JOHN FENZEL

WSJ.com - Crisis Deepens as Big Bank Fails

Bear Stearns was just the opening salvo, as Indy Mac's failure today demonstrates. Look for more dominoes to fall in the weeks and months ahead in what is shaping up to be the most serious financial and economic crisis our nation has seen since the Great Depression....

IndyMac Seized
In Largest Bust
In Two Decades

By DAMIAN PALETTA and DAVID ENRICH
July 12, 2008; Page A1

IndyMac Bank, a prolific mortgage specialist that helped fuel the housing boom, was seized Friday by federal regulators, in the third-largest bank failure in U.S. history.

IndyMac is the biggest mortgage lender to go under since a fall in housing prices and surge in defaults began rippling through the economy last year -- and it likely won't be the last. Banking regulators are bracing for a slew of failures over the next year as analysts say housing prices have yet to bottom out.

The collapse is expected to cost the Federal Deposit Insurance Corp. between $4 billion and $8 billion, potentially wiping out more than 10% of the FDIC's $53 billion deposit-insurance fund.

The Pasadena, Calif., thrift was one of the largest savings and loans in the country, with about $32 billion in assets. It now joins an infamous list of collapsed banks, topped by Continental Illinois National Bank & Trust Co., which failed in 1984 with $40 billion of assets. The second-largest failure was American Savings & Loan Association of Stockton, Calif., in 1988.

The director of the Office of Thrift Supervision, John Reich, blamed IndyMac's failure on comments made in late June by Sen. Charles Schumer (D., N.Y.), who sent a letter to the regulator raising concerns about the bank's solvency. In the following 11 days, spooked depositors withdrew a total of $1.3 billion. Mr. Reich said Sen. Schumer gave the bank a "heart attack."

"Would the institution have failed without the deposit run?" Mr. Reich asked reporters. "We'll never know the answer to that question."

Mr. Schumer quickly fired back.

"If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today," Sen. Schumer said. "Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs."

IndyMac had been troubled for months, and investors were concerned about its possible downfall well before Sen. Schumer's comments. It specialized in Alt-A loans, a type of mortgage that can often be offered to borrowers who don't fully document their incomes or assets. The company sold most of the loans it originated, but continued to hold some on its books. As defaults piled up, IndyMac's finances deteriorated.

The bank will be run by the FDIC and reopen Monday. The FDIC typically insures up to $100,000 per depositor. IndyMac had roughly $19 billion of deposits. Nearly $1 billion of those deposits were uninsured, affecting about 10,000 people, the FDIC said.

IndyMac's arc -- rapid growth, followed by an even more rapid descent -- is a microcosm of the mortgage industry. It boomed in the first part of this decade, as investors were willing to fund loans on ever-looser terms, then hit hard times when the housing market began to turn down in late 2006.

Small mortgage lenders started going under quickly, with the number of failures climbing into the hundreds. Now the fallout has spread world-wide, bringing down some of America's largest financial institutions. Bear Stearns Cos., which suffered losses on mortgage-related investments, underwent a meltdown in March and had to be rescued by J.P. Morgan Chase & Co.

Countrywide Financial Corp., at one time the nation's largest mortgage lender, saw its stock price plunge this year and was forced to sell itself to Bank of America Corp. at a firesale price.

IndyMac, in a last-ditch effort to fend off collapse after it failed to raise fresh capital, said this past week it was firing more than half its work force and closing most of its lending operations. While its shares had been tumbling since early 2007, the move was nonetheless jarring for a company that ranked as the ninth-largest U.S. mortgage lender last year in terms of loan volume, according to trade publication Inside Mortgage Finance.

IndyMac is one of the few federally insured banks to fail in recent years. Banking regulators are bulking up their staff of bank examiners and taking a tough approach toward banks that are seen as risky.

Mr. Reich, the thrift regulator, noted that the IndyMac case had some "unique" features, including the involvement of Sen. Schumer and the rapid fall in its deposits. Officials said most of the recent withdrawals came from depositors at branches, rather than those making deposits at IndyMac's online bank.

