BMW Deals with Strong Euro, Weak US Demand

PERU SEIZES REBEL SUSPECTS

A More Honest Socialism

How do you turn $5.9 billion into $200 billion overnight? By magic. Political magic in the case of Fannie Mae and Freddie Mac -- due to their status as publicly traded private companies back-stopped by taxpayer guarantees.

Yesterday, Fannie and Freddie announced, alongside their chief regulator Jim Lockhart, that they would be leveraging up their businesses in the name of riding to the rescue of the mortgage-backed securities market. Here's how the wizardry works: Mr. Lockhart, the Director of the Office of Federal Housing Enterprise Oversight, agreed to cut the amount of capital Fannie and Freddie are required to maintain by a combined $5.9 billion and to allow them to increase their leverage to 33-1 from about 30-1. That means Fan and Fred can borrow up to $33 for every dollar in freed-up capital, and presto -- the two mortgage giants get $200 billion or so to spend buying up mortgages or mortgage-backed securities.

There is a catch. In exchange for this freedom, Fan and Fred have promised to raise "significant" new capital over the next year. We're told it's on the order of $10 billion each. That's the good news. The bad news is that the companies can leverage any new capital right alongside the old, meaning that the total increase in business -- and risk -- could be well above the $200 billion set by Mr. Lockhart.

Let's put some of these numbers into context. J.P. Morgan Chase is leveraged about 12-1 against its Tier 1 capital base. Investment banks are usually more highly leveraged than commercial banks, and Bear Stearns, formerly the industry leader in this category, was leveraged at 34-1 at the end of 2007. You know how that turned out.

The oddest argument is that Fan and Fred need to be unleashed to help the mortgage market. That's what they were supposed to be doing all along, yet so far in this crisis they have themselves become sources of systemic financial fear. After taking big losses in last year's fourth quarter, investors and counterparties have become nervous that Fan and Fred might face solvency problems similar to those of other mortgage players. Their refinancing "spreads" -- the price of their paper -- have periodically blown out nearly as far as everybody else's on Wall Street.

This isn't supposed to happen. The two companies are chartered to liquify the mortgage market, especially at the lower-income end. But of course the low end isn't where the money is if you are a publicly traded company whose executives need to enhance shareholder value. Thus in this crisis, Fan and Fred have both so far been hunkering down, often not even buying back their own mortgage-backed paper. What good are quasi-socialists if they won't act like socialists in a capitalist crisis?

Yesterday's capital expansion merely lets the companies continue their double lives as profit-making companies backed by taxpayer guarantees -- and to do so by taking even greater risk at a very risky time. No wonder their stock prices are up by more than a third in a week (see nearby). If the politicians really want to double-down on Fan and Fred, the honest way to do it is to provide them the taxpayer money up front.

Here's one idea: How about issuing the companies some subordinated debt, with an option to convert that paper into Fannie and Freddie stock down the road? Fan and Fred would get the money to return to the mortgage markets, but once the crisis ends at least the taxpayers would get some upside from the risk they are taking now.

Yes, this amounts to a form of nationalization, but at least it's honest socialism. As it stands now, Fannie and Freddie get to gear back up, and if they get into deeper trouble because housing prices keep falling, the taxpayers pick up the tab. If the crisis ends, Fan and Fred's private shareholders get all the upside and their executives get even richer than they are. If Washington wants to socialize the housing market -- as it seems eager to do -- let's do it in the open and put Fannie's debt on the federal budget so taxpayers can see what they're buying.

Of course, the last thing Congress wants is all of this to be transparent. The Members benefit from the current private-public confidence game because the two companies ladle them with campaign contributions to protect their privileged status. That's why Congress continues to dither over reforms that might actually provide a regulator capable of staring down Fan and Fred.

With a couple of brave exceptions (Mr. Lockhart, Alabama Senator Richard Shelby), Fannie and Freddie own Washington. It'd be better for the housing markets and taxpayers if Washington finally admitted it and bought Fannie and Freddie.

Whatever Happened to Moqtada?

