NEW BRITISH PM UNDER FIRE OVER IRAQ

With Tony Blair no longer around to support George Bush’s Iraq policy, Gordon Brown the new British PM has come under increasing pressure from Washington to keep British troops in Iraq. At the same time, British generals have been telling him to call it a day and move troops from southern Iraq to help in the fight against the Taliban in Afghanistan.
He has also received advice from political opponents including, Sir Menzies Campbell, leader of the Liberal Party, who has publicly stated that a full withdrawal of the 5,500 soldiers in Basra is the only acceptable option because they are achieving nothing by staying there. According to Sir. Menzies the goals once set by George Bush and Tony Blair can no longer be considered realistic.
Criticism of the British mission in Iraq has also come from the fiery Shiite cleric, Muqtada al-Sadr. His Madhi army has fought the British to a standstill in and around Basra, forcing British troops to stay holed up in Basra Palace, as well as in a massive compound near the airport. Much of the time, soldiers remain on base and face daily shelling from rockets and mortars. The CIA and other US intelligence assets have been based in Basra Palace for some time, using it as a listening post to monitor Iranian border activity. They are unhappy about the prospect of the British garrison leaving and have made their feelings known to the White House.
Al-Sadr says that contrary to claims by some elements of the US military he has not been in hiding in Iran. To prove that was so, he gave an interview to the London Independent at the historic mosque in Kufa in Iraq. In the interview, he said his Mahdi army was responsible for forcing the British to begin a pull-out and that his fighters were in regular contact with Hezbollah in Lebanon. They were not, he added, being armed and trained by Iran’s Revolutionary Guard but they would take weapons from anyone.
To most observers, his admission about links to Hezbollah made sense because both militias are Shia. It also explained how his fighters had suddenly become skilled at attacking British armored patrols. Last year, Hezbollah fighters, much to the surprise of US and Israeli generals, fought the Israel Defense Forces to a standstill. Israeli armor and infantry suffered heavy losses and were unable top push deep into Lebanon.
Al Sadr has proved over time to be a great survivor, as well as a winner of major political battles within Iraq. Despite attempts by the US to have the Iraqi government isolate him, he has continued to gain strength politically. When asked by the London Independent why he pulled his political appointees out of the Iraqi government, he responded that most Iraqis saw the Iraqi PM, Nouri al-Maliki as a “tool of the Americans” and for that reason alone his government would fall. The prediction of a limited lifespan for the Iraqi government is shared by the chairman of the Armed Services Committee, Carl Levin, D. Mich., and his deputy, John Warner, Rep. VA. After a recent visit to Iraq they declared it was too late to find political consensus and that al-Maliki should be removed from office.
In the meantime, within Britain the most significant pressure for a pull out from Iraq has not come from the streets, or from members of parliament, but from serving British generals. Their advice to Gordon Brown has been unequivocal – get out now before things get worse and a withdrawal becomes messy and costs lives. That advice may have been on Brown’s mind when he met George Bush at Camp David last month because he subsequently issued a statement that British commanders on the ground in Basra would decide when to pull out. He also promised to report to the British Parliament on the matter in October. By confirming he would do that, some analysts reckoned he was signaling that by October a staged withdrawal from Iraq would be well underway.
In Washington, especially among neocons who still think the war in Iraq can be won, there are those who are not prepared to let Brown off the hook. There has b a concerted whispering campaign warning that a British pull-out could jeopardize the surge strategy of General Petraeus and could prove “ugly by providing the enemy with a propaganda victory. While little has been reported here about this in the US media, its increasing bitterness has not been lost on the British who do not take kindly to statements implying that they are acting in a cowardly and unpatriotic fashion, especially when those comments originate in Washington and from some who are close to General Petraeus.