IndyMac was set up by Countrywide in 1985, but the two companies severed ties in 1997 and became direct competitors. The company's name stands for Independent National Mortgage. It was created to specialize in jumbo mortgages -- those that are too big to be sold to government-backed Fannie Mae and Freddie Mac. In 1997, under the direction of Chief Executive Michael Perry, a protege of Countrywide chief Angelo Mozilo, IndyMac set off on its own.

The company grew quickly, pioneering the issuance of so-called Alt-A mortgages to people with blemished credit histories. The loans have gained notoriety as an example of the type of lax lending that came to characterize much of the mortgage industry.

Early last year, Mr. Perry remained optimistic about IndyMac's future, insisting that the company had the resources to remain independent. At the time, IndyMac's stock was trading for about $45 a share.

But the combination of the frozen credit markets and mounting defaults on IndyMac loans steadily sapped investor confidence in the company. In February, IndyMac reported the first annual loss in its 23-year history. By this week, its shares, which ended last year at less than $7 each, were trading for 28 cents apiece.

The company was desperate for more capital but couldn't find investors willing to put fresh funds into what looked like a crippled institution.

The failure could be felt across the entire banking industry, as the FDIC will likely have to raise insurance assessments for all banks to build up government reserves. "It takes a big chunk out of the FDIC insurance fund," said Chip MacDonald, a banking lawyer at law firm Jones Day. He said that if the FDIC hikes insurance fees, that will add to already-intense pressure on bank profits.

The OTS and FDIC didn't secure any outside firm to acquire the bank's assets. The FDIC will temporarily run the bank through a new bank it has created, called IndyMac Federal Bank, FSB.

 

Notorious International Arms Merchant, Victor Bout, Arrested in Bangkok...

In a stunning development Wednesday (and as a follow-up to my previous post last year), notorious international arms merchant, Victor Bout, was arrested in a luxury hotel in Bangkok after a month's long joint Thai-U.S. DEA sting operation. The U.S. Justice Department says it is now pursuing extradition of Bout from Thailand and plan to charge him with conspiracy to provide weapons to a foreign terrorist organization. The 41-year-old Russian had allegedly been trying to secure a major weapons deal that included the sale of surface-to-air missiles to US agents posing as Colombian FARC (Revolutionary Armed Forces of Colombia) rebels.

Labeled a a narco-terrorist organization by the U.S. and European Union, the FARC is the Western Hemisphere's oldest and most developed insurgency, sustained largely through drug trafficking and ransom obtained from kidnappings.

Bout graduated from Moscow's military institute in the early 1990s and was a major in the Soviet KGB. Since leaving the KGB, he has become legendary for his role in the illegal global arms trade from Ostend to Odessa and from Liberia to Kabul. He was dubbed the "merchant of death" and is believed to have inspired Nicolas Cage's character in the 2005 film, Lord of War.

During recorded telephone calls and e-mails, Bout and associate Andrew Smulian agreed to sell the weapons to two underground sources working with the U.S. Drug Enforcement Administration who presented themselves as FARC representatives who negotiated with the two arms merchants from November 2007 until February 2008. Smulian is reportedly still being sought by Thai and DEA officials.

Lieutenant-General Pongpat Chayapan, head of the Crime Suppression Bureau, said police executed a warrant from a Thai court, based on a warrant issued in the United States at the request of the US DEA.
Despite U.S. plans to pursue the extradition of Bout from Thailand, Thai authorities have indicated that they plan to prosecute Bout before he is extradited elsewhere. Bout was remanded in custody at the Klong Prem prison otherwise known as the infamous "Bangkok Hilton." Thai Police can detain him for three months, and with the help of U.S. DEA officials say that they expect to finish their investigation in two months before handing their case off to prosecutors.

"Viktor Bout and Andrew Smulian agreed to arm terrorists with high-powered weapons that have fueled some of the most violent conflicts in recent memory," said U.S. Attorney Michael J. Garcia.

