The Egypt Crisis in a Global Context: A Special Report | STRATFOR

January 30, 2011

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The Egypt Crisis in a Global Context: A Special Report

By George Friedman

It is not at all clear what will happen in the Egyptian revolution. It is not a surprise that this is happening. Hosni Mubarak has been president for more than a quarter of a century, ever since the assassination of Anwar Sadat. He is old and has been ill. No one expected him to live much longer, and his apparent plan, which was that he would be replaced by his son, Gamal, was not going to happen even though it was a possibility a year ago. There was no one, save his closest business associates, who wanted to see Mubarak’s succession plans happen. As his father weakened, Gamal’s succession became even less likely. Mubarak’s failure to design a credible succession plan guaranteed instability on his death. Since everyone knew that there would be instability on his death, there were obviously those who saw little advantage to acting before he died. Who these people were and what they wanted is the issue.Let’s begin by considering the regime. In 1952, Col. Gamal Abdel Nasser staged a military coup that displaced the Egyptian monarchy, civilian officers in the military, and British influence in Egypt. Nasser created a government based on military power as the major stabilizing and progressive force in Egypt. His revolution was secular and socialist. In short, it was a statist regime dominated by the military. On Nasser’s death, Anwar Sadat replaced him. On Sadat’s assassination, Hosni Mubarak replaced him. Both of these men came from the military as Nasser did. However their foreign policy might have differed from Nasser’s, the regime remained intact.Mubarak’s OpponentsThe demands for Mubarak’s resignation come from many quarters, including from members of the regime — particularly the military — who regard Mubarak’s unwillingness to permit them to dictate the succession as endangering the regime. For some of them, the demonstrations represent both a threat and opportunity. Obviously, the demonstrations might get out of hand and destroy the regime. On the other hand, the demonstrations might be enough to force Mubarak to resign, allow a replacement — for example, Omar Suleiman, the head of intelligence who Mubarak recently appointed vice president — and thereby save the regime. This is not to say that they fomented the demonstrations, but some must have seen the demonstrations as an opportunity.

This is particularly the case in the sense that the demonstrators are deeply divided among themselves and thus far do not appear to have been able to generate the type of mass movement that toppled the Shah of Iran’s regime in 1979. More important, the demonstrators are clearly united in opposing Mubarak as an individual, and to a large extent united in opposing the regime. Beyond that, there is a deep divide in the opposition.

Western media has read the uprising as a demand for Western-style liberal democracy. Many certainly are demanding that. What is not clear is that this is moving Egypt’s peasants, workers and merchant class to rise en masse. Their interests have far more to do with the state of the Egyptian economy than with the principles of liberal democracy. As in Iran in 2009, the democratic revolution, if focused on democrats, cannot triumph unless it generates broader support.

The other element in this uprising is the Muslim Brotherhood. The consensus of most observers is that the Muslim Brotherhood at this point is no longer a radical movement and is too weak to influence the revolution. This may be possible, but it is not obvious. The Muslim Brotherhood has many strands, many of which have been quiet under Mubarak’s repression. It is not clear who will emerge if Mubarak falls. It is certainly not clear that they are weaker than the democratic demonstrators. It is a mistake to confuse the Muslim Brotherhood’s caution with weakness. Another way to look at them is that they have bided their time and toned down their real views, waiting for the kind of moment provided by Mubarak’s succession. I would suspect that the Muslim Brotherhood has more potential influence among the Egyptian masses than the Western-oriented demonstrators or Mohamed ElBaradei, the former head of the International Atomic Energy Agency, who is emerging as their leader.

There is, of course, the usual discussion of what U.S. President Barack Obama’s view is, or what the Europeans think, or what the Iranians are up to. All of them undoubtedly have thoughts and even plans. In my view, trying to shape the political dynamics of a country like Egypt from Iran or the United States is futile, and believing that what is happening in Egypt is the result of their conspiracies is nonsense. A lot of people care what is happening there, and a lot of people are saying all sorts of things and even spending money on spies and Twitter. Egypt’s regime can be influenced in this way, but a revolution really doesn’t depend on what the European Union or Tehran says.

