Lidija Rangelovska

"The ability of regulators to contain moral hazard directly is limited. Moral hazard results when economic agents do not bear the marginal costs of their actions. Regulatory reforms can alter marginal costs but they accomplish this task through very crude and often exploitable tactics. There should be limited confidence that regulation and supervision will lead to bank closures before institutions become insolvent. In particular, reliance on lagging regulatory measures, restrictive regulatory and legal norms, and the ability of banks to quickly alter their risk profile have often resulted in costly failures."

Stern concludes his remarks by repeating the age-old advice: caveat emptor. Let depositors and creditors suffer losses. This will enhance their propensity to discipline market players. They are also likely to become more selective and invest in assets which conform to their risk aversion.

Both outcomes are highly dubious. Private sector creditors and depositors have little leverage over delinquent debtors or banks. When Russia - and trigger happy Russian firms - defaulted on their obligations in 1998, even the largest lenders, such as the EBRD, were unable to recover their credits and investments.

The defrauded depositors of BCCI are still chasing the assets of the defunct bank as well as litigating against the Bank of England for allegedly having failed to supervise it. Discipline imposed by depositors and creditors often results in a "run on the bank" - or in bankruptcy. The presumed ability of stakeholders to discipline risky enterprises, hazardous financial institutions, and profligate sovereigns is fallacious.

Asset selection within a well balanced and diversified portfolio is also a bit of a daydream. Information - even in the most regulated and liquid markets - is partial, distorted, manipulative, and lagging. Insiders collude to monopolize it and obtain a "first mover" advantage.

Intricate nets of patronage exclude the vast majority of shareholders and co-opt ostensible checks and balances - such as auditors, legislators, and regulators. Enough to mention Enron and its accountants, the formerly much vaunted firm, Arthur Andersen.

Established economic theory - pioneered by Merton in 1977 - shows that, counterintuitively, the closer a bank is to insolvency, the more inclined it is to risky lending. Nobuhiko Hibara of Columbia University demonstrated this effect convincingly in the Japanese banking system in his November 2001 draft paper titled "What Happens in Banking Crises - Credit Crunch vs. Moral Hazard".

Last but by no means least, as opposed to oft-reiterated wisdom - the markets have no memory. Russia has egregiously defaulted on its sovereign debt a few times in the last 100 years. Only seven years ago - in 1998 - it thumbed its nose with relish at tearful foreign funds, banks, and investors. Six years later, President Vladimir Putin dismantled Yukos, the indigenous oil giant and confiscated its assets, in stark contravention of the property rights of its shareholders.

Yet, Russia is besieged by investment banks and a horde of lenders begging it to borrow at concessionary rates. The same goes for Mexico, Argentina, China, Nigeria, Thailand, other countries, and the accident-prone banking system in almost every corner of the globe.

In many places, international aid constitutes the bulk of foreign currency inflows. It is severely tainted by moral hazard. In a paper titled "Aid, Conditionality and Moral Hazard", written by Paul Mosley and John Hudson, and presented at the Royal Economic Society's 1998 Annual Conference, the authors wrote:

"Empirical evidence on the effectiveness of both overseas aid and the 'conditionality' employed by donors to increase its leverage suggests disappointing results over the past thirty years ... The reason for both failures is the same: the risk or 'moral hazard' that aid will be used to replace domestic investment or adjustment efforts, as the case may be, rather than supplementing such efforts."

In a May 2001 paper, tellingly titled "Does the World Bank Cause Moral Hazard and Political Business Cycles?" authored by Axel Dreher of Mannheim University, he responds in the affirmative:

"Net flows (of World Bank lending) are higher prior to elections ... It is shown that a country's rate of monetary expansion and its government budget deficit (are) higher the more loans it receives ... Moreover, the budget deficit is shown to be larger the higher the interest rate subsidy offered by the (World) Bank."