By DAN SENOR and ROMAN MARTINEZ

"I have failed to liberate Iraq, and transform its society into an Islamic society."
-- Moqtada al-Sadr, Asharq Al Awsat newspaper, March 8, 2008

Moqtada al-Sadr -- the radical cleric dubbed "The Most Dangerous Man in Iraq" by a Newsweek cover story in December 2006 -- has just unilaterally extended the ceasefire he imposed on his Mahdi Army militia last summer. And on the eve of the Iraq War's fifth anniversary, Sadr also issued a somber but dramatic statement. He not only declared that he had failed to transform Iraq, but also lamented the new debates and divisions within his own movement. Explaining his marginalization, Sadr all but confessed his growing isolation: "One hand cannot clap alone."

Ismael Roldan

What happened? Over the past five years, Sadr has been one of the most persistent and insurmountable challenges for the U.S. Leveraging his family's prestige among the disaffected Shiite underclass, he asserted his power by violently intimidating rival clerics, agitating against the U.S. occupation, and using force to establish de facto control over Baghdad's Sadr City (named after his father, and home to two million Shiites on the east bank of the Tigris) and large swaths of southern Iraq.

The story of his rise, and fall, illustrates the complex relationship between security and political power that drives the fortunes of the U.S. mission in Iraq.

Sadr's postwar ascent caught the U.S. Government completely off-guard. Iraqi society was impenetrable in the 1980s and 1990s. Neither our intelligence community nor our diplomats, who had left Iraq in 1990, knew anything of significance about Sadr. The western press and punditry had never reported on him before the war (a Nexis search reveals not a single news article mentioning Sadr's name in the year leading up to the war). The oft-cited "Future of Iraq Project," produced by the State Department, failed to warn about Sadr in its thousands of pages of projections and scenarios. Few knew he existed, let alone anticipated the influence he would one day wield.

That influence was vast: Moqtada al-Sadr came very close to establishing a state within a state inside Iraq, much like Hezbollah had done in Lebanon.

It began in 2003, when Sadr's followers orchestrated the murder of Majid al-Khoie, a moderate Shiite cleric whom the U.S. government had hoped could play a pivotal role in building a democratic Iraq. It continued with a series of armed uprisings across the south in April 2004, which took the lives of scores of American troops, and led to the collapse of Iraq's fledgling security forces. These culminated in a dramatic standoff against the Iraqi government and U.S. forces at the Holy Shrines in August 2004. In 2005 and 2006 Sadr expanded his territorial reach, using his militia to expel Sunnis from their Baghdad neighborhoods and massively infiltrating the Iraqi police forces.

In areas under his control, Sadr set up extrajudicial Sharia courts to administer justice against Iraqi Shiite "heretics." Large numbers of citizens found guilty were punished by death. The Mahdi Army militia also established its own security checkpoints in Baghdad and across the south -- supplanting Iraq's weak national army and lightly deployed U.S. forces.

This militia took over petrol stations, skimming funds to finance its own operations. And it had practically halted many of the civic society initiatives launched by the coalition, NGOs, and many Iraqis in Shiite towns. For example, in 2004 our U.S. colleagues Fern Holland, Robert Zangas and their Iraqi translator, Salway Oumaishi were assassinated by Shiite militiamen, just as they had courageously helped a group of Shiite women to build a successful program to train them in advocacy for their rights.

The principal reason for Sadr's ability to augment his power during these years was the absence of security in Baghdad. This vacuum left the Shiite community completely vulnerable to an unrelenting wave of terror attacks from the Sunni insurgency and al Qaeda. With the U.S. Government's failure to engage in serious counterinsurgency and make it a priority to provide basic safety for Iraqi civilians, Sadr and his Mahdi militia moved quickly to fill the void.

As one Sadrist militant told the International Crisis Group last year: "The Mahdi Army's effort to conquer neighborhoods is highly sophisticated. It presents itself as protector of Shiites and recruits local residents to assist in this task. In so doing, it gains support from people who possess considerable information -- on where the Sunnis and Shiites are, on who backs and who opposes the Sadrists and so forth." By the end of 2006, U.S. military officials had concluded that sectarian violence by Shiite militants had surpassed al Qaeda and the insurgency as the principal threat to Iraqi stability.

In retrospect, that assessment marked the high point of Sadr's influence. While his empire had expanded, it had generated its own resentments. Ordinary citizens chafed at the harsh version of Islamic law imposed by Sadr's lieutenants, not to mention the corruption and brutality of functionaries manning checkpoints and patrolling the streets. Sadr's hold on the broader Shiite community was actually quite tenuous, cemented chiefly by fear of the insurgency and al Qaeda.

