The implosion of US and global financial markets over the last week has been extraordinary, but not wholly unexpected - after all there have been warnings for some time that things were coming apart.

What has been a surprise is the speed of the unraveling in the US. And it would almost certainly have been a whole lot worse if it weren't for the fact that there are some extremely smart people working in the US administration who have presumably been not just putting together the government bail outs, but also manipulating markets through the application of very large bets on market for the same companies that are being bailed out...

Next we are going to see how the tsunami affects the rest of the world as the aftershocks ripple around the planet...

And isn't it ironic that the country in which capitalism has become such a fine art is now in the process of becoming the country that is most socialized on the planet?

How is is possible that the world's largest insurance company is now owned by the US government?

The AIG mess is going to reverberate through China next, and who knows what that means. Look at this article about the connections that the company has with China.

China's imploding US ally
September 18, 2008
by Richard Komaiko and Chris Stewart

Asia Times

                The collapse of US insurance giant AIG and its US$85 billion takeover by the US government on Tuesday takes the US financial crisis right to the heart of China's development as a capitalist country.

                AIG, the world's sixth-largest company by assets and biggest insurer, according to the Forbes Global 2000 list for 2007, is one of the few US institutions to be founded in China, its roots dating from 1919 when Cornelius Vander Starr, a veteran of World War I, founded a small insurance company in Shanghai called American Asiatic Underwriters, later to become AIG.

                More famously, Starr's successor, Maurice R Greenberg, built relations with China's leadership from 1975, his first visit to the country predating by several years the revolutionary moves by Deng Xiaoping to open up China to Western influences.

                In this, Greenberg proved himself a master of developing guanxi, a term summarized as "connections" and now recognized as holding the key to successful development of business in China.

                According to Benjamin A Shobert, reviewing Robert Buderi and Gregory T Huang's book of that name, "guanxi is commonly perceived as partnering and understood to focus the attention of Westerners on the great importance that the Chinese put on relationships. To most Westerners guanxi emphasizes personal relationships in contrast to the contractual, non-relational business practices common in America.

                "While a portion of the word's meaning can simply be seen as stressing relationships, the authors emphasize that a better understanding of the word is to emphasize four things: trust, favor, dependence and adaptation - the last what the authors call 'patience and cultivation'."

                Greenberg's patience and cultivation of relations with China's leaders saw him play a key role in building links between the US and China, while his company had a front-runner's view as it and China metamorphosed into leading players in the global business world.

                Starr was the initial pathbreaker. When he set up shop in Shanghai, there were many other Westerners selling insurance in the city, then as now the country's financial hub. But these potential rivals almost exclusively concentrated their efforts on selling to other Westerners. Starr realized that the Chinese people themselves represented a vast and underserved market for insurance, with relatively low risks. This insight would enable him to become one of the wealthiest men in the world.

                Within 10 years, Starr had established offices across China, Hong Kong, the Philippines, Indochina, Jakarta and Kuala Lumpur. In 1926, he opened his first office in the United States. The growth of his company was temporarily disrupted by the Chinese civil war and the general turmoil in East Asia. In 1939, Starr moved the headquarters of his corporate empire to the Empire State - New York. From there, his company and fortune grew many fold.

                In 1962, Starr appointed Greenberg to head AIG's then failing North American operations. In a remarkable display of business prowess, Greenberg turned the unit around, a feat that encouraged Starr to name him his successor before passing away in 1968.

                Starr bequeathed all his wealth to the C V Starr Foundation, one of the largest foundations in the United States, with over $3 billion in assets. Greenberg became the chairman of this foundation while also assuming the reins at AIG. Under his leadership, the company prospered while he himself became one of the kingpins of American foreign policy.

                In 1977, he became a member of the Council of Foreign Relations, arguably America's most influential think-tank, and over the next three decades he would hold numerous leadership positions in the council, culminating in 1997 with the founding of the Greenberg Chair.

