Month: September 2001

Who Is Responsible?

It’s Osama bin Laden, according to Colin Powell and various unnamed sources quoted in the US media. Bin Laden is the puppetmaster who pulls the strings of sophisticated, well-trained terrorist cells in 34 nations around the world. A multi-millionaire, he has 3,000 agents on his payroll, has given millions of dollars to the Taliban in Afghanistan to ensure his own safety, and bankrolls dozens of terrorist training camps that produce foot soldiers for conflicts in Israel, Egypt, Chechnya, The Philippines, India, and Uzbekistan.

On the other hand, the Taliban swear that they have bin Laden under surveillance and have taken away his satellite phone. He only has a few bodyguards and advisors, they say, and he doesn’t have the means to organize or train pilots; his own specialty seems to be land-based, guerrilla warfare.

So who’s right?

Neither.

In the past week, the Western press has been full of sketchy biographies of the infamous Osama bin Laden, which begin with a vague mention of his participation in the Afghan civil war and end with the bombings of the embassies in Kenya and Tanzania. They leave out a couple of important details.

Bin Laden’s father, Mohammad, was a wealthy Yemeni businessman who moved to Saudi Arabia in the 1950s and established a construction company that profited handsomely on the post-WWII oil boom. The Bin Laden Construction Group raked in cash because of patronage from the Saudi royal family, and it was selected to expand the holy sites at Mecca and Medina. Young Osama was raised within a social circle that included the sons of prominent Saudi businessmen, politicians, and royalty.

When his father died, Osama inherited millions. But that’s not the only source for his wealth. His contacts among the Saudi elite made him the perfect candidate for overseeing the flow of CIA money through Saudi Arabia to Islamic fundamentalist groups fighting the Soviets in Afghanistan in the late 1970s and early 1980s. His estimated $400 million in net worth also consists of US taxpayer money.

Yet that money sits untouched. Most of his assets were frozen several years ago, and bin Laden has had no access to it. In fact, court records in the trial of men convicted of bombing the embassies in Kenya and Tanzania reveal that bin Laden is a stingy employer. The testimony in that trial reveals that his organization is far from the all-powerful octopus the CIA would have us believe. As Benjamin Weiser of the Associated Press wrote in May of this year: “his group, Al Qaeda, was at times slipshod, torn by inner strife, betrayal, greed, and the banalities of life that one might find in any office.”

Weiser goes on to quote Larry C. Johnson, a former deputy director of the State Department’s Office of Counterterrorism: “What the evidence at trial has correctly portrayed, is that it’s really a loose amalgam of people with a shared ideology, but a very limited direction.”

Weiser further says that two former aides to bin Laden claimed “Al Qaeda was also fractured over strategies and operations.”

Al Qaeda could have grown and gained focus since then, but terrorism specialists continue to caution that Osama bin Laden may not be the head honcho, if there even is one. The anonymous “well-placed sources” within the US intelligence community are careful to remind us that bin Laden was probably acting in concert with other groups, whatever that means. Most resort to a puzzled “who else could it be?” that tells us exactly the level of skill of our government’s intelligence agencies.

If they read the newspaper once in a while, maybe they’d have a clue. Agence France Presse ran an article on September 12 entitled “Osama bin Laden linked to sacked Saudi intelligence chief.” The editor of a well-respected intelligence newsletter in France reminds us that bin Laden is close friends with Turki al-Faycal, who was the head of Saudi intelligence until just last month, when King Fahd fired him for failing to get bin Laden extradited from Afghanistan. Al-Faycal headed Saudi intelligence for 25 years and worked closely with bin Laden during the 1970s and 1980s. And he risked his job to protect bin Laden.

Is it a coincidence that the FBI is uncovering connections between the hijackers and the Saudi state airline company?

Even the Seattle Post-Intelligencer has something to contribute; on September 12 it ran an article by Lisa Hoffman of the Scripps Howard News Service about the bombing of the USS Cole and the death of 17 US sailors in the port of Aden last October. She cites the fact that the Yemeni government wouldn’t cooperate with FBI agents: “FBI frustrations only grew worse as Yemeni officials refused to allow them to interview prominent Yemenis who the agents suspect are connected [to the bombers].”

Absurdly, Osama’s terrorist cells seem to include the former chief of Saudi intelligence, commercial pilots from four different countries (Saudia Arabia, Egypt, Algeria, and the United Arab Emirates), prominent Yemenis, and officials in the Yemeni government.

No one has pointed out that it’s a huge leap from Ahmed Ressam and his half-assed suitcase bomb to 19 well-educated, well-connected hijackers who trained over the course of five years to carry out this attack.

In the Middle East, resentment runs deep against the US for its support of the sanctions against Iraq, for its support of repressive governments in Egypt, Kuwait, Pakistan, and Saudi Arabia, for its role in the destruction of Lebanon, and for the billions of dollars in military aid it sends to Israel. Osama bin Laden is not the only multi-millionaire or military commander who can hold a grudge.