In 2007, the U.S. military shifted approach, putting in place for the first time a comprehensive counterinsurgency strategy backed by a surge of troops to support it. The new strategy paid large dividends against al Qaeda and Sunni insurgents, as attacks dropped to 2005 levels and Iraqi deaths due to ethno-sectarian violence declined 90% from June 2007 to March 2008. As Sunni attacks against Shiite civilians declined, so did the rationale for Sadr's authority.

As the International Crisis Group concluded, one "net effect" of the surge "was to leave the Sadrist movement increasingly exposed, more and more criticized and divided, and subject to arrest."

Other factors also contributed to Sadr's marginalization. But the increased security provided by more U.S. forces was essential in removing an underlying rationale for the Sadrist movement. Newsweek's 2006 profile had predicted that "the longer the American occupation lasts, the less popular America gets -- and the more popular Sadr and his ilk become." But as a recent ABC News poll of Iraqis makes clear, Shiite support for local militias has plummeted over the past year. The full implementation of the surge helped weaken Sadr, not make him more popular.

To be sure, Sadr's diminished capacity to stir up trouble may not last forever. While he has not appeared in public in close to a year, he still has his family name and a base of support among the Shiite underclass, particularly in Baghdad. He may be biding his time, hoping a U.S. withdrawal will leave him with a weaker opponent in the fledgling Iraqi security services. And as this week's deadly suicide bombing of a Shiite shrine in Karbala indicates, the security threats that enabled the Mahdi Army's rise to power have not yet been fully defeated.

So while the progress made against Sadr has been remarkable, it may also be fragile. Sustaining it means recognizing that political progress depends fundamentally on security. This basic insight of counterinsurgency warfare -- which has driven our progress against Sadr's militants, the Sunni insurgency, and al Qaeda over the past year -- is the central lesson America has learned in its five years of war in Iraq.

BMW Deals with Strong Euro, Weak US Demand

Folks, let me assure you that I use the BMW for transportation. But, it's not what you're thinking. Rather, I use the bus, metro rail, and walk to get where I need to [rimshot! Take my wife pleeze, etc.] Seriously, though, the famed German automaker whose luxury sedans are technologically advanced enough to make Toyota's Prius seem like a gas guzzler by comparison is dealing with two ominous and interrelated headwinds. First is the infamous declining dollar and, conversely, the excessively mighty Euro denting profits. While BMW does hedge its transactions as most of its sales are outside the Eurozone--think forward purchases of euro--hedging is not exactly a costless endeavor. Moreover, the fallout from the subprime contagion is having effects on key markets like the US, home of the infamous Beemer-loving upwardly aspirational yuppies. Unsurprisingly, the company is looking to make more cars Stateside to lower production costs. From the BBC:

BMW's glitzy new showroom, BMW World, dominates the Munich skyline. Walking into the futuristic building, with its steel roof, everything is geared towards promoting the BMW brand. There are restaurants, a café and a shop selling BMW merchandise. Since the luxury showroom opened its doors last autumn, more than a million visitors have flocked here. BMW chose the showroom as the venue for the company's annual press conference.

The world's biggest premium carmaker sold a record 1.5 million vehicles in 2007, and says its on course to meet its target of selling 1.8 million cars in 2012, confident that sales of its BMW, Mini and Rolls-Royce brands will continue growing. The company's profit before tax was 3.9bn euros ($6.1bn; £3.0bn) in 2007, 6.1% down on the previous year, but still high.

Managers told reporters that despite the weak dollar and high commodity prices, the carmaker is hoping to increase its earnings this year. But there is one big cloud on the horizon. The BMW group is battling to limit the fall-out from the weakening dollar. In an interview with the BBC, BMW's chief executive, Norbert Reithofer, confirmed that the carmaker would be increasing production at its plant in the US.

"If I look into the future, we will increase our production capacities in the US from 150,000 units to 240,000 units, the car plant in the US helps us on the natural hedging side, it can reduce your total exposure," Norbert Reithofer said. The United States is BMW's biggest single market and the group has a big plant in Spartanburg, South Carolina. Four out of five BMW Group cars are exported, so the company is exposed to exchange rate fluctuations.