Thus, the antidote to moral hazard is not this legendary beast in the capitalistic menagerie, market discipline. Nor is it regulation. Nobel Prize winner Joseph Stiglitz, Thomas Hellman, and Kevin Murdock concluded in their 1998 paper - "Liberalization, Moral Hazard in Banking, and Prudential Regulation":

"We find that using capital requirements in an economy with freely determined deposit rates yields ... inefficient outcomes. With deposit insurance, freely determined deposit rates undermine prudent bank behavior. To induce a bank to choose to make prudent investments, the bank must have sufficient franchise value at risk ... Capital requirements also have a perverse effect of increasing the bank's cost structure, harming the franchise value of the bank ... Even in an economy where the government can credibly commit not to offer deposit insurance, the moral hazard problem still may not disappear."

Moral hazard must be balanced, in the real world, against more ominous and present threats, such as contagion and systemic collapse. Clearly, some moral hazard is inevitable if the alternative is another Great Depression. Moreover, most people prefer to incur the cost of moral hazard. They regard it as an insurance premium.

Depositors would like to know that their deposits are safe or reimbursable. Investors would like to mitigate some of the risk by shifting it to the state. The unemployed would like to get their benefits regularly. Bankers would like to lend more daringly. Governments would like to maintain the stability of their financial systems.

The common interest is overwhelming - and moral hazard seems to be a small price to pay. It is surprising how little abused these safety nets are - as Stephane Pallage and Christian Zimmerman of the Center for Research on Economic Fluctuations and Employment in the University of Quebec note in their paper "Moral Hazard and Optimal Unemployment Insurance".

Martin Gaynor, Deborah Haas-Wilson, and William Vogt, cast in doubt the very notion of "abuse" as a result of moral hazard in their NBER paper titled "Are Invisible Hands Good Hands?":

"Moral hazard due to health insurance leads to excess consumption, therefore it is not obvious that competition is second best optimal. Intuitively, it seems that imperfect competition in the healthcare market may constrain this moral hazard by increasing prices. We show that this intuition cannot be correct if insurance markets are competitive.

A competitive insurance market will always produce a contract that leaves consumers at least as well off under lower prices as under higher prices. Thus, imperfect competition in healthcare markets can not have efficiency enhancing effects if the only distortion is due to moral hazard."

Whether regulation and supervision - of firms, banks, countries, accountants, and other market players - should be privatized or subjected to other market forces - as suggested by the likes of Bert Ely of Ely & Company in the Fall 1999 issue of "The Independent Review" - is still debated and debatable. With governments, central banks, or the IMF as lenders and insurer of last resort - there is little counterparty risk. Or so investors and bondholders believed until Argentina thumbed its nose at them in 2003-5 and got away with it.

Private counterparties are a whole different ballgame. They are loth and slow to pay. Dismayed creditors have learned this lesson in Russia in 1998. Investors in derivatives get acquainted with it in the 2001-2 Enron affair. Mr. Silverstein was agonizingly introduced to it in his dealings with insurance companies over the September 11 World Trade Center terrorist attacks.

We may more narrowly define moral hazard as the outcome of asymmetric information - and thus as the result of the rational conflicts between stakeholders (e.g., between shareholders and managers, or between "principals" and "agents"). This modern, narrow definition has the advantage of focusing our moral outrage upon the culprits - rather than, indiscriminately, upon both villains and victims.

The shareholders and employees of Enron may be entitled to some kind of safety net - but not so its managers. Laws - and social norms - that protect the latter at the expense of the former, should be altered post haste. The government of a country bankrupted by irresponsible economic policies should be ousted - its hapless citizens may deserve financial succor. This distinction between perpetrator and prey is essential.

The insurance industry has developed a myriad ways to cope with moral hazard. Co-insurance, investigating fraudulent claims, deductibles, and incentives to reduce claims are all effective. The residual cost of moral hazard is spread among the insured in the form of higher premiums. No reason not to emulate these stalwart risk traders. They bet their existence of their ability to minimize moral hazard - and hitherto, most of them have been successful.

Note on Regulation

Ultimately, the state is the mother of all insurers, the master policy, the supreme underwriter. When markets fail, insurance firm recoil, and financial instruments disappoint - the government is called in to pick up the pieces, restore trust and order and, hopefully, retreat more gracefully than it was forced to enter.