One Washington critic of the British desire for withdrawal recently found himself on the sharp end of a broadside from Lord Boyce, Chief of the Defence staff between 2001 -2003. Lord Boyce’s feathers were ruffled when Stephen Biddle, a White House adviser to General Petraeus, had the audacity to compare a British withdrawal to the American pull-out from Saigon at the end of the Vietnam War. According to Biddle, a British withdrawal would be “ugly and embarrassing – a Saigon moment.”
Lord Boyce lost no time giving Biddle a history lesson by pointing out that what the US faced in Saigon in 1975 was not comparable. For a start, the American military was fighting a well-equipped Viet Cong army when it left Saigon and not the “disparate murderers and terrorists” British soldiers were combating in southern Iraq.
The tenor of Lord Boyce’s response typified the true character of recent exchanges by some in Washington and their counterparts in Britain. Some British commentators have suggested it is unhelpful to hear remarks of the type made by Biddle, given the fact Britain has remained America’s most steadfast ally in the war on terror. It has also been made clear in many of Britain’s editorial columns that Gordon Brown has no intention of wasting political capital following Tony Blair’s Iraq policy. Unlike George Bush, Brown has a general election to fight and knows how unpopular the Iraq war has been. He is equally aware Britain could be in Afghanistan for decades and he needs the British public’s support for that commitment. He is, however, fortunate that there is growing evidence the British military is winning a hearts and minds battle against the Taliban in Helmand Province. More troops are needed for that campaign and, with the British army weakened by its Iraq commitment, the troops in Basra could be better deployed to Helmand.
If the prospect of a British withdrawal from Basra spells trouble for the Bush Iraq policy, events in northern Iraq, especially in Kurdistan, are deeply troubling. It has been a relatively peaceful area of the country, long portrayed as the “jewel” of the post invasion. However, it would not take much to propel the region into chaos. Two months ago, there was a major problem when Turkey threatened to send 200,000 troops into Kurdistan to destroy Kurdish guerillas hiding in the mountains bordering Turkey. At the last minute, the US convinced the Turks to back down by offering to provide American Special Forces to help covert Turkish units eliminate the guerillas in their mountain hideouts. Now, Kurdistan faces another threat to its stability, this time from Iran. Like the Turks, the Iranians claim they too need to eliminate Kurdish guerillas that are using bases in Kurdistan to mount attacks within Iran. The guerillas say they have infiltrated the Kurdish community within Iran and have the capability to mount serious attacks on Iranian infrastructure. As it stands, the future for Kurdistan could be bleak and that must be troubling for US military planners who have more than enough to deal with in other parts of Iraq.

BRITISH OPPOSE AMERICAN MILITARY TACTICS

The US and Britain are close allies but that has not stopped British generals and politicians from expressing serious concern about US military tactics, especially in Afghanistan where the US-NATO coalition is under fire this year for killing more civilians than the Taliban with an overuse of airpower.
Relations between the two allies were strained recently when a top British commander ordered US Special forces out of part of the Helmand Province of Afghanistan where the British believe they are getting the upper hand in a tough counter insurgency war against a resurgent Taliban. The British commander blamed US Special Forces teams for calling in heavy airpower that was causing untold civilian casualties, thereby providing propaganda for the Taliban. The deaths were alienating the local population from the British and undermining their reconstruction efforts. The British, with a long history of fighting low intensity conflicts from Kenya to Aden and N. Ireland, have warned for some time that heavy handed tactics by the US military were proving counterproductive.
There has been a growing concern within NATO that in Helmand, where as many as 300 civilians have died this year alone, there has been a tendency for US Special Forces to call in “shock and awe” bombing runs when they are outgunned or outmanned. The result has often been civilian casualties either because the bomb coordinates were wrong or the bombs fell close to villages. In the past year, the Afghan president, Hamid Karzai has been openly critical of US air power, pointing out that a high civilian death toll has been turning the population against his government and its coalition sponsors.