There are four outcomes possible. First, the regime might survive. Mubarak might stabilize the situation, or more likely, another senior military official would replace him after a decent interval. Another possibility under the scenario of the regime’s survival is that there may be a coup of the colonels, as we discussed yesterday. A second possibility is that the demonstrators might force elections in which ElBaradei or someone like him could be elected and Egypt might overthrow the statist model built by Nasser and proceed on the path of democracy. The third possibility is that the demonstrators force elections, which the Muslim Brotherhood could win and move forward with an Islamist-oriented agenda. The fourth possibility is that Egypt will sink into political chaos. The most likely path to this would be elections that result in political gridlock in which a viable candidate cannot be elected. If I were forced to choose, I would bet on the regime stabilizing itself and Mubarak leaving because of the relative weakness and division of the demonstrators. But that’s a guess and not a forecast.

Geopolitical Significance

Whatever happens matters a great deal to Egyptians. But only some of these outcomes are significant to the world. Among radical Islamists, the prospect of a radicalized Egypt represents a new lease on life. For Iran, such an outcome would be less pleasing. Iran is now the emerging center of radical Islamism; it would not welcome competition from Egypt, though it may be content with an Islamist Egypt that acts as an Iranian ally (something that would not be easy to ensure).

For the United States, an Islamist Egypt would be a strategic catastrophe. Egypt is the center of gravity in the Arab world. This would not only change the dynamic of the Arab world, it would reverse U.S. strategy since the end of the 1973 Arab-Israeli war. Sadat’s decision to reverse his alliance with the Soviets and form an alliance with the United States undermined the Soviet position in the Mediterranean and in the Arab world and strengthened the United States immeasurably. The support of Egyptian intelligence after 9/11 was critical in blocking and undermining al Qaeda. Were Egypt to stop that cooperation or become hostile, the U.S. strategy would be severely undermined.

The great loser would be Israel. Israel’s national security has rested on its treaty with Egypt, signed by Menachem Begin with much criticism by the Israeli right. The demilitarization of the Sinai Peninsula not only protected Israel’s southern front, it meant that the survival of Israel was no longer at stake. Israel fought three wars (1948, 1967 and 1973) where its very existence was at issue. The threat was always from Egypt, and without Egypt in the mix, no coalition of powers could threaten Israel (excluding the now-distant possibility of Iranian nuclear weapons). In all of the wars Israel fought after its treaty with Egypt (the 1982 and 2006 wars in Lebanon) Israeli interests, but not survival, were at stake.

If Egypt were to abrogate the Camp David Accords and over time reconstruct its military into an effective force, the existential threat to Israel that existed before the treaty was signed would re-emerge. This would not happen quickly, but Israel would have to deal with two realities. The first is that the Israeli military is not nearly large enough or strong enough to occupy and control Egypt. The second is that the development of Egypt’s military would impose substantial costs on Israel and limit its room for maneuver.

There is thus a scenario that would potentially strengthen the radical Islamists while putting the United States, Israel, and potentially even Iran at a disadvantage, all for different reasons. That scenario emerges only if two things happen. First, the Muslim Brotherhood must become a dominant political force in Egypt. Second, they must turn out to be more radical than most observers currently believe they are — or they must, with power, evolve into something more radical.

If the advocates for democracy win, and if they elect someone like ElBaradei, it is unlikely that this scenario would take place. The pro-Western democratic faction is primarily concerned with domestic issues, are themselves secular and would not want to return to the wartime state prior to Camp David, because that would simply strengthen the military. If they win power, the geopolitical arrangements would remain unchanged.

Similarly, the geopolitical arrangements would remain in place if the military regime retained power — save for one scenario. If it was decided that the regime’s unpopularity could be mitigated by assuming a more anti-Western and anti-Israeli policy — in other words, if the regime decided to play the Islamist card, the situation could evolve as a Muslim Brotherhood government would. Indeed, as hard as it is to imagine, there could be an alliance with the Muslim Brotherhood designed to stabilize the regime. Stranger things have happened.

When we look at the political dynamic of Egypt, and try to imagine its connection to the international system, we can see that there are several scenarios under which certain political outcomes would have profound effects on the way the world works. That should not be surprising. When Egypt was a pro-Soviet Nasserite state, the world was a very different place than it had been before Nasser. When Sadat changed his foreign policy the world changed with it. If Sadat’s foreign policy changes, the world changes again. Egypt is one of those countries whose internal politics matter to more than its own citizens.