                Today, the Greenberg Chair "is the senior person directly responsible for the substantive content and management" of the think-tank. Greenberg has also been a member of the board of directors of the New York Stock Exchange; a former chairman, deputy chairman and director of the Federal Reserve Bank of New York; a member of the US-China Business Council; the chairman of the Asia Society; and a member of the Advisory Committee for Trade Policy and Negotiations to the President of the United States.

                With all of these roles, plus his control over the resources of the Starr Foundation and the American International Group, Greenberg's power to shape America's foreign policy was rivaled only by Citizen Kane.

                Greenberg's foreign policy views were heavily influenced by two factors. One was his experience in World War II of the liberation of the Nazi concentration camp at Dachau. The other was the legacy of Starr's love for China. This latter factor would ultimately play an enormous role in shaping America's policy toward China for more than a quarter of a century.

                In all of his actions and with all of his influence, Greenberg exercised a sanguine desire to foster reconciliation and cooperation between the United States and the People's Republic of China. The impact of this desire can be seen in the fingerprint that Greenberg has left on academic and policy institutions around the United States.

                At his discretion, the Starr Foundation has funded numerous fellowships with the Asian Cultural Council, donated $300,000 to Columbia University's East Asian Library and considerably more to Berkeley's C V Starr East Asian Library. Most recently, Greenberg and the Starr Foundation each donated $25 million to Yale University to create the Maurice R Greenberg Yale-China Initiative.

                Greenberg's lobbying efforts were a driving factor behind America's decision to support China's admission to the World Trade Organization, which it officially joined in November 2001. Undoubtedly, a fair amount of the credit for the creation of an American policy environment that is favorable to China is due to Greenberg and the resources that were generated by AIG.

                AIG's own development in China took various, often ground-breaking, forms. China America Insurance Company was formed in 1980 as a 50-50 joint venture between AIG companies and the People's Insurance Company of China (PICC), the first joint venture between a foreign insurance organization and PICC. Personal ties with future leaders were also forged. In 1990, AIG financed and chaired a financial services conference in Shanghai to assist then city mayor and later country premier Zhu Rongji in introducing the international financial community to investment opportunities in Shanghai.

                Two years later, AIG unit American International Insurance (AIA) established a branch office in Shanghai, to become the first foreign-owned life and non-life insurance business to receive a license from the People's Bank of China. In 1995, AIG companies won licenses to extend operations to Guangzhou, the key city in the country's efforts to open up to the outside world of commerce, and a year later it secured a lease allowing it to return in 1998 to the Shanghai Bund, home of C V Starr's original Shanghai insurance companies.

                In 2003, by which time AIG's presence in the country extended to several provinces, the insurer acquired a 9.9% stake in PICC Property and Casualty (PICC P&C) when the Chinese company listed in Hong Kong. In 2005, as the Chinese government continued to ease its grip on the financial sector, AIG Private Bank became the first foreign private bank to receive approval to open a representative office in Shanghai.

                One immediate effect of AIG's collapse could be on PICC P&C's stock price, which would be at risk if AIG liquidated its stake, Citigroup analyst Bob Leung said in a research note on Tuesday.

                Chinese insurers also face a greater counter-party risk from the collapse of AIG than from Lehman Brothers, the other US financial giant that crumpled in the past few days. Lehman, which has filed for bankruptcy has significant exposure in Asia. "Given the very low life insurance accession rate in Asia, "if AIG loses its A- rating or its situation worsens significantly, we expect the financial impact to affect mainly P&C insurers," Leung wrote.

                S&P lowered AIG's long-term counterparty rating to 'A-' on Monday.

                China's insurance regulator declared that AIG businesses in the country were sound, echoing statements from the rest of the region. This is however a big concern going forward, given the large market share that AIG commands in many Asian markets, and the sheer volume of domestic securities that it holds across the region.