Bout's arrest also represents a dramatic reversal of policy when Clinton Administration efforts to arrest Bout were forestalled by National Security Advisor, Condoleeza Rice--ostensibly based on her determination that resources needed to be directed toward more significant targets; but it's also widely believed that Bout was a contracted agent of the United States with support he leant to U.S. companies like Halliburton and FEDEX in the aftermath of the 9-11 attacks.

Perhaps most significant, however, is that Bout was arrested under the apparent direct supervision of the United States Drug Enforcement Agency immediately after Vladimir Putin's departure from the Russian presidency and assumption as Prime Minister. It seems intuitive, therefore--given Bout's strong former KGB/FSB connections in the Kremlin--that the order to arrest Bout was approved in the West Wing by National Security Advisor Steve Hadley with the passive (or active) approval of the President. At the very least, it represents another indirect affront to Putin himself.

Thai police escort Russian Viktor Bout, center, as he arrives at the head of the Crime Suppression Bureau in Bangkok, Thailand, on Thursday March 6, 2008.

Thai officials will certainly face enormous pressure from Russian authorities to release Bout to their control, rather than extradite him to the United States.
Given Victor Bout's massive cash reserves, his detailed first-hand knowledge of U.S. and Western European corporate corruption, and his extensive contacts at the highest levels of the Kremlin, it would be foolish to discount Victor Bout's ability to arrange his extradition to Moscow, where he would unquestionably be set free.

The wild card that no one has mentioned thus far in relation to Victor Bout's arrest? His older brother, Sergei Bout--who will certainly do his best to free Viktor through any means....

A Solution to Russian Protests over the U.S. Satellite Shootdown...

The U.S. said last week that it would use a missile to destroy a broken satellite, to stop it from crash landing. U.S. officials say the satellite contains hazardous fuel which could kill humans. It says the satellite is carrying more than 1,000lb (454kg) of hydrazine fuel in a tank which would survive re-entry, and the substance could be released as a toxic gas if the satellite crash landed.

Somewhat predictably, Russia has accused the US of using a plan to shoot down the satellite as a cover for testing an anti-satellite weapon.

Russia's defence ministry said the US planned to test its "anti-missile defence system's capability to destroy other countries' satellites...Speculations about the danger of the satellite hide preparations for the classical testing of an anti-satellite weapon," a statement reported by Itar-Tass news agency said. "Such testing essentially means the creation of a new type of strategic weapons. ...The decision to destroy the American satellite does not look harmless as they try to claim, especially at a time when the US has been evading negotiations on the limitation of an arms race in outer space," the statement continued. Russia's defence ministry went on to say that the US had not given enough information on the reasons for the decision.

The Chinese have made similar protests.

The US says the satellite lost power and communications shortly after it was launched in December 2006 and is now uncontrollable.

On Saturday the Pentagon said that the window for the operation would begin on Wednesday, when the space shuttle Atlantis ended its current mission.

The Solution?

Not discounting national security concerns about information sharing, I wonder if we have considered inviting the Russians and the Chinese to observe or even participate in the satellite shoot-down? They would most likely refuse, but such an offer would effectively neutralize their protests, even if they continued to make them....

A National Blood Shortage...

You may not have heard, but nationwide, regional branches of the Red Cross blood banks are in the midst of an unprecedented crisis. It amounts to an extreme drought in our blood supply that has forced a quarter of American hospitals to postpone or even cancel nonemergency operations -- including heart bypass procedures -- due to lack of blood. Part of the problem, it seems, is perhaps overstringent screening measures for blood safety that include many overseas travel restrictions levied on would-be blood donors. Those measures, we're told, are being reviewed and revisited. Still, only 5 percent of eligible donors currently give blood, according to the Red Cross. In many of its facilities, the Red Cross has only half a day's supply of blood rather than the three to five day reserve needed to prepare for emergencies. Jennifer Garfinkel, a spokesperson for the American Association of Blood Banks, said that, in disaster situations, "It's the blood on the shelves that saves lives. It has already been processed, tested, given the green light to be transfused." Without that reserve supply, as a nation we're simply unprepared for mass disasters.