News reports of the actions of the British commander in Helmand were down played by Britain and the US. The Pentagon even denied there was any disagreement and insisted US Special Forces would remain in Helmand for the foreseeable future. Nonetheless, civilians are being killed by US bombing and that was evident on May 8 when villagers at Sarwan Qala carried 21 bodies to a NATO compound. On May 11, the British confirmed that an adjoining village was hit by American bombs and 18 civilians were wounded.
All of this has greater echoes in Iraq where the civilian death toll from bombing has been exceptionally high. There, the British have continually expressed serious disquiet about the excessive use of US firepower. In 2004, a leaked British government memo, published in the Sunday Times of London, referred to “heavy handed tactics” and warned that their use in Fallujah and Najaf had helped “fuel” Sunni and Shiite opposition to the coalition and “lost us much public support outside Iraq.” In Fallujah, cluster munitions and phosphorous bombs were deployed yet there were no US military figures for the numbers of civilian and insurgent casualties. The leaked memo also stressed the need for a more “sensitive and sensible” approach to the use of military force and pointed to serious diplomatic damage accruing from the Abu Ghraib prison scandal.
The British contend that their counter insurgency experience proves you cannot win a low intensity war unless you have the trust of the civilian population because the enemy hides within that population. The moment you alienate civilians is the moment you hand the initiate to the insurgents. A case in point occurred in July 1970 in N. Ireland in an episode called “The Lower Falls Curfew.” In what British Generals later admitted was a crude strategy, a massive military force was used to seal off and squeeze a Catholic enclave in Belfast. The result was that Catholics turned against the British army and young, Catholic men joined the ranks of the emerging Provisional IRA. The British army never quite recovered from that episode. It was a classic example of how the use of excessive power against civilians ultimately benefits insurgents. With events like that in its background the British in Iraq and Afghanistan have been wary about doing anything that would turn locals against their troops and provide succor and propaganda for the enemy.
Another worry voiced by the British has been about the use of “contractors” – mercenaries. In Iraq, they number well over 100,000 with approximately 45,000 originating with US companies. The fact that there is no exact number is testimony to the unregulated character of this private army. For example, US and British soldiers have been charged with killing civilians but “contractors” have not because they are not governed by the same rules. One of the most controversial aspects of their operational roles in Iraq is that they are not bound by the Uniform Code of Military Justice. Secondly, they cannot be tried by Iraqis for killing civilians because of an unusual agreement put in place by the Coalition Provisional Authority – that ineffective body run by Paul L. Bremer that governed Iraq for 14 months after the 2003 invasion. That agreement, which ensured US soldiers and mercenaries could not be tried in the Iraqi courts, remains in place, insulating “contractors” from being held legally accountable for their actions. In a business that is said to generate anywhere from $5 billion to $10 billion a year “contractors” have become a second military in Iraq thereby raising the number of coalition forces from 160,000 to as many as 260,000 with some estimates putting the total coalition military force at 300,000.
In the main, “contractors” are exceptionally well armed, sometimes better than regular US and British combat troops, and are paid high wages. They provide security for US supply convoys, visiting diplomats, congressional personnel and even US generals like David Petraeus. Construction projects are among many of their priorities yet the failure of reconstruction in Iraq suggests the money used to hire mercenaries has not been well spent.
Like the British, US troops on the ground have serious reservations about the unregulated behavior of the “contractor” force. A leaked video hit the Internet in 2005, showing “contractors” laughing and firing at civilians. No one was charged in that incident. The company involved, “Aegis” defended the shooting on the basis that it was allowed within the rules established by Bremer’s Coalition Provisional Authority. Ironically, the CPA set up the Reconstruction Operations Center to monitor and list the numbers of mercenaries and their activities but like most CPA initiatives it turned out to be a failure. One ROC rule required mercenaries to report the wounding or killing of civilians. Unfortunately, the rule was not legally binding and was ignored as was an ROC request for mercenaries to register with the ROC center in Baghdad. As a consequence, there is now a lack of information about this private army, its activities, the numbers of civilians it has killed, and its funding.