The state would, therefore, do well to regulate all financial instruments: deposits, derivatives, contracts, loans, mortgages, and all other deeds that are exchanged or traded, whether publicly (in an exchange) or privately. Trading in a new financial instrument should be allowed only after it was submitted for review to the appropriate regulatory authority; a specific risk model was constructed; and reserve requirements were established and applied to all the players in the financial services industry, whether they are banks or other types of intermediaries.

Note on Risk Aversion

Why are the young less risk-averse than the old?

One standard explanation is that youngsters have less to lose. Their elders have accumulated property, raised a family, and invested in a career and a home. Hence their reluctance to jeopardize it all.

But, surely, the young have a lot to forfeit: their entire future, to start with. Time has money-value, as we all know. Why doesn't it factor into the risk calculus of young people?

It does. Young people have more time at their disposal in which to learn from their mistakes. In other words, they have a longer horizon and, thus, an exponentially extended ability to recoup losses and make amends.

Older people are aware of the handicap of their own mortality. They place a higher value on time (their temporal utility function is different), which reflects its scarcity. They also avoid risk because they may not have the time to recover from an erroneous and disastrous gamble.

Return

Private Armies and Private Military Companies (PMCs)

In July 2002, Christopher Deliso recounted in antiwar.com that Dutch Radio, based on reports leaked by a Dutch military analysis firm, accused the US government of aiding and abetting terrorists in Macedonia. Not for the first time, the Americans were rumored to have hired the services of MPRI (Military Professional Resources, Inc.) to train and assist the rebels of the NLA, the Albanian National Liberation Army, which skirmished for months with the Macedonian police and military throughout last year.

MPRI is a leading Private Military Company (PMC) whose presence was espied in other Balkan trouble spots, such as Croatia, Kosovo, and Bosnia. The absurd is that MPRI has been training the Macedonia army - to little avail it would seem - since 1998 under a "Stability and Deterrence Program".

Croatian former Foreign Minister Tonino Picula described MPRI's role thus:

"We started at the beginning of the 1990’s lacking all kind of assistance. We faced a war of aggression. We needed all kinds of friends to enhance our capability to keep a schedule. I know that it (MPRI) did a significant job in Croatia as a part of US assistance to Croatia during the 1990s."

Other governments - notably Colombia's and Nigeria's - were less sanguine about the utility of MPRI's services. Colombian officials complained "the MPRI's contributions were of little practical use", while according to the Center for Democracy and Development, the vociferous objections of the Nigerian military led to the dismissal by the president of senior army officers, among them General Malu, the Nigerian chief of staff.

The end of the Cold War spelled the termination of many an illustrious career in the military and the secret services - as well as the destabilization and disintegration of many states. The Big Powers are either much reduced (Russia), militarily over-stretched (Europe), their armies ill-prepared for rapid deployment and low intensity warfare (everyone), or lost interest in many erstwhile "hot spots" (USA). Besieged by overwhelming civil strife, rebellions, and invasions - many countries, political parties, politicians, corporations, and businessmen seek  refuge and protection.

More than 5 million soldiers were let go all over the world between 1987-1994, according to Henry Sanchez of Rutgers University. Professional soldiers, suddenly unemployed in a hostile civilian environment, resorted to mercenariness. A few became rogue freelancers. The role of the Frenchman Bob Denard in the takeover of the Comoros Islands is now mythical. So is the failed coup in Seychelles in 1981, perpetrated by Colonel "Mad" Mike Hoare, a British ex-paratrooper.

Private armies for hire proliferated. Executive Outcomes acted in Sierra Leone, Congo, and Angola, Sandline International in Sierra Leone and Papua New Guinea, DynCorp in Colombia, Haiti, Kosovo, and Bosnia and, of course, MPRI in Bosnia, Croatia, Kosovo, and, lately, Macedonia. Aviation Development Corporation flies surveillance planes for the CIA. Its involvement was revealed when, in Peru, it misidentified a civilian light plane as carrying narcotics. It was shot down by the Peruvian air force.