What can you do right now to help? Visit--or at least call--your nearest Red Cross office to find out how you can give blood!

IHT :: Politicus: America's misplaced hopes on Russia

If you are at all uneasy about the direction in which Russia is now heading, this OpEd by John Vinocur that explores Russian obstructionism in helping to curb Iran's nuclear program will only reinforce those concerns....

Monday, September 10, 2007
WASHINGTON: Suppose the Russians, as Iran's monopoly supplier of nuclear wherewithal, decided they could live with a few atomic weapons in the hands of the mullahs.

Suppose the Russians, flush with money and superpower fantasies, believed that weakening and humiliating the United States was well worth the instability that might come with Moscow's refusal to help block Iran's drive toward nuclear arms.

Where's the downside? From Vladimir Putin's point of view, it's win-win.

With Russia's obstructive tactics encouraging Iran to plunge ahead, he may figure the Americans will eventually strike Iranian nuclear installations. The Yanks would harvest opprobrium in much of the world.

Still, if their strike does eradicate the Iranian nuclear program, that's fine, too. Russia's oil and gas prices are sure to shoot up. Russia becomes Iran's key reconstruction contractor, and sets out a rare claim to international righteousness.

What's irrational about the above scenario? Or its counterpart, which is that Russian now calculates the United States in the end will sit on its hands concerning Iran?

Nothing. Multiple versions of them get discussed within the Bush Administration, all stamped, Non Whacko.

It's exemplary of the misery of the American situation.

On one hand, the Administration sticks to the notion - recall, please, George W. Bush's magnanimous first-term reading of Putin's soul in his KGB eyes - that somehow, someday, but in the nick of time, the Russians are going to come around to joining an international effort to halt Iran's nuclear drive.

On the other hand, important areas of the administration are offering a hardened assessment of what Russia ultimately wants.

After a couple of years of talking about how Putin's richer Russia (reasonably) craved respect, a senior administration policymaker, in a private conversation, now asserts the "overwhelming evidence" is a Russia that seeks to weaken the United States. Wherever possible internationally, he says, Moscow will work to stop America from achieving success.

The hitch is that concerning Iran, these two administration notions, expecting good from Russia while regarding it as a gathering, noxious force, are contradictory to the point of incompatibility.

The summer showed just how much.

In June, the Americans said they expected a United Nations Security Council resolution in July that would add a new round of modest sanctions to those already in effect against Iran. It never happened. The Russians, with Chinese assistance, sidetracked the measure.

Reality now says the United Nations is not going to be the place where Iran's nuclear dreams die.

Almost in the same stride, the Russians in July used the threat of a Security Council veto to dismantle an American-backed motion on Kosovo's independence.

The combined effect is not only an American defeat. It's a demonstration that, unlike in the Cold War, there are no clear limits on how far this Russia feels it can push this America.

Forget the grandiloquence of Moscow's planting flags in the Arctic and re-establishing world-wide strategic bomber patrols.

But as the United States flails in Iraq, and faces a financial crisis that may affect command-economies and authoritarian regimes less than democracies, why shouldn't Russia see the Iran issue as a strategic hole for achieving a new global status?

After all, Jacques Chirac, whose vision of a multipolar world consigning America to the role of everyone's opponent gets applause in Moscow, argued in his last months as French president that a few Iranian nukes shouldn't cause much lost sleep for anyone sharing his take on a remade global hierarchy.

Chirac didn't say it, but he could have rationalized that a limited number of atomic weapons at Iran's disposal would be a reasonable price to pay for disabling an American world order that he, like Putin, reviles.

It's a reflection of America's current incapacities that Nicolas Sarkozy, who might have interesting notions of Putin's calculations from Élysée Palace files, two weeks ago detailed the Iran situation in a tougher and more concise way than Washington.