The carmaker knows that it is operating in a tough economic climate. "During the first two months of this year, in January and February, we had a challenge in the US," said the company's chief executive. "We were able to compensate for the losses in car volume in the US elsewhere in the world. We have a very good market situation in China, Germany is going up, and we had good results in the UK. We are a global player and we are not just dependent on one market," he said. "From a financial hedging point of view, we are in a good position this year," Mr Reithofer said, smiling broadly. "It's not just one currency. We have three important markets, Japan, the UK and the United States," Mr Reithofer explained.

BMW said that it has hedged itself completely this year with "all of the main currencies". However, currency fluctuations are taking their toll. They cost BMW 517m euros last year, while raw material price increases cost the group 288m euros. But that was offset by higher sales and improvements in efficiency.

Faced with tough competition from rivals, the German group is bent on cost-cutting. "Our major production cost is materials, which amounts to 26bn euros," Mr Reithofer said. We have to have discussions with our supplier networks about prices and we have to start an initiative to find out if we can we reduce the costs of our supplier companies and cut logistics costs. We have to buy more goods, that means more components for our cars, in the US. For our car plants in the US and Europe."

The premium carmaker has announced that it is planning to axe more than 8,000 jobs, a decision that provoked outrage in Germany. And it is worried that a slowdown in the US market could affect its sales. "A slowdown of the car market in the US in 2008 could affect the whole car market. Look at our customers, we are a premium car manufacturer and that helps," Mr Reithofer said. "Over the last 10 years, during a recession, first volume car manufacturers are affected, then later it's premium carmakers. Will it affect us? We don't know, it depends on how deep the crisis will be," he added, sounding an ominous tone.

Di Plane Pt. 3: 787 in Trouble + EADS v. Boeing

This post is a follow-up to two I made earlier regarding the troubles brewing at Boeing over its now thrice-delayed 787 and the continuing row over EADS winning a $35B contract to supply the US Air Force with air tankers at the expense of Boeing. These do not seem to be the best of times for the famous Chicago-based firm. Let us begin with the 787 being officially delayed for a third time and the customers who are now harrying Boeing over late delivery. Worse, the whole program may require a major overhaul in light of ongoing difficulties:

Boeing admitted on Wednesday that it would have to redesign parts of its troubled 787 Dreamliner, raising the prospect of a third delay in recent months to delivery of the new aircraft. The company’s comments came in response to a warning from Steven Udvar-Hazy, chairman of International Lease Finance Corporation (ILFC), the 787’s biggest customer. Mr Hazy told a JPMorgan Chase conference that the state of the Dreamliner programme was “not pretty”. He said first deliveries would be delayed for at least another six months because its centre wing box – which holds the wings in place – needed to be redesigned.

Boeing refused to comment on the specifics of the redesign work but said Mr Hazy was not painting an accurate picture of the overall programme. “We are doing some redesign work but things are more complex than what he said,” said Yvonne Leach, for Boeing. “There’s a whole load of things going on.” Mr Hazy said he expected delivery of the long-range, 250-300 seat jet to be delayed until the end of the third quarter of next year. Boeing’s most recent guidance was that the Dreamliner would be ready “early” in 2009.

Boeing said it was sticking to its most recent guidelines, but added that it was undertaking a review of the 787 and would report its findings publicly at the end of March or early in April. There is now widespread expectation in the industry that the company will at that point announce a further delay.

Mr Hazy’s warning echoes a report from Goldman Sachs this month, which also said delivery of the 787 would not begin until the third quarter of 2009. A further delay would be hugely embarrassing for the company, which replaced Mike Bair, the former head of the 787 programme, after the first delay was announced in October last year. His replacement, Pat Shanahan, who was drafted in from Boeing’s missile defence unit.

Mr Shanahan has found it difficult to stick to the aggressive timetable laid out for the aircraft and in January the programme was delayed again. The two earlier delays were both attributed to assembly problems rather than issues with the aircraft’s design.

Boeing now faces having to make penalty payments to customers of the sort that have plunged Airbus, its European rival, into heavy losses. Last month ILFC said it would seek compensation “on a large scale” from Boeing for the 787 delays. Qantas, the Australian flag carrier, has also said it will ask for damages.