But these are only the tip of a growing iceberg. Vinnell Corporation was established in the US during the Great Depression and majority owned by TRW until 2002 and by Northrop Grumman since then. It has coached militaries, operated facilities, and provided logistical support in more than 50 countries, starting in Saudi Arabia in 1975, where it won a controversial $77 million contract to train oilfield guards.

BDM International, Betac, Logicon, and SAIC are competitors, but Kroll of New York and Saladin Security of London do mainly intelligence gathering. Brown and Root of Houston, Texas, provide logistical support to peacekeeping operations, for example in Kosovo.

Pacific Architects and Engineering (PAE) furnishes logistical support and private security to armies the world over, mainly to the ECOMOG West African multilateral force. Control Risks Group offers corporate security, research, and intelligence solutions. It specializes in hostage situations. It boasts having advised in more than 1200 kidnappings and extortion cases in 80 countries.

Armor Holdings was founded in 1969 as "American Body Armor and Equipment" and incorporated in 1996. It is a Private Security Company (PSC). Its London-based subsidiary, Defense Systems Limited, guards industrial and other sensitive sites, such as embassies and HQ's of international organizations, mainly the UN's.

Armor itself manufactures police and other "non-lethal" equipment. It is a leading maker of armored passenger vehicles and the prime contractor to the U.S. Military for the supply of armoring and blast protection for High Mobility Multi-purpose Wheeled Vehicles (HMMWVs).

Gray Security is another PSC with clients in both Africa and among Latin American immigrants in Florida. Some PMC's are ethnically pure. Succumbing to market realities, the legendary Gurkhas now offer their services through Gurkha International. The oil-rich region of Cabinda is air-patrolled by AirScan - Airborne Surveillance and Security Services.

Big money is involved. The Los Angeles Times quoted, in its April 14th, 2002 issue, Equitable Services, a security industry analyst. In 1997, it predicted that the international security market will mushroom from $56 billion in 1990 to $220 in 2010. This was long before the boost given to the sector by the September 11 attacks.

"The top five executives at Science Applications International Corp. of San Diego made between $825,000 and $1.8 million in salaries in 2001, and each held more than $1.5 million worth of stock options." - continued the LA Times.

Control Risks Group's turnover exceeded $50 million in 2001. Armor Holding's 1999 revenues exceeded $150 million. Prior to its controversial demise, Executive Outcomes of South Africa was said to have earned c. $55 million in its last 4 years - excluding the $1.8 million per month contract it has signed with Sierra Leone, most of which went unpaid. There were unsubstantiated allegations of securing a share of the diamond trade in the ravaged country as well.

Sandline's contract with Papua New Guinea amounted to $36 million for the first 3 months with just under $1 million for any consecutive month - or a total of c. $45 million per the first year. The country's new government at first refused to honor the commitments of its predecessor - hurling at it vague corruption charges - but then compromised with Sandline and agreed to dole out $13 million.

Nor are these small ensembles. MPRI - now in its 17th year - employs over 800 people, most of them former high level US military personnel. It draws on a database of 12,500 freelancers "former defense, law enforcement, and other professionals, from which the company can identify every skill produced in the armed forces and public safety sectors". Many of its clients work under the US government's Foreign Military Sales program and abide by the GSA (General Services Administration) tariffs.

Control Risks Group - founded in 1975 as a subsidiary of the Hogg Robinson insurance group - claims to have had "more than 5,300 clients (including 86 of the Fortune 100 companies) in over 130 countries". Eighty three percent Of the firms comprising the FTSE 100 use one or more of CRG's services. It has 400 employees in 16 offices around the world. It has recently acquired Network Holdings Limited, the UK's largest private forensic laboratory.

The Armor Holdings Products Division is made up of nine operating companies in eight geographic locations. It offers its branded security products through a network of more than 500 distributors and agents internationally. ArmorGroup employs 5,500 people in 38 countries.

Modern PMC's, such as Sandline, are veritable - though miniature - armies, replete with staff military ranks, uniforms, doctrine, training syllabi, cohesion, unit spirit, and discipline.