The British have not been alone in calling for a reining in of mercenary companies and their personnel. Top level US commanders have begun to voice concerns, pointing out that because mercenaries are not under their control they can put the lives of regular soldiers at risk by their wayward behaviour. They also have the potential to alienate the civilian population which General Petraeus is trying to win over as part of his “surge” strategy. The lack of a chain of command within the shadowy “contractor army” has been one of the most serious issues for US commanders. They have complained that when an incident occurs involving mercenaries there is no mechanism for raising the issue.
But, for all the experience the British acquired in their low intensity wars it has not been enough to avert a failed campaign in the south of Iraq, especially around Basra. Privately, the British complain that there were never enough troops on the ground in southern Iraq and that the overall Iraq battle plan devised by the US was seriously flawed from the outset. Some British military commentators have argued that the events at Abu Ghraib and the use of excessive force made winning over the Iraq population impossible. That may in part be true but is it too convenient an argument and ignores the reality that the bitter tribal history of Iraq once unleashed was always likely to lead to a civil war outsiders could never win.
The British more than the US should have understood that Iraq was a place with dangerous divisions because they witnessed and helped with the emergence of Iraq from disparate elements in the early 20th century. They also oversaw the partitioning of Pakistan and India and the creation of Kashmir. It was Prince Charles’ uncle, the late Lord Louis Mountbatten who created Kashmir from the partition of India and Pakistan. It seems the problem with military men and with politicians who have great designs but a meager knowledge of the past is they rarely understand intricate historical complexities. They tinker with them in ways that can later lead to the resurrection of deeply held historical aspirations and a bitterness that can generate untold misery for generations.

SURGE GENERAL IN CHARGE DURING MISSING WEAPONS FIASCO

General David Petraeus, the man with the task of reversing Iraq’s descent into chaos, was in charge of training the Iraqi army when more than 190,000 American weapons vanished from its arsenal.
While the Pentagon admits that these weapons, mostly pistols and AK 47 automatic rifles, cannot be accounted for, some observers feel it is only the tip of the iceberg. After all, less than a year ago the Pentagon acknowledged that less than 3% of the weapons issued to Iraqi units had been catalogued and filed.
This latest bad news from Iraq arrived in a report by the watchdog GAO – Government Accountability Office – in Washington. It could not have come at a worse time for the White which expects General Petraeus to provide an upbeat report on Iraq next month. According to the GAO, from 2004 to 2005, 80,000 pistols, 110,000 automatic rifles, 135,000 pieces of body armor and 115,000 have vanished. But even those figures could turn out to be higher, considering that by September 2005, the US had given the Iraqi forces almost 190,000 AK-rifles and a similar number of pistols. The rifles had been purchased by the US in the Balkans from supplies confiscated after the Bosnian War. No mention has been made by the Pentagon about the amount of ammunition that may also be unaccounted for.
The most disturbing aspect of this whole affair is that many of the missing guns may have been used by insurgents to kill American soldiers. Another worrying dimension to the saga is how much it illustrates the untrustworthiness of an Iraqi military heavily infiltrated by Shia militias fighting US troops in Baghdad elsewhere in the country. And it is on record that an Iraqi Brigade that was stood down in 2004 later used its American-supplied weapons in battles with the US military in Fallujah.
When it comes to blame for the missing guns, Iraqi army spokesmen have been quick to point out that the US was responsible for the distribution of the weapons and therefore for their disappearance. The GAO is no less critical of the US military and blames the weapons fiasco on a failure of those in charge to see that the guns were not distributed in a “haphazard” fashion and that established rules were followed. There was, says the GAO, numerous mistakes due to incorrect manual entries.” If the GAO is right in pointing the finger of blame at those in authority then the buck stops with General David Petraeus who is now seen by President Bush as the savior of his Iraq policy. The GAO directly referred to Petraeus in its report, by talking about the commander of MNSTC-1 - Multi-National Security Transition Command 1:
“GAO found a discrepancy of at least 190,000 weapons between data reported by the former MNSTC-1 commander and the property books. Former MNSTC-1 officials stated that this lapse was due to insufficient staff and the lack of a fully operational distribution network, among other reasons.” The GAO added that as of January 2007, there were continuing problems with missing and incomplete records.