The 787 is Boeing’s most successful new aircraft, with 857 orders in place, worth about $140bn. But analysts are asking difficult questions about how profitable the whole programme could be if penalty payments are added to other cost concerns. “The large number of 787s sold at low prices, combined with rising recurring costs, are steadily eating away at programme margins and long-term programme profitability,” wrote Joseph Nadoll of JPMorgan in a research note on Wednesday.

ILFC, the world’s leading aircraft leasing firm, has ordered 74 Dreamliners, making it the biggest buyer for Chicago-based Boeing’s fastest-selling aircraft. The company has already struck leasing contracts with a string of international carriers such as Air Berlin, Lan Chile, Royal Jordanian, AeroMexico and Air Seychelles.

Meanwhile, Boeing is now battling EADS in a race to gather the biggest guns in the DC lobbying clique. As the Government Accountability Office (GAO) decides whether Boeing's complaints have merit, there will be no lack of political bickering in the meantime. The international political economy angle is interesting in that (a) improved US relations with France and Germany in the aftermath of the Iraq invasion may be damaged and (b) Boeing and Airbus--the commercial airline making subsidiary of EADS--have lodged complaints against each other at the World Trade Organization. Whoever said IPE was staid? When big money is at stake, the calculus of political consent often ratches up, too:

Northrop last week hired a lobbying firm run by Trent Lott, the former Mississippi Republican senator, and John Breaux, a former Democratic senator from Louisiana. Northrop and EADS are relying on a group of Washington firms – including Hill & Knowlton, Quinn & Gillespie, and Public Strategies – to counter Boeing’s powerful lobby on Capitol Hill.

Boeing supporters have challenged the unexpected decision on several fronts, including that it would cost American jobs and damage the US defence industrial base. They have also lambasted the air force for choosing EADS while Airbus and Boeing are involved in a World Trade Organisation dispute.

Boeing last week lodged a protest with the Government Accountability Office, the oversight arm of Congress. Boeing allies allege that the air force changed the requirements of the competition at a late stage in a manner that favoured EADS. The company has also suggested that the air force misled Boeing by encouraging it to offer the 767, a smaller aircraft than the Airbus A330 which won.

The GAO has 100 days to respond to the protest. While the air force is not legally required to follow the agency’s recommendation, it almost always does. One congressional aide familiar with the process said government departments were inclined to treat GAO recommendations as mandatory because they are given great deference in the courts.

Major David Small, an air force spokesman, on Sunday said the air force “will follow the recommendations of the GAO.” If the GAO ruled in Boeing’s favour, it would also provide ammunition to politicians on Capitol Hill who want to reverse the deal.

Last week, Sue Payton, head of air force acquisitions, says the air force was legally required to ignore the impact on US jobs and the industrial base. With Robert Gates, US defence secretary, and Admiral Mike Mullen, chairman of the joint chiefs, Ms Payton has strongly defended the competition as fair.

While the GAO considers Boeing’s protest, lawmakers from states with a strong Boeing presence – particularly Washington and Kansas – are trying to engineer broader opposition to the deal on Capitol Hill. EADS and Northrop are hoping to counter that by urging politicians without a direct stake in the fight to stay on the sidelines.

Another element of the Northrop-EADS strategy is to downplay the role of the European company in public statements. While EADS will supply the Airbus tanker, Northrop, which is the prime contractor, generally comments publicly instead of its European partner.

EADS and Northrop must decide whether to start the tanker programme soon or wait until the GAO has issued its recommendation. A source familiar with the planning said the companies had already decided to proceed with a groundbreaking ceremony in Mobile, Alabama, where the tankers would be assembled. Randy Belote, a Northrop spokesman, said only that the companies “hadn’t announced plans”.

The companies have had some success pushing back against Boeing. Last week, John Warner – the Republican on the Senate armed services committee who backed Senator John McCain’s investigation of the original Boeing deal – reminded lawmakers the defence industry was increasingly globalised.

”Until the GAO acts and reports to Congress their findings, we should lower the emotional rhetoric, be accurate with the facts, and withhold judgment of the work done by a large dedicated group of uniformed and civilian acquisition specialists,” said Mr Warner.

Mr Warner also defended John McCain, the Arizona senator and presumptive Republican presidential nominee, who aggressively investigated a previous Boeing contract to provide the air force with tankers. Congress cancelled that deal in 2003 after investigations revealed that a senior air force officer had held illegal job negotiations with Boeing.