                Other insurers in China meanwhile may gain from AIG's loss. "China Life, with a strong balance sheet and limited non-yuan asset exposure (less than US$3 billion and mainly in H-stock Hong Kong listed shares and cash) has the strongest balance sheet of all regional insurers and is likely to benefit from a 'flight to quality' perspective," Leung wrote.

                The sudden decline of AIG may lead to a reduced influence of the company in international affairs, and a cut in the amount of resources that are lavished on America's foreign policy establishment for the purpose of encouraging China-friendly policy.

                As it is, Greenberg's pathfinding and influential role in China has already been superceded to a large extent by the huge influx of other Western business leaders, notable among them Henry Paulson, who as chairman and chief executive of Goldman Sachs spent much time and and effort building his own relations with the present Chinese leadership.

                Paulson's appointment as US Treasury Secretary in 2006 came at a time of simmering tensions between Washington and Beijing over China's reluctance to strengthen its currency and rein in the growing trade surplus it enjoyed with the US. Demands for faster appreciation of the yen continue, but their tenor has become less strident since Paulson took up his government post, with the focus on relations changing through the Strategic Economic Dialogue to broader long-term bilateral economic interests.

                Ironically, while the US Federal Reserve played the dominant role in bailing out AIG this week, it was Paulson holding key strings of power in Washington while Maurice Greenberg sat on the sidelines.

                In 2005, Greenberg was accused of financial malfeasance. In the ensuing scandal, he was ousted from his leadership role at AIG. Nonetheless, he retained direct ownership of 39 million shares of AIG stock, and an additional 243 million shares through the investment company that he still controls, C V Starr and Co. At the beginning of this year, his shares were worth $15.8 billion. By the close of the market on Tuesday afternoon, they were worth a little more than $1 billion.

                The links that Greenberg had cultivated over the decades with the Chinese community certainly are also looking frayed when it comes to trust in AIG products in the wake of this week's collapse.

                As Chan Akya reports in Asia Times Online on Wednesday panic-stricken policyholders lined up all day on Wednesday in Singapore to surrender their policies to secure redemption value.

                In Hong Kong, where AIA is the largest life insurer with more than 26% of the market and more than 1.9 million policies sold, more than 1,700 people canceled their insurance policies with AIA on Tuesday. On Wednesday, some 170 policy holders rushed to AIA headquarters to cut their insurance or investments. The Hong Kong government has demanded AIA seek approval before it removes any asset out of the territory.

                One 50-year-old woman at the hectic commercial and retailing center of Causeway Bay said she decided to surrender her insurance policy today as she was worried AIA's business might be affected.

                "I was supposed to pay premiums this month but I don't want to take any risk now. I am so afraid that I will lose all my money here. To keep as much money as I have in my pocket, I surrender the policy now," she said.

                With further reporting by Olivia Chung, senior Asia Times Online reporter in Hong Kong.

                Richard Komaiko researches Sino-American relations, economic policy, terrorism and national security. He holds a degree in economics from the University of Illinois

Over the last couple of weeks I have been having some very interesting conversations with an old acquaintance who is one of the most savvy Internet guys in Australia. He built one of the early ISP's and made a fortune (which he subsequently lost but that's life). He is truly a geek's geek. But its probably better that I don't discuss who he is at the moment... (Some mutual friends will figure that out).

A couple of years ago we had some in depth conversations about copyright piracy and what could - or in most cases could not - be done about it. We were both clear about a couple of things back then: DRM was never going to work. And human nature being what it is, people will always go for the least expensive option.

So that led us to believe back then that the content companies were going to get into ever deeper crap as broadband penetration widened. The music companies have continued, particularly in the US, to apply a sledgehammer to a walnut strategy, pursuing the little guys and making a very small percentage of law suits stick. I imagine that their thought is that the publicity surrounding the law suits will discourage the masses.

So in the last few weeks after a hiatus of probably two years we started discussing this stuff again.