Sources include: “Osama bin Laden, black sheep of a family close to Saudi rulers,” Agence France Presse (AFP), 9/13/01; “Suspect No. 1,” Sydney Morning Herald, 9/13/01; “Bin Laden Innocent says Taleban,” BBC, 9/13/01; “Osama bin Laden linked to sacked Saudi intelligence chief: expert,” AFP, 9/12/01; “USS Cole investigators leave Yemen,” Lisa Hoffman, Scripps Howard News Service, printed in Seattle P-I, 9/13/01, A4; and “Trial Poked Holes in Image of bin Laden’s Terrorist Group,” Benjamin Weiser, AP, 5/31/01.

The Earnings Mirage

It’s been 17 months since the stock market nosedived in April 2000. Since that time, many tech companies have gone out of business, hundreds of thousands of people have been laid off, and “old economy” companies have seen their profits disappear.

What caused the collapse? Well, for one thing, the spectacular rise in the markets wasn’t real to begin with; it was a “bubble,” as economists call it. Yet, underneath the hot air, there was a basis to the dot-com and high-tech frenzy.

What kept unprofitable tech companies alive and made them seem like attractive investments was the huge amounts of cash they attracted in venture capital. After the Asian collapse of 1997-98, followed by the Russian economic collapse and the Brazilian crisis, wealthy investors from around the world were looking for a place to put their cash. They yanked their money out of overseas investments and put it into venture capital firms here in the US. Those venture capital firms then poured cash into the dot-coms, hoping for fantastic returns on the “new economy.”

At the same time, the Y2K scare was making the rounds, forcing everyone from local mom-and-pop stores to multinational corporations to national governments into a hardware and software buying frenzy to avoid any potential shut-downs on January 1, 2000. When 1/1/00 came and went without incident, the tech-buying frenzy died.

Then April 2000 arrived and brought bad news: technology companies were reporting low earnings for the first quarter of 2000. At the same time, people who had cashed in their stock options in 1999 had to sell stock to pay their tax bills which were due on April 15th. The markets plummeted. People who had borrowed money on margin to buy stocks were suddenly wiped out. Non-tech companies that had accepted stock from tech companies in payment for services were left with huge holes in their balance sheets.

In addition, a large number of companies had been reporting net gains in 1998 and 1999 that had nothing to do with their operating profits. Instead, those companies had operated at a loss, but made up the difference by investing some of their income in buying and selling high-flying tech stocks. When the NASDAQ collapsed, those companies were suddenly exposed as money-losers and their own stock prices dove.

The loss to tech companies has been incalculable. Most of these companies were financing mergers, acquisitions, and even basic operating expenses with stock instead of cash. Not any more. The 100 biggest tech companies in Northern California, for example, have lost an estimated $2 trillion in market capitalization. In the past eight months, tech companies have laid off about 358,000 people nationwide. The unemployment rate in San Francisco has doubled; in Santa Clara County it has more than tripled.

Yet the market is still overvalued. A recent article in the Wall Street Journal exposed the now-common practice of manipulating price/earnings ratios. The P/E ratio is used by most investors to determine whether a stock is overpriced or a good value. The P/E ratio is calculated by comparing the company’s stock price (P) to its net earnings per share (E). The net earnings per share is figured by taking the company’s income minus its expenses and dividing that amount by the number of shares of stock outstanding (held by all the shareholders in the world).

The historical average P/E for the S&P 500 is about 15/1; in theory, any stock that has a P/E lower than that is usually considered a value. There are some exceptions: if the company has some legal tie-ups, owns large amounts of worthless assets, or has other problems that may drive it into bankruptcy, a low P/E is a sign of trouble. This is why investors often rely on Wall Street analysts for “tips” on good stocks; these people are supposed to carefully look at a company’s balance sheet, its legal situation, and its history, and determine if a company’s low P/E is an indicator of value. But most Wall Street analysts are careful not to antagonize the companies they watch, lest they be cut off from the information they need.

In addition, there’s a whole media circus built around the financial markets. To them, the P/E ratio of each company–and, by extension, the average P/E of the S&P 500–is one of the benchmark numbers that every investor must know in order to make the decision to buy or sell. The P/E is viewed as unassailable, untouchable, unquestionable. It is never dissected, and it is always reported as the gospel truth.

But it’s unreliable. The very basis of the P/E ratio–net earnings–is now a meaningless number. The Securities and Exchange Commission can’t force companies to adhere to GAAP (General Accounting & Auditing Practice) standards. And so companies routinely inflate their net earnings.

According to the Wall Street Journal, the problem began in late 1998, when two companies, Yahoo and our very own Amazon.com, began excluding certain regular expenses from their net earnings calculations. This made their losses seem a lot smaller than they really were. Other dot-coms followed suit. Soon other tech companies were doing the same and, before long, “old economy” companies had also joined the bandwagon. Many companies have even made their net losses magically disappear and net gains appear in their place. As the Wall Street Journal commented: “Sometimes the results are nothing short of surreal.”

Naturally, this manipulation of P/E ratios is suckering lots of investors into buying stocks because they think they’re getting a good value. In fact, they’re not. Analysts currently say the P/E ratio of the S&P 500 is 22/1. In reality, the P/E ratio is about 36/1–more than double its historical average–so the market is still vastly overvalued.

There’s a lot of hype and price inflation on the NYSE and the NASDAQ. The bubble has deflated a little, but it’s still very much there.

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