Posted 10:49 PM by Robert

For The Holidays, Send A Gift With A Wish Attached

The purchase of debt issued by a sovereign nation is correctly known in banking circles as "a gift with a wish attached."

It appears that many people - a lot of those people being Continental Europeans - made gifts to Iraq while Saddam Hussein was in charge. Some $120 Billion worth of gifts. That's a lot of wishing on a deranged dictatorial star of Arabia.

Now the President has dispatched James Baker to bring Saddam's gifters back down to earth. Although a sovereign nation is not obligated to repay its debts under international law, most do when they can because they don't want to obtain the reputation of not paying, since that would deter people from lending to the sovereign in the future.

Of course, that consideration has little force in obligating Iraq to repay Saddam's $120 Billion. There is a clear break between the incoming government and the old Saddam government. A repudiation by Iraq of its old debt will have effects similar to those of a bankruptcy reorganization that wipes out the old creditors so new financing can be obtained on a going-forward basis. Did the Federal Republic assume the debts of the old Nazi regime? Of course not - and the German economic miracle flourished!

In exchange for their repudiated debt, the existing Iraq gifters/lenders can be given some kind of equity interest in Iraq's future appreciation - what is sometimes called a "carried interest." That is, if Iraq prospers from its reconstruction, the lenders/gifters-cum-equity-participants will be entitled to a share of the appreciation. Investment bankers are really very clever at crafting such instruments. It should be sophisticated fun for all the individual professionals involved in the work-out - real Bang-On-A-Can stuff!

Although it will not be so much fun for the institutional gifters/lenders, at least not at first.

Mr. Baker is surely the right man for the job. And despite the ridiculous posturing of the New York Times the Pentagon has done him a huge favor by barring obstructionist European nations from reconstruction contracts. That act - and the President's endorsement of it - credibly evidences United States willingness to have Iraq unilaterally repudiate every last dime of that $120 Billion.

Citing out-of-the-loop senior diplomats telling tales out of school, the Times and other opportunist hand-wringers, such as Herr Doktorprofessor Paul Von Krugman, argue that the Pentagon decision and its "highly offensive language" about national security needs constitute a gaff that has made Mr. Baker's job harder, even though the White House signed off on the Pentagon decision ahead of time.

Maybe. But, personally, I don't believe a word of it.

The Iraq gifters/lenders are the same bunch who refused to contribute more than a pittance to the construction effort. Having refused voluntarily to contribute funds directly, these same players are not going to agree to do the same thing indirectly by voluntarily agreeing to debt foregiveness. THIS IS GOING TO BE A CRAMDOWN.

What Mr. Baker needed was a club and a lot of bad-cop credibility. And he got it from that Pentagon decision - especially its nasty tone and "highly offensive language." I'll bet he's a very happy debt negotiator right now.

Heck, even Herr Doktorprofessor could have figured that one out ... if he spent any time now-a-days thinking about economics. Instead we get another one of his silly hunts for "deeper meanings" and implied, paranoid conspiracy riffs - this one about Mr. Baker supposedly being some kind of emissary from the first Bush Administration and some neo-cons at the Pentagon undermining our reconciliation with Europe. But more and better of the same kind of fantasy thinking hits the silver screen on December 17.

It's impossible to take any part of Herr Doktorprofessor's December 12 column seriously, but I can't resist reproducing an exquisite Taranto catch on this one:

"Yes, Halliburton is profiteering in Iraq--will apologists finally concede the point, now that a Pentagon audit finds overcharging?"--former Enron adviser Paul Krugman, New York Times, Dec. 12

"The officials said Halliburton did not appear to have profited from overcharging for fuel, but had instead paid a subcontractor too much for the gasoline in the first place."--news story, New York Times, Dec. 12

As I said, even Herr Doktorprofessor could have figured that one out ... if he spent any time now-a-days thinking about economics ... or reading the Times.

UPDATE: Astute reader Dennis Culkin writes:

Dear Man Without Qualities:

Kudos on the commentary re Halliburton and Iraq.

As a one-time USAID program manager with some experience in overseeing federal contracts with profit/non-profit entities for work overseas, I've found the illiterate, demagogic, at times absurd "coverage" of the whole Halliburton thing among the most annoying and outrageous examples of poor current journalism (which is saying A LOT).

The only timid counter-punch based on reality so far has been a thin op-ed in the WashPost by a former senior federal contracting type (a Clinton appointee). He at least took on the notion that contracts are handed out to friends of VP Cheney, or anything remotely like that. The op-ed grossly understated its case, and most importantly failed to heap deserved vituperation on the lazy and biased journalists who continue to keep this paticularly baseless myth alive.

It's a deadly dull topic, but not one that's impossible to explain to the public.

As on several other issues, however, the passivity or incompetence of the administration in explaining the realities of the Halliburton case are perhaps of equal importance. It's a self-inflicted wound for the administration, but more importantly it's a disservice to the taxpayers, to the mostly honest and hard-working federal employees overseeing contracting, and to the mostly honest and hard-working Halliburton/KBR employees (some of whom literally are risking their lives).

On the related topic of the widespread inability (NYT, major media, Dem. candidates, even some GOP office-holders) to understand how this is a marginal positive contribution to Baker's mission, you also nail it.

Dennis is right. The leftish mainstream media's fixation on Halliburton has become nothing short of obsessive. That Halliburton is providing incredibly valuable, competent services in Iraq - services that would otherwise have to be performed by overstretched American military units - is almost a grudging footnote in much of the coverage.

Watching CNN, for example, while working and not paying too much attention, one could easily get the impression from the tone of much of the coverage that Halliburton is actually in the employ of Saddam Hussein. There is a sickness festering in some of the American liberal mind that is manifesting itself here. And it isn't pretty.