While the White House continues to portray the war in Iraq as merely a war against Al Qaeda and blames Iran and Syria for supplying weapons to insurgents, the fate of ordinary Iraqis is almost forgotten. The White House has conveniently ignored the fact that Iraq is teetering on the edge of a humanitarian crisis. Many aid groups cannot operate to feed the poor and children continue to die of malnutrition. There is also the fact that the infrastructure has never been worse and electricity and water shortages are common. Unprecedented numbers are also leaving the country and Iraq is more bitterly divided than at any time in its history. In the south, where the British are gradually withdrawing, chaos reins, yet in February former British Prime Minister, Tony Blair and Dick Cheney were portraying the southern city of Basra as a success. The reality is that the British around Basra resemble the cavalry of the Wild West. They tend to remain within a large compound close to Basra airport while mortars rein down on them. Meanwhile, Basra is being fought over by Shia militias and gangsters. Tony Blair’s successor, Gordon Brown, knows the battle for Basra was lost some time ago and is anxious to get his 4,000 remaining soldiers out of the country.
But, as in most wars truth about reality is often sacrificed on the altar of propaganda and disinformation. That appears to be how the veteran Irish journalist, Patrick Cockburn sees it. Based in Iraq and writing for the London Independent, Cockburn remained in Baghdad during the first Gulf War. He believes more lies have been told about the casualties and overall situation in Iraq than any other conflict since World War 1. He points to the Baker Hamilton Report, which confirmed there were serious flaws in US military reporting. Baker-Hamilton stated that in one day in July 2006 the US military reported 93 attacks on US and Iraqi forces when in fact US intelligence figures showed there were 1,100.
Cockburn claims that the Iraqi government has helped hide casualty figures by banning journalists from bomb scenes and by denying hospitals the right to release casualty figures. He identifies an example of a bombing in a district of Baghdad on July 26, 2007, when the Iraqi police were quoted as saying there were 25 dead and 100 wounded when in fact 92 were killed and 127 wounded.
From Cockburn’s perspective much of the disinformation began when the US military invaded Iraq and declared it was not keeping figures of the numbers of Iraqis killed by US action.
“It often describes bodies found after a US raid as belonging to local insurgents when the local Iraqi police are saying they were civilians killed by the immense firepower deployed by American forces. Almost the only time a real investigation of such killings is carried out is when the local staff of Western media outlets is among the dead,” says Cockburn.
His opinions fit into the debate about the true nature of the civilian death toll in Iraq which has ranged in estimates from 60, 000 to 500,000 or more. A similar debate rages in Afghanistan where this year it turned out that coalition forces were killing more civilians than the Taliban, a point not lost on the Afghan president, Hamid Karzai who has demanded that the US and NATO be more circumspect in the use of air and ground power.

US TO JOIN TURKEY IN COVERT WAR

A Bush administration plan to join Turkey in a covert war to eliminate leaders of a Kurdish rebel group in Iraq was exposed after a former Dick Cheney aide briefed lawmakers on Capitol Hill.
Within days of the visit to the Hill by Eric Edelman, under secretary of defense for policy, the columnist, Robert Novak got wind of the plan and made it public. It transpired that Edelman boasted that the plan was to use US Special forces help their Turkish counterparts “behead” the leadership of the Kurdish guerilla group the PKK – Kurdistan Workers Party – in its hideout in mountains bordering northern Iraq and Turkey. When lawmakers questioned the wisdom of the US getting caught up in yet another low intensity conflict, Edelman assured them it would be a success. The US role would be hidden and vigorously denied if made public. Some members of Congress thought the strategy was risky, especially at a time when the US was bogged down in Iraq and Afghanistan and had special operations commitments in other parts of the world, including countries like the Philippines. Edelman’s response was that the plan was a slam dunk and would not take long to accomplish. Some lawmakers might have been concerned that doing Turkey’s dirty work could have unforeseen consequences and could only add to further isolation of the US within Europe.