Smaller, ad hoc, outfits from Ukraine, Russia, Belarus, France, the United Kingdom, Israel, Croatia, South Africa, the United States and other nationalities scour the Earth for emerging conflicts. Such units are often infiltrated by criminals on the run, terrorists in disguise, sadistic psychopaths, and intelligence officers.

These "dogs of war" are known for their disloyalty and lack of discipline. Many have committed acts of banditry, rapes, and an array of atrocities in the mutilated host countries. Still, these are marginal groups and in the minority of PMC's - the last resort, often hired by undesirables and failed states.

On February 12, 2002 the British Foreign and Commonwealth Office released a long-awaited briefing ("green") paper in support of regulating the private military sector. Quoted in "Defense News", the paper stated:

"The demand for private military services is likely to increase ... A strong and reputable private military sector might have a role in enabling the (United Nations) to respond more rapidly and more effectively in crises. The cost of employing private military companies for certain functions in U.N. operations could be much lower than that of national armed forces."

Regulation, though, has a poor record. All PMC's in the USA are subject to the porous and ill-enforced Arms Export Control Act overseen by the State Department. The Los Angeles Times is not impressed with the record:

"Congress is notified only of contracts worth more than $50 million. Sometimes there are conflicting views of what is in the U. S. interest. And once a license is granted, there are no reporting requirements or oversight of work that typically lasts years and takes the firms' employees to remote, lawless areas." Decisions often appear to be arbitrary and are mysteriously reversed. All major PMC's maintain lobbyists in Washington and function, partly, as rent seekers.

Still, PMC's are the most cost-effective alternative. According to the UN Special Representative to Sierra Leone, The UN peacekeeping mission there costs more than $500 million per year - compared to Executive Outcomes' $33 million spread over 21 months.

Regulation may amount to a belated acceptance of reality. MPRI boasts that it already operates in foreign countries with the full knowledge and "licence" of the American administration. It is a way to circumvent both the oft-withheld Congressional approval needed for US military involvement abroad - and unwelcome media scrutiny.

The US Army, in the framework of LOGCAP (Logistics Civil Augmentation Program), "preplans during peacetime for the use of civilian contractors to perform selected services in wartime and other contingencies. Utilization of contractors, in a theater of operation, will release military units for other missions or fill shortfalls." The ubiquitous MPRI is LOGCAP's main contractor.

Bahamas-incorporated Sandline also claimed British Foreign Office tacit approval of its mission in Sierra Leone. Most PMC's are self-regulating and selective. They won't render their services to organized crime, drug cartels, rogue states, terrorists, illegal arms traders, and regimes known for flagrant violations of human rights.

The privatization of hitherto exorbitantly costly peacekeeping and humanitarian operations would bestow legitimacy upon these outfits and entice them to adhere to strict regulatory codes. Still, the exercise of violence is a prerogative of states and a hallmark of often hard-gained sovereignty. Many do not take kindly to the encroachment of morally-neutral private sector replacements upon these hallowed grounds.

David Isenberg wrote in the March 11, 2002 issue of "Defense News":

"The only question is how best to address concerns about accountability, threats to a nation's sovereignty (i.e., usurping the state's prerogative of having a monopoly on violence), having a vested interest in perpetuating a conflict, violating human rights or acting as government proxies. The consensus opinion is that this is best accomplished through regulation."

The imperceptible line between "military advisors" and combatants is often crossed. According to the Los Angeles Times, Vinnell employees, acting as "advisors", may have joined Saudi National Guard units in battle against the invading army of Saddam Hussein in 1991.

MPRI personnel are alleged by Ken Silverman in his book "Private warriors" and by numerous media - from the British journalist Paul Harris on Australia's Radio National's "Background Briefing" to The Scotsman - to have helped plan the Croatian occupation and ethnic cleansing of Serb-populated Krajina in 1995.  Even the Foreign Military Training Report published by both the State Department and Department of Defence in May refers to these allegations against MPRI not entirely disparagingly.