Some Boeing supporters have blamed Mr McCain’s investigation for ending the original deal. Others have accused Mr McCain of pressuring the air force to change the requirements of the competition to suit EADS. Mr McCain responds that he only forced the air force to remove language that would have tilted the competition unfairly towards Boeing.

Richard Aboulafia, an aerospace analyst at the Teal Group, said that while Boeing faced a “long fight” to try to regain part of the tanker contract, the outcome might depend on whether the Democrats won the presidency and retained control of Congress in November, which he said would produce a 60 per cent chance of a split-buy.

Loren Thompson, an analyst at the Lexington Institute, said he doubted whether there would be enough evidence “within the narrow confines of a GAO inquiry”, but added that “a combination of GAO findings and legislative action could stall or reverse the decision”.

Paul Nisbet, an aerospace expert at JSA Research, said the GAO decision was also likely to be “engulfed in politics”. He added that there was also the possibility that the recent improvement in US relations with Germany and France could work against Boeing.

“It would be a blow to these improved relations with these Airbus countries if the US air force decision were to be reversed. The GAO, looking out for its own well being, will likely be ‘politically correct’ regarding its ruling.”

Mr Nisbet says he believes Boeing’s chances are a “long shot”, and said he doubts that “there is sufficient resolve in the Congress to pass legislation that would unfund the tanker or reverse the US Air Force’s decision.”

Kissing off Canada

Investor's Business Daily

Energy Policy: Quick — what country has the world's largest oil reserves? Saudi Arabia? Iran? Nigeria? Venezuela? Wrong on all counts. The answer is Canada. And our neighbor to the north is worried we don't want it.

Canada has an estimated 1.6 trillion barrels of oil on its territory, much of it locked in tough-to-excavate tar sands in the province of Alberta. By comparison, oil-rich Saudi Arabia has an estimated 270 billion barrels left. It isn't even close.

Yet, according to the Financial Times of London, Canada's government recently sent U.S. Defense Secretary Robert Gates a letter of warning that it might not be able to sell the U.S. any of its oil, which the Pentagon desperately needs for national defense.

For that, you can thank the Energy Independence and Security Act of 2007, passed with great gusto and self-righteousness by the Democratic Congress.

Under Section 526 of that law, tar sands are considered to be an alternative fuel. But the law requires oil sold to the U.S. government and produced from alternative sources to emit fewer greenhouse gases than oil produced from conventional crude sources.

That's a big problem.

Estimates show that removing the highly sticky, coagulated oil found in tar sands produces as much as five times the amount of greenhouse gas as pumping from a conventional well.

"Classifying the oil sands as a nonconventional fuel," said Tristan Landry, a spokesman for Canada's Embassy in Washington, "would unnecessarily complicate the integrated Canada-U.S. energy relationship."

"Unnecessarily complicate" is putting it politely. Really, it's like someone dying of thirst but refusing to drink from a burbling spring just feet away. It makes absolutely no sense.

If enforced, this provision of the law will not only make our oil more costly, it will imperil our national security.

But then, we never did think much of the 2007 energy bill. It forced a nearly 400% increase of renewable fuels on U.S. companies and consumers by 2022, but provided no real road map for getting there.

It set the stage for $18 billion in new taxes on oil companies, discouraging production. It stiffened CAFE standards on cars, a feel-good measure that only will lead to higher vehicle prices.

Indeed, everything Congress has done on energy seems contrived to create less energy and higher prices across the economy.

That's especially true for our foolish new ethanol standards, which have removed 15% of our farmland from food production to make the ethanol equivalent of just 2% of our gasoline. Been to a supermarket lately? You're paying for this in every thing you buy now, from frozen pizza to canned corn.

Now, here we sit, a neighbor of the country with the world's largest oil supplies and we're going to tell them no thanks? This is the equivalent of legislative malpractice. But you'll have to get used to that if, as many expect, we elect a Democratic president and enlarge the Democrats' hold on the two houses of Congress.

But oh, don't worry about all that oil in Canada. The tar sands will still be developed. U.S. companies have already partnered with Canadian companies to dig the stuff up.

And they won't want for customers. There's little doubt that China and India — who are adding half a million barrels to the world demand each year, or roughly 40% of total global demand growth — will happily take our place as consumer of first resort.