Most of the outcomes I envision leave Egypt pretty much where it is. But not all. The situation is, as they say, in doubt, and the outcome is not trivial.

Read more: The Egypt Crisis in a Global Context: A Special Report | STRATFOR


Really Bad News for New York City Co-op and Condo Owners

January 17, 2011

This was news to me tonight and I had to rebroadcast.  If such a rule were passed I imagine there would be a large singular correction in New York City real estate values.  Funding would effectively dry up for a large chunk of inventory, effectively curbing demand.

Under the proposed rule, Freddie Mac and Fannie Mae would be forbidden from investing in mortgages in buildings where there is a flip tax or transfer tax.  Since a large amount of buildings in NYC have such charges, any buyers looking at these units would be precluded from a conforming mortgage, if this were passed.

From NY1:

Flip Tax Regulation Could Hit NYC Market Hard

By: Jill Urban

A new proposed federal regulation could change the way condos and co-ops do business here in the city. NY1’s Jill Urban filed the following report.It’s a proposed federal regulation that has the real estate industry buzzing — a new rule that, if passed, could change the way condos and coops in New York do business and could drive property values way down.

Eva Talel, a partner at Strook & Strook & Lavan, is a real estate attorney who specializes in coops and condos and NY1 recently asked her to explain.

“The proposed legislation would essentially prohibit Fannie and Freddie and the federal home loan bank from investing in mortgages where the building, be it a coop or condo, has a flip tax,” says Talel.

Since a majority of the buildings in New York have a flip or transfer tax, this could jeopardize the stability of the local real estate market.

Last year, The Federal Housing Finance Agency proposed the guideline in an effort to prevent developers from requiring buyers to pay them or a trustee a fee whenever a property is re-sold. But this good intentioned regulation overlooks the fact that in New York City, the flip and transfer taxes are generally paid to the buildings themselves and are almost always used for maintenance and capital improvements.

“They are going to have to find a source for money to replace what used to come from flip taxes and the transfer fees. Maintenance or common charges would go up, special assessments will have to be imposed,” explains Talel.

Those increased monthly expenses would drive property values down and hit homeowners pocketbooks during what is already a tough economic time.

The proposal was put on the table last year and then during an open comment phase close to 3,000 comments were made, including ones from groups like the Real Estate Board of New York who all offered a simple solution:

“Carve out flip taxes where the money goes back into the building. That’s all that is really required in order to make this bill palatable and non-punitive,” says Talel.

Even though the comment phase has closed, Talel still urges anyone with a comment to email the agency at or by sending a letter to:

Alfred M. Pollard, Esq.
General Counsel
Federal Housing Finance Agency
Fourth Floor
1700 G Street NW
Washington, DC 20552
ATTENTION: Public Comments Guidance on Private Transfer Fee Covenants (No.2010-N-11)

How to Fire a Teacher in New York City

January 15, 2011

I was reminded of this chart the other day in a conversation with a friend.  I had to re post it here.  The chart illustrates the burden of law on American public schools.  This chart is for New York City, but many such systems are in place around the country.  We will never improve the quality of high school eduction in this country until we alter this system. Imagine the level of productivity and commitment at your job if this was the system used to fire you or your coworkers.  Please note this system is in place for tenured public school teachers.  This does not apply to private school teachers or those without tenure in the public school system.  It does apply to some tenured teachers who are also sex offenders, much of which has been written about, but little of which seems to make it into the public discourse.  Remember a tenured teacher even if you are not allowed to teach, as is the case with convicted sex offenders or the emotionally unstable, you remain on municipal payrolls in “white rooms”.  At a time where municipal budgets are under pressure, I hope this system can be amended.  I encourage you to skip to the end for the punchline after you have taken a little time to get the gist of it.

How do I fire an inept teacher? (Source:

NYTimes: What Goldman Won’t Admit

January 14, 2011

Great article, not just about Goldman but about one of the largest systemic risks (externalities) that remain unaddressed since the collapse of Lehman. I wonder if anyone has studied the “true cost of capital” for large financial firms that prices in the externalization of systemic risk to the financial system born by excessive post Glass-Steigal leverage. My best guess is that the cost of capital for banks is about the same with and without large amounts of leverage in equilibrium, if you include the costs associated with externalizing systemic risk. If this were the case it would prove what most of us sense, which is that wall street is systematically taking advantage of us all, all of the time.

