketable and descend into Level 3.

Securitized credit card obligations. $915 billion of credit card debt is currently outstanding, the majority of it securitized, and its default rate is likely to soar as the full effects of the home mortgage market's crack-up spread to the credit card area. The risks in Level 3 portfolios derived from this asset class arise particularly in the areas of complex derivatives and manufactured assets based on credit card debt pools.

Leveraged buyout bridge loans. After a hiccup in August, the market in these has reopened recently, although around $250 billion of them still remains on banks' balance sheets. The value of a leveraged buyout bridge loan that has failed to find a pier to support the other end of the bridge is very dubious indeed, even though these loans are being carried in the books at or close to par. As the value of underlying assets declines and the cash flow fails to match debt payments, the deterioration in credit quality of these loans will accelerate.

Asset backed commercial paper. The amount of asset backed commercial paper outstanding has dropped from $1.2 trillion to $900 billion in the last three months. This financing structure was always unsound; it was basically a means of removing the assets backing the commercial paper from bank balance sheets, and always faced the problem of a severe mismatch between asset and liability duration. The $100 billion vehicle intended to rescue this market has found a mixed reception to say the least. It is likely that as credit conditions deteriorate, the assets underlying ABCP vehicles will increasingly find themselves on bank balance sheets, where they will prove to be almost completely unmarketable.

Complex derivatives contracts. Even simple interest rate swaps and currency swaps caused large losses in the last significant credit tightening in 1994, although most of those losses were suffered by Wall Street's customers rather than Wall Street itself. The more complex transactions that have been devised during the last 12 giddy years are much more likely to prove impossible either to sell or to hedge. Goldman Sachs reported that in the third quarter of 2007 its profits on derivatives used for hedging more or less matched its losses on subprime mortgages. It is likely in reality that the bulk of those profits were incurred through model-based write-ups of value on contracts that were within the Level 3 category - after all, Goldman's Level 3 assets increased by a third during the quarter. It's not much good shorting to match a long position you don't like if your hedging shorts prove to be impossible to close out.

Credit Default Swaps, the global outstanding value of which in June 2007 was $2.4 trillion, according to the Bank for International Settlements. These are a relatively new instrument, the efficacy of which has not been tested in a downturn. It appears likely that the value in banks' books of their Level 3 credit derivatives contracts bears no relation whatever to reality. As discussed above, the incentives have been all in favor of inflating it.

The capital underlying Wall Street, at the top, is not all that large - a matter of a few hundred billion. Given the piling of risk upon risk that has been engaged in over the last few years, and the size of the losses in the mortgage market alone that seem probable - my own estimate last spring of $980 billion looks increasingly likely to be somewhat below the final figure - it appears almost inevitable that in a bear market in which liquidity dries up and investors become skeptical, Wall Street's capital will be wiped out. Only the commercial banks like Wachovia and Bank of America whose investment banking ambitions have been largely thwarted and whose portfolios of Level 3 rubbish are correspondingly lower, are less likely to disappear.

Given the size of the overall figures involved and the excessive earnings that Wall Street's participants have enjoyed over the last decade, a taxpayer-funded bailout of Wall Street's titans would seem politically impossible, however loud the lobbyists scream for it.

In the long run, that is probably a blessing for the US and world economies.

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found at www.greatconservatives.com.