Sarkozy knows that some Westerners who have talked directly to Putin have been told that Russia does not want a nuclear-armed Iran. He also knows the deceit of Russia's official position that it has no evidence indicating Iran's nuclear activities are anything but peaceful.

Draw this conclusion: If Sarkozy has been informed that Putin will act to halt Iran's drive short of a bomb, then he would not be calling the prospect of Iranian atomic bomb capability the world's biggest menace.

There are, on good evidence, officials within the Bush administration frustrated by its own bollixed approach - hoping that the Russians will turn responsible after their "elections" next year while acknowledging Moscow is now in full confrontational mode. Assume they could only leap to praise Sarkozy for saying in a speech a couple of weeks ago what Bush would not:

If sanctions fail, the alternatives are an Iranian bomb or the bombing of Iran. As for Russia, Sarko described its behavior as marked by a "certain brutality."

The sanctions Sarkozy is talking about are hard, new measures outside the United Nations that would probably involve an ad hoc group including the United States, Britain, France and Japan at its core.

This approach specifically means forgetting about the Security Council, and giving up on Russia, barring sudden and unlikely cooperation. The sanctions have to be so penalizing, obviously disadvantaging Western banks and industry, to become truly dissuasive. This requires real resolve.

It also requires the underpinning of a tacit yet palpable threat: if these measures don't work, there's real unpleasantness to come. With a phrase, Sarkozy marked out the Iranian choice with a sharper edge than the Americans have.

That's a significant advance.

But unless Bush first gets publicly tougher on Russia as Iran's protector and international obstructionist, the mullahs may take America's insistence on skirting this reality as the surest sign they can get that they're home free.

9-11-01 :: In Memorium :: Fanfare for the Common Man

A Graphic Visual of the World's Populace in Relative Terms...

Click the Photo for an expanded view...

Newcastle Ships Run Aground...

My brother, Mark, is a merchant mariner who has piloted supertankers and is now a shipbroker in Chicago. He just sent me this rather incredible link with a dramatic slide show: Newcastle Ships Run Aground, with the following commentary:

I used to have nightmares about this. It's a nice summer up here [in Chicago] but it's winter down in Newcastle, Australia. This just happened:

Newcastle Ships Run Aground

The full story:

...there are a huge number of ships (around 120) at anchor in Newcastle and Dalrymple Bay in Australia waiting for coal and iron ore cargoes. It is one of the big reasons the dry freight market is sky high. As it happens, a major storm system has hit the Newcastle area and caused big problems for all the ships (about 58) lined up there. In particular one unfortunate Lauritzen vessel.

FROM- Shipping News Service Inc.

Concerns for bulkers off Newcastle - 08 June 2007

Source: Lloyd's List

By Keith Wallis in Hong Kong

SEAFARERS onboard nearly 60 ships waiting to load at Newcastle on Australia's east coast were braced for more bad weather over the weekend after unseasonal storms led to the grounding of a panamax bulk carrier today.

A further seven bulkers were threatened with the same fate as wintry weather caused havoc for ships waiting to load at the country's largest coal port. NSW Maritime spokeswoman Penny Robins told Lloyd's List that the 2006-buiilt 76,781 dwt Pasha Bulker remained intact and the weather had moderated.

But she added: "The weather forecast is not looking particularly favourable."

NSW Maritime chief Chris Oxenbould said: "The forecast is for the weather to deteriorate with seas now at 8m-10m and winds of around 40 knots."

Port officials had advised crews onboard about 60 ships waiting to load at Newcastle to head for open sea.

The crew of 18 Filipinos and three South Koreans on board the Pasha Bulker were airlifted to safety today as strong winds and heaving seas buffeted the ship.

None of the seafarers were hurt.

The Panama-flagged vessel, registered to Wealth Line and owned by Japan's Fukujin Kisen Kaisha, ran aground bow at about 10am local time at Big Ben reef near Nobby's Beach and just south of the entrance to Newcastle.