From The New York Times:

ECONOMIX: What Goldman Won’t Admit

Policy makers and regulators endanger the financial system by not insisting that big banks rely less on debt and more on equity, an economist writes.

NYTimes: The Fed’s QE2 Traders, Buying Bonds by the Billions

January 11, 2011

From The New York Times:

The Fed’s QE2 Traders, Buying Bonds by the Billions

The traders are buying hundreds of billions of dollars of United States Treasury securities on the open market in a controversial attempt to keep interest rates low and revive the economy.


(BN) Goldman Sachs May Sell, Hedge Facebook Stake Without Warning to Investors

January 6, 2011

This is an omen to warn of the impending bubble in technology companies. Correct me if I am wrong but isn’t FB generating about $500mm a year in revenue? At a $50B valuation that means that these investors are paying 100x top line sales for a company whose business model could be disinter-mediated overnight. Who in their right mind would lock up money in a deal where the most upside to the investment is 100%, tops, and that is assuming what is currently massively overvalued becomes shit-balls overvalued and then of course that you can get out before the balloon deflates. No city slicker will ever be able to convince me that at user generated content site whose primary purpose is to serve the underemployed will be able to reasonably fetch a valuation of $100B. If that happens then I suppose we might also see Osama Bin Laden lay down his arms and declare America the best country in the world. Goldman Sachs clients may be rich and might be presumed to be smart, but any moron clamoring for this deal is just a plain old fashioned sucker.

Bloomberg News, sent from my iPhone.

Goldman Sachs Says It May Sell, Hedge Facebook Stake

Jan. 6 (Bloomberg) — Goldman Sachs Group Inc. clients considering whether to buy shares in closely held Facebook Inc. should take heed: Wall Street’s most profitable securities firm could unload its own holdings without letting them know.

In the last sentence of a one-page investment profile sent to private wealth clients, the firm explains: “GS Group may at any time further reduce its exposure to its investment in Facebook (through hedging arrangements, sales or otherwise), without notice to the fund or investors in the fund.”

The offering document, obtained by Bloomberg News, shows that $75 million of the $450 million investment in Facebook by Goldman Sachs is coming from Goldman Sachs Investment Partners, a hedge fund that handles client money. The firm’s own $375 million investment will probably be cut to $300 million because Goldman Sachs expects to sell $75 million to third parties or to the fund it created so clients could buy a stake in Facebook.

“There may be conflicts of interest relating to the underlying investments of the fund and Goldman Sachs,” according to the Facebook offering document’s disclosures section. Material in the documents “is not guaranteed as to accuracy or completeness.”

Goldman Sachs paid $550 million in July to settle fraud charges filed by the Securities and Exchange Commission relating to the 2007 sale of a mortgage-linked investment called Abacus. The company said it made a “mistake” by failing to inform clients in the 2007 deal that it allowed a hedge fund betting against the investment to help put together the deal.

Stephen Cohen, a Goldman Sachs spokesman in New York, declined to comment yesterday. Jonathan Thaw, a spokesman for Facebook, also declined to comment.

Rules for Clients

To get a stake in Facebook, Goldman Sachs clients are required to make a minimum investment of $2 million by Jan. 7 in what’s described as limited partnerships based in the Cayman Islands and Delaware. Goldman Sachs is charging 0.5 percent of any capital committed to the partnership as an “expense reserve” as well as a 4 percent placement fee and 5 percent of any gains, according to the document.

Facebook has more than 600 million monthly active users, of whom more than 230 million access the site on mobile devices, the document shows. Statistics available on Facebook’s website indicate it has more than 500 million monthly active users and more than 200 million access from mobile devices.

A letter addressed to “potential investor” that introduces the Facebook investment profile ends with a two- sentence paragraph. The first asks potential investors to contact a Goldman Sachs representative for further information. The second says:

“Do not contact Facebook.”

To contact the reporters on this story: Max Abelson in New York at mabelson Christine Harper in New York at charper

To contact the editor responsible for this story: David Scheer at dscheer .