The Turks have long argued that the PKK, which wants Kurds within Turkey to be granted autonomy, has been aided by Iraqi Kurds who have been staunch American allies. Iraqi Kurds have no love for Turkey but deny involvement with the PKK. Nevertheless, they will not look kindly on US involvement in a campaign against fellow Kurds. Several months ago, Turkey, which is a NATO member, alarmed the EU and the US by massing large numbers of troops on the border. At the time, Turkish generals talked openly of invading Iraq with 200,000 troops.
The reaction from the Iraqi parliament, as well as from the regional Kurdish government in northern Iraq, was swift. They warned an invasion by Turkey would not only be a breach of Iraqi sovereignty but would be repulsed. It now seems the US has encouraged Turkey to jettison its invasion plans in return for a joint US-Turkey Special Forces war against the PPK, using US air power and hi-tech surveillance.
The PKK is regarded as a terrorist group by many western nations and has been a thorn in Turkey’s side because it has caused unrest among Turkey’s large Kurdish minority by demanding autonomy so that part of Turkey could be annexed with northern Iraq and a small part of Iran to form a united Kurdish state. Turkey is not without blame when one looks at the deaths of perhaps 30,000 ethnic Kurds during several decades of fighting between the PKK and the Turkish military. The Turks have been guilty of assassination, brutality, rape and the disappearances of large numbers of its Kurdish nationals. During the Cold War the PKK’s Marxist-Leninist leanings made it an enemy of the West and the US, mainly through the CIA, trained some of the assassination squads and brutal right wing militias that the Turkish military used to track down PKK members and sympathizers. The US involvement in that secret war is rarely discussed but lawmakers who may be aware of it would certainly not wish a repeat of American participation in what could turn out to be a similar venture. Turkey's human rights record leaves a lot to be desired and it would hurt the US internationally if it became tainted with excesses by Turkish military or paramilitary forces.
There is yet another aspect to the Bush plan that may concern some on the Hill. Turkey has its own agenda in respect of how it would like to see the Iraq conflict resolved. The Turks have never been happy about America’s closeness to the Kurds who helped the US bring down Sadamm Hussein. But, they are most concerned that Iraqi Kurds are sitting on huge oil reserves around Kirkuk. Therefore, if Iraq descended into all-out civil war, Kurdistan in northern Iraq could become a totally separate and very rich entity on Turkey’s border.
But the problem is even more complicated than that. Israel is supportive of Iraqi Kurds and has gone out of its way to train militias under the control of the Kurdish regional government. Israel may well see the Kurds as an ideal bulwark against fundamentalist Iran and a Turkey with the potential to move in the future from a secular to a state controlled by Islamic radicals. As for the US, its relations with the Kurds goes back to when the Kurds helped the US military overthrow Saddam but there is a more troubling connection between the US and the PKK. The PKK no longer sees itself as a Marxist-Leninist organization and accuses Turkey of denying Kurds within its borders the same human rights as the rest of the Turkish population. The PKK’s opposition to Turkey is matched only by its hatred of Iran because of Iran’s treatment of Kurds within its borders. In the past year, evidence has mounted that the CIA and the Israelis have been encouraging, if not supporting PKK attacks within Iran in an effort to destabilize that regime.
Taking all that into consideration it may be no wonder some lawmakers are jittery about the Cheney-Bush tendency to think foreign policy is best served by covert military action. As the Iraq war has shown, this administration’s tendency to favor action over diplomacy can lead to terrifying consequences.