The ship is on charter to Denmark's Lauritzen Bulkers which had sublet the vessel to a Japanese shipping company, believed to be Sansho Kaiun.

Lauritzen Bulkers said in a statement it was watching the "situation very closely" and would do its "utmost to assist and support the Japanese owner of the vessel" which had been anchored waiting to load since May 23.

Peter Cummings of Westpac Rescue Helicopter Service, which rescued the crew of the Pasha Bulker, told Lloyd's List that the ship "was pretty high and dry".

Newcastle Port Corporation said a salvage team arrived today and would "determine any possible salvage operations that will be needed". Mr Cummings added that weather conditions during the rescue were "pretty horrendous" with winds gusting to about 90-100kmph, 5m high swells and a sea state of 4 to 5.

He said the weather"was a bit unusual for this time of year" and had caused flooding all around the Newcastle and Sydney area. He added that such severe conditions normally occurred during August and September.

Ms Robins said seven more ships were "in distress" today, "but none were in a situation that Pasha Bulker found itself in".

These included the 2005-built 52,200 dwt Sea Confidence controlled by Interocean Shipping, the 2004-built, 76,800 dwt Betis managed by Anglo Eastern Shipmanagement and the 2007-built, 75,632 dwt Coral Emerald managed by World Marine.

Both Betis and Sea Confidence had weighed anchor by and were heading further out to sea, the port corporation said.

END

Photographs:

1. Rescue helicopter hovers over the grounded ship.| Photographer: Simone Thurtell
2. The Pasha Bulker runs aground near iconic Nobbys Headland at Newcastle.| Photographer: Geoff Overmyer

Country Report: Indonesia

Here is a summary of the chapter on Indonesia in Countries at the Crossroads, 2006

Introduction

Indonesia has been dramatically transformed since President Suharto's government collapsed in 1998. From being a society in which an authoritarian regime severely constrained political expression and organization, in little over a year Indonesia became a vigorous multiparty democracy with a vibrant media and civic life. However, the democratic transition was marred by a series of violent communal and separatist conflicts. Corruption scandals rocked successive governments. Government institutions often proved ineffective as they struggled to respond to the many challenges of Indonesia's political transition and the severe economic crisis that began in 1997…and from which the country still hasn’t fully recovered from.

Indonesia is no longer ruled by an authoritarian government that systematically restricts political participation and resists efforts to make it accountable, as was the case in the Suharto years. The political system is open and democratic in its basic structures, and multiple actors compete to assert influence. The Yudhoyono government has promised to pursue political reform and tackle corruption, but given this context, even the most determined government would face enormous challenges in pursuing these goals.

The political challenges are unevenly distributed across the country. A far-reaching process of decentralization, implemented after 1999, has transformed the country into a political mosaic in which pockets of more accountable and effective governance coexist with regions in which corruption and abuse of power are unchecked.

In these areas, governance problems of all kinds have been amplified, and security forces have committed egregious human rights abuses. In the period covered by this survey, conflict in Maluku and Poso declined in intensity. In Aceh, conflict first dramatically peaked with the declaration of a military emergency by the government in May 2003, but then sharply declined following the December 26, 2004, Indian Ocean tsunami and successful peace talks between the government and the Free Aceh Movement. In Papua, popular distrust of Jakarta remains high, and there are intermittent violent incidents, but large-scale violence hasn’t erupted.

Accountability and Public Voice

The most dramatic change in Indonesian politics has been the rapid and successful institutionalization of elections as the means of appointing governments. Under Indonesia's electoral laws, legislative and executive elections are held on a five-year cycle, all citizens over 17 years of age may vote, and elections are supervised by an independent General Elections Commission.

Institutionalization of open elections offers the opportunity for effective rotation of power. To a large degree that opportunity has been exercised.

The influence of money politics has been a matter of considerable public concern in Indonesia, and regulations limit funds that individuals and companies may provide to political parties and candidates, as well as require parties to disclose their finances in a timely and transparent manner.

There have also been efforts to improve government accountability, although they have been less successful than the reforms to the electoral system.