What I found interesting this time around in my discussions with the anonymous friend was to be told of the speed of the growth of the P2P networks. Not only the speed of growth of the downloads, but the growth of the number of networks. And a lot of these networks are mesh networks. That means that there is no central server necessary - your computer and my computer form part of a group where files can be easily shared and are pretty much untraceable.

Now the music companies have been playing Spy V Spy games with content for some time, placing spurious files into the more visible file sharing networks. These are files that have text titles that match with popular downloads (Madonna, Metallica etc) but when the unsuspecting consumer downloads them they find that the file is (1) empty or (2) has a virus inside it. Make no mistake the copyright police is one of the most active distributors of viruses that is out there. 

But the problem is that for the most part people who are active downloaders are also very hip to changes taking place in technology. So once they realize what is happening they migrate to these very sophisticated mesh networks where there are trusted suppliers of content. Of course the copyright police are also aware of this. But they are actually conflicted. They know that their bread and butter comes from providing measurable results to their commercial clients. That comes about most easily if they catch people. Since the amount of people downloading music is growing at a geometric growth curve they don't actually have to work too hard to achieve results. Hence they focus on the tip of the iceberg rather than the mass.

All that means that the fundamental model that continues to be pursued by the content companies is flawed. But it can be fixed. Fixed by a combination of technology and understanding of human nature. And in doing so can produce huge increases in revenues for the content owners.

I would be happy to discuss it with any interested parties!

So the American economic train wreck is unfolding before our very eyes. The question is whether it truly is a flat world in every sense or whether there has been decoupling over the last few years.

The pundits in Australia seem to think that the banks have been very conservative here in terms of the way they have structured their businesses because their fundamental businesses are so profitable. Let's hope so.

Not so the players who have been largely funded by debt. Hence the decline and fall of companies like Babcock and Brown. Who knows whether the giant Macquarie Bank will survive since their model is so reliant upon debt.

While doom and gloom inhabits the boardrooms of the western world and we all sit waiting to find out whether America will finally wake up to the reasons that we are in this crisis in the first place (the cost of waging an everlasting war) I tend to think that it is time to start looking for the opportunities to emerge from the wreck.

After the storm and the mayhem comes the time to clean up and rebuild. And the ones who do best are the ones who are preparing for the rebuild as the eye passes overhead and the winds start to crank around to blow from the opposite direction. Its time to look both optimistically and opportunistically at what is happening. And let's hope that in amongst it the people of America vote for sanity at the next election.

Fascinating article by Arnaud de Borchgrave on the background to the recent Georgian war and how the balance of power has changed as a result.

He provides the background to the largely unreported role that the Israeli defence forces had in the period leading up to the war, how local airfields were to be used as staging posts for an attack on Iran and the fact that America's intelligence gathering capabilities were overstretched with the wars in Afghanistan and Iraq.

Here is a sample of the article:

Its amazing how many people seem to believe that there are surprises when it comes to what nations do. There are no real surprises. Instead there is scenario planning, psychology, brinkmanship, bluff and double-bluff, and huge amounts of money spent on projecting, or giving the appearance of projecting, power.

Very few of us truly know what is going on in the minds of the people in power. We can only imagine. But one thing is for sure - things don't happen by accident.

I came across an analysis of the grand chess game being played out in the Caucasus that provides one hypothetical deconstruction of Georgia, the US and Russia that is worth reading.

The ultimate prize in this contest is control over the flow of oil and natural gas from the energy-rich Caspian basin to eager markets in Europe and Asia. According to the most recent tally by oil giant BP, the Caspian's leading energy producers, all former "socialist republics" of the Soviet Union -- notably Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan -- together possess approximately 48 billion barrels in proven oil reserves (roughly equivalent to those left in the U.S. and Canada) and 268 trillion cubic feet of natural gas (essentially equivalent to what Saudi Arabia possesses).