Sanchez describes what happened in Papua New Guinea:

"When citizens of Papua New Guinea learned that their government signed a $27 million contract with EO (should be Sandline - SV) to train the Army to fight a secessionist rebel uprising it set off five days of rioting and protests. Even the Army commander (later convicted on unrelated corruption charges - SV) refused to work with the South African firm.

States that hire private firms for security are usually financially poor but mineral rich. They often pay for services by offering concessions earned through diamond mining, oil drilling or other natural resources. An enterprising military firm may end up exploiting a poor nation of its modest resources. As a result there may be a new 'Scramble for Africa' over resources where no government exists or is desperate for help..."

Few PMC's if any consent to any form of payment, except cash. Mineral concessions require heavy investments and existing mines require a logistical infrastructure often way beyond the expertise and financial wherewithal of the average PMC. PMC's may be involved in influence peddling on behalf of mineral extractors or receive introduction fees and commissions from multinationals, though. PMC's also make a lot of money on arms sales to their client states.

Consider Sandline International. It was never a shareholder in Branch Energy, DiamondWorks, or any other real or imaginary mining firm it was associated with by sloppy researchers and journalists. Nor was it the successor to Executive Outcomes. Yet, the same people acted as directors, or advisors in all these firms.

This incestuous setup led to the false assertions that Sandline - and EO before it - looted the mineral wealth of countries such as Sierra Leone and Angola. That many PMC's render security services to mining firms - both statal and private - adds to the confusion.

"The Financial Times" mentioned the positive role "Southern Cross Security" played in keeping Sierra Leone's titanium-dioxide mines intact throughout the war. Others wrongly accused it of being an EO offshoot out to pillage the minerals it sought to protect.

Even Sanchez acknowledges that "(others think that) a private company can deploy forces rapidly, avoid the difficulties of ad-hoc multinational forces (command is streamlined and cohesive), they usually have standing logistics for transport, appear to be cost-effective, and are willing to sustain loss of life".

Isenberg concurs:

"It is time to recognize that today's PMCs are far different from the ad hoc organizations of the past. As experts such as professor Herb Howe of Georgetown University have noted, many of today's companies exhibit a distinct corporate nature and a desire for good public relations. The companies' goal of obtaining contracts encourages them to control their employees' actions. Private firms have a large pool of qualified applicants, due to worldwide political realignments and defense cutbacks since 1989 ... One thing is clear: The need for security from the private sector is going to increase dramatically. And PMCs are going to fulfill that need."

PMC's have embarked on a concerted effort to alter their penumbral image. MPRI - its Web site replete with literary quotes lifted from the works of Marcel Proust and other renowned soldiers of fortune - has contracted with Enterprise Strategies and Solutions under the Department of Defence's Mentor-Protégé program. MPRI explains:

"ESSI's emphasis on economic well-being, technology transfer, corporate social investing, business incubation, and knowledge management complement the vital safety and security roles performed by MPRI. MPRI has the added advantage of being able to utilize the skill sets of a small, woman-owned, veteran-owned business. MPRI and ESSI form a comprehensive team that enables them to perform on a wide range of projects that would otherwise be inaccessible for one or the other."

MPRI branched out to offer corporate leadership programs that include the re-enactment of historical battles. It is a major provider of training, support, and "other services" - such as strategic planning and leader development - to the US armed forces, Department of Defense, the corporate sector, and "non-DoD government agencies." Its Web site - a sincere stab at transparency - lists dozens of military and semi-military contracts.

Its military contracts notwithstanding, it emphasizes the humanitarian side of its operations. It "shipped more than $900,000,000 worth of donated food and medical supplies to the newly independent states of the former Soviet Union over a five year period ... has provided peace keeping monitors for both the Department of Defense and the Department of State" and engaged in other charitable deeds, like demining.

In the Winter 2002 issue of "Harvard International Review", Sean Creehan summed up this shift in public perceptions:

"Today's mercenaries still fight for money, but in the context of global capitalism, some groups are becoming less morally objectionable. The organization of mercenaries into corporations that function