In principle, members of the civil service are selected, promoted, and dismissed on the basis of open competition and merit. In practice, corrupt payments and connections are often crucial in recruitment and career advancement. Although the political influence of well-connected business and bureaucratic groups remains dominant, Indonesia's democratic transition has also seen a dramatic widening of space for political engagement and monitoring by civil society.

While official censorship has become exceptional, major threats to press freedoms derive from the corrupt nexus between private interests and state officials, especially at the local level.

Civil Liberties

Indonesia has made substantial progress in protection of civil liberties. A remarkably open political climate has replaced the authoritarian restrictions of the Suharto years. In general, the state recognizes the rights of civic, business, and political associations to organize, mobilize, and advocate for peaceful purposes. Nevertheless, restrictions on political expression remain. Above all, makar (treason) provisions are used extensively against persons peacefully advocating secession in Aceh, Papua, and Maluku. Human rights abuses by security forces have been especially severe in conflict areas.

The constitution guarantees all persons freedom from discrimination and grants both men and women equal civil and political rights. In Indonesia's newly plural political system, groups favoring women's equality, visibility, and free expression have been empowered, but so too have groups that would restrict them. It is not yet clear which will be stronger in the long run, although so far those favoring greater equality have had more victories.

The state has begun to take measures to prevent trafficking of women and children, although they are not yet sufficient to address the massive scale of the problem (UNICEF estimates that 100,000 women and children are trafficked in Indonesia each year).

No single ethnic group dominates in Indonesia, meaning that discussion of discrimination on ethnic, linguistic, and cultural grounds must be highly contextualized. The state motto is "unity in diversity," and pride in Indonesia's multiethnic makeup runs deep in official circles and the wider public. During the Suharto era, the central government also frequently rode roughshod over minority indigenous groups, especially in resource-rich areas. Decentralization has enhanced the ability of such groups to assert their interests but has also given rise to official discrimination against minorities.

Most Indonesians, including those in public life, value religious pluralism. The constitution guarantees freedom of religion, but it also enshrines the principle of "belief in one supreme God." This has translated into official recognition of only five faiths (Islam, Protestantism, Catholicism, Buddhism, and Hinduism).

Rule of Law

A major challenge confronting implementation of the rule of law in Indonesia is the extreme corruption that pervades the judiciary and other law enforcement agencies. Indonesian commentators speak of a court mafia in which brokers arrange for plaintiffs and defendants to pay bribes to judges, defense lawyers, prosecutors, and police in order to fix the outcomes of trials. Judicial decisions are routinely bought and sold. This results in a system of law enforcement that is lacks the confidence of much of the population.
Undeniably, significant efforts have been made to strengthen the rule of law, including strengthening judicial independence and improving the professionalism of law enforcement agencies.

Indonesia's judiciary is increasingly independent politically. Full responsibility over the administrative and financial affairs of the judiciary was transferred to the Supreme Court from the Ministry of Justice in 2004. Although political intervention is still possible at the highest levels, overall it appears that judges are appointed, promoted, and dismissed in a relatively unbiased manner.

The law stipulates that every person charged with a criminal offense is presumed innocent until proven guilty. In practice, however, many judges have not shaken off Suharto-era habits of viewing themselves as partners of police and prosecutors, to the great disadvantage of the accused.

Indonesian corruption and judiciary watchdog bodies have accused prosecutors of being highly politicized and also corrupt. The new attorney general has promised sweeping reform, and the government has achieved some dramatic successes in anticorruption prosecutions.

Although the Indonesian constitution provides equal status before the law, effective access to justice is often determined by wealth and political connections.