The past two years have shown Congress' ineptitude when it comes to energy. This is but another example, resulting in higher prices, soaring food costs and now, perhaps, a recession brought on by a failure to understand basic economics.

Bush vs. Chávez (1)

U.S. looking into terror list for Venezuela

by Pablo Bachelet

The Bush administration has launched a preliminary inquiry that could land Venezuela on the U.S. list of nations that support terrorism because of its alleged close links to Colombian rebels, a senior government official has confirmed.

The inquiry, by government lawyers, is the first step in a process that could see Venezuela join North Korea, Cuba, Sudan, Syria and Iran as countries designated by the State Department as supporters of terrorism.

U.S. laws permit some leeway on the scope of sanctions, but experts say that adding Venezuela to the list could force U.S. and even foreign firms to sever or curtail links with one of the world's leading oil producers and the owner of Citgo Petroleum.

The inquiry comes after Colombia seized four computers belonging to a guerrilla leader in a March 1 raid into Ecuador. The documents suggest Venezuela, among other things, promised $300 million to the Revolutionary Armed Forces of Colombia, or FARC.

The U.S. and Colombian governments and the European Union have officially designated the FARC as a terrorist organization, but Venezuelan President Hugo Chávez has said publicly that he considers it a legitimate insurgency.

A senior U.S. official, who spoke on condition of anonymity because of the delicate nature of the subject, said government lawyers had been asked to clarify ''what goes into effect in terms of prohibitions, or prohibited activities'' when a country is put on the U.S. list.

The official was reluctant to predict if the FARC computer discoveries will lead to sanctions, noting that U.S. investigators must first corroborate their veracity. The lawyers have not yet returned their opinions.

But if the seized documents are shown to be true, the official added, ``I think it will beg the question of whether or not Venezuela, given Chávez's interactions with the FARC, has . . . crossed the threshold of state sponsor of terror.''

Venezuela already is subject to a U.S. weapons sales ban and other sanctions as a country that refuses to cooperate on terrorism matters -- though does not necessarily sponsor them. Bush administration officials also complain that Venezuela refuses to cooperate on drug-trafficking issues.

But declaring Venezuela a state sponsor of terrorism would push the sanctions to a much higher degree.

Such a designation ''immediately imposes restrictions on the abilities of U.S. companies to work in Venezuela,'' said James Lewis, a former State Department arms-trafficking expert now with the Center for Strategic and International Studies in Washington. ``It would make it very hard for Venezuela to sell oil to the U.S.''

The State Department's website cites four categories of sanctions for countries on the list, including restrictions on U.S. aid, a ban on weapons sales, tightened export controls over U.S. items that have dual military and civilian purposes, and ``miscellaneous financial and other restrictions.''

Lewis said the last category is ''the killer.'' Those sanctions, often implemented by the Treasury Department's Office of Asset Control, or OFAC, prohibit U.S. companies and banks from dealing with countries on the list. Even non-U.S. companies are reluctant to do business with countries on the list for fear of running afoul of U.S. sanctions, he added.

The designation could reach far beyond the oil fields. Boeing, for instance, would need to be careful in its dealings with Venezuelan airlines, Lewis said. Assets belonging to specially designated entities linked to the country could see their financial assets in U.S. banks frozen.

But Lewis and other U.S. officials cautioned that the harsh sanctions against a country like Iran, which was declared a state sponsor in 1984, would not necessarily be replicated on Venezuela.

''There's not a standard template'' for sanctions, said OFAC spokesman John Rankin.

But even a relatively gentle menu of sanctions would have strong economic and foreign policy implications, given Venezuela's position as the fourth-largest supplier of petroleum to the United States. The government-owned PDVSA oil company also owns Citgo Petroleum, which has several U.S. refineries.

The ban on dual-use items could affect some deep-sea drilling equipment, said Bill Reinsch, president of the National Foreign Trade Council, a business group that usually opposes unilateral U.S. sanctions.

And any financial transaction with Venezuela would require a license from the Treasury Department. The Commerce Department sets up a regimen that is country-specific, with much discretion built into the system, Reinsch said. ''It's kind of a mystery how they get there,'' he said.

Chávez, who often rails against President Bush and U.S. policies, has repeatedly threatened to cut off oil shipments to the United States in response to what he views as possible threats of a U.S. attack against his government.