When new broke about the covert war plan outlined by Edelman, the Pentagon confirmed that the US, in keeping with its war on terror, was working closely with its NATO ally, Turkey, to crush Kurdish guerillas operating from bases in northern Iraq. As Edelman predicted to lawmakers, the Pentagon denied any US covert involvement with Turkish special operations inside Iraq.

INVESTORS JITTERY OVER NEAR COLLAPSE OF HEDGE FUNDS

The near collapse of two hedge funds owned by the Bear Stearns investment bank has left not only Wall Street jittery but also public pension fund managers and millions of small investors across America.
On June 21, Bear Stearns moved quickly to stop the hemorrhaging of the funds by shoring them up with over $1.6 billion but the future for both funds remains uncertain and the crisis raises serious questions about what is a virtually unregulated part of the financial markers. The funds in question were within the bank’s High-Grade Structured Credit Strategies Fund and were dealing in CDO’s – collateralized debt obligations. Essentially CDO’s are mortgage debits matched with other debts and are bought up by investors on the basis that over time as those debts are paid off at high interest rates they will produce big profits. But the Stearns’ funds were operating against a backdrop of a changing housing/mortgage market. Mortgage debt across America had led to unprecedented numbers of foreclosures because too many lending companies had given loans to risky borrowers. The result was that CDO’s in the debt market began to suffer potentially big losses. The Bear Stearns Funds had raised over $1.5 billion from investors but were gambling on over $30 billion in debt securities. In April the two funds saw a drop of 23% in their value, making it clear that the boom days for bonds supported by homeowners with weak or subprime credit were coming to an end. The market could no longer sustain a situation in which many people were being given mortgages to buy homes at $450,000 with little or no collateral. Homeowners were falling behind on loan repayments and foreclosures were growing at an alarming rate. Some analysts are now forecasting that Bear Stearns may spend over $3 billion to protect the future of the strongest of its two fund and ignore the weaker, which lost half its value.
A major concern on Wall Street and among investors is that the hemorrhaging, even of the more robust of the two funds, may have been stopped only temporarily, and in the not too distant future it will collapse and bring down a large slice of the market by creating even more investor nervousness about hedge funds.
Hedge funds are almost unregulated and have a unique role within the financial markets in the US. They are permitted to operate at a high level of secrecy and, unlike pension funds, mutual funds and funds from insurance companies, they are not obligated to release information to the public about their activities. At the beginning of the 1990s, there were approximately 600 hedge funds with a total asset value of $39 billion. The number of funds has since ballooned to 8,000 with assets well over $1 trillion. The massive increase was due to the fact that their often high yields attracted public pension funds, corporate groups of wealthy investors and in recent years millions of ordinary Americans encouraged by the Bush Administration to gamble on the markets.
By the start of 2007, public pension funds spent about one tenth of their assets in hedge funds and private equity funds. Much more was invested in hedge funds by charities and endowments. The ordinary investor was quick to see that unlike mutual funds, hedge funds annually performed much better. In many respects greed on the part of ordinary investors prevented them from seeing that greater risks could mean great losses in a collapse.
Members of Congress and regulators have frequently called for greater scrutiny and control of hedge funds but Wall Street has vehemently resisted change. However, if hedge funds begin to slide in the coming year and investors start to panic even Wall Street may drop its opposition to SEC regulation of the funds. Some analysts believe if that happened it might be easier to weed out the risky funds that pose a serious problem to 401Ks.
One of the effects of the Bear Stearns’ crisis is that it will now be exceedingly difficult for banks to package mortgage loans as securities that can be traded by hedge funds. In a housing market that is seeing the downward impact of the overblown tendency to give large mortgages to risky borrowers the chances are that things can only get worse. Until the risky trading practices of hedge funds are exposed and the veil of secrecy surrounding their activities is lifted, those who gamble with hedge funds should realize the risks may not be worth the potential losses in a future collapse.