In theory, security forces, including both the military and the police, are now subject to civilian control. Ineffectiveness of civilian control is based on two deep foundations. The first is continuation of the military's territorial structure, by which military forces are distributed throughout the country in a system of commands that shadow civilian administrative structures at every level. This arrangement provides military officers with extensive opportunities to become involved in local political and economic affairs. Attempts to reform this structure, which began in the early post-Suharto period, have stalled.
Second is inadequate state funding of the security forces. Only an estimated 30 percent of security force funds are provided by the state budget. Security officers raise the remainder through a variety of legal, semi-legal and illegal business activities, ranging from providing security services to large multinational companies in the mining sector to involvement in protection rackets, smuggling, prostitution, drug-dealing, and gambling.

Anticorruption and Transparency

Corruption has been the bane of Indonesia's political transition. In 2005, Transparency International in its annual Corruption Perceptions Index ranked Indonesia as one of the most corrupt countries in the world, at 147th out of 159 countries surveyed. Another survey rated Indonesia as the most corrupt country in Asia. However, although corruption is endemic, it is also universally and publicly condemned.
Corruption is so deeply entrenched in politics and the bureaucracy that public office is rarely separated from the personal interests of officeholders. No adequate rules govern how public officials should manage their business interests while in office, and no rules require divestment.

Since the fall of Suharto, successive governments have introduced a battery of new regulations, investigative bodies, and procedures to promote integrity and prevent, detect, and punish official corruption. Victims of corruption can now pursue their rights through several anticorruption institutions.
One of the major challenges in effectively combating corruption is poor government transparency. The budget-making process has become much more open since the fall of Suharto. The legislature now reviews the process extensively, although legislators lack resources and expertise, and some at least use the review process for extortion. The government is far less adept at publishing detailed, timely, and accurate accounting of expenditures. A major source of corruption is the awarding of government contracts.

NATO’s Peaceful Advance

Zoltan Barany's article on the expansion of NATO from January 2004 is summarized below...

Over the last decade and a half, international organizations have played a vital role in fostering economic and democratic development in Eastern Europe. Notable among these have been the World Bank, the International Monetary Fund, and the Organization for Security and Cooperation in Europe. By far the most influential, however, have been the European Union and the North Atlantic Treaty Organization.

Since the end of the Cold War, it has been a consistent and principal foreign-policy objective of the region's states to join the two organizations, a prospect that has given the EU and NATO tremendous leverage over these states' domestic and foreign policies. While NATO membership may not promise the kinds of tangible, long-term economic benefits that EU membership does, NATO accession is nevertheless a democratic milestone for the countries of Eastern Europe.

Just as democratic consolidation depends on the stability afforded by robust security arrangements, full membership in the Atlantic Alliance is a more important objective than EU integration. And because a number of East European states perceived (accurately) that an invitation from NATO would be more readily forthcoming than one from the EU, they focused their early post-communist efforts on satisfying NATO's less rigorous membership criteria. NATO enlargement has been one of the most important events in post-Cold War international affairs. In less than a decade, countries that were ardent and strategically crucial enemies of the Alliance became its newest members. How and why did this happen?

Three developments compelled Eastern Europe’s leaders to turn their attention to security: 1. The breakup of Yugoslavia; 2. Eastern Europe’s leaders had come to understand that they had more to fear than conventional, or “hard,” security threats; 3. The momentous development was the all-out collapse of the Soviet Union in 1991. Vladimir Zhirinovsky promised to reinstate the Soviet Empire and to redraw the map of Eastern Europe in Russia’s interests.

This article argues that NATO has been an essential instrument of democratic transition and consolidation because it has a) guaranteed security, a fundamental precondition of democratization; b) exerted a positive general influence on political processes; and c) urged and helped shape specific policies in the military-security domain.

After explaining the East European states' interest in gaining full membership in the Alliance, the article analyzes the debates preceding the 1997 and 2002 enlargement decisions and the ways in which 9/11 has changed NATO's expansion. Barany emphasizes that the NATO expansion has important consequences both for the democratic prospects of its new members and for the Alliance itself.

By providing the security essential for successful democratization as well as positive changes in specific policy areas, NATO may have made even more contribution than the European Union to Eastern Europe's democratic transformation, and by engaging in a politically driven enlargement, it may risk its effectiveness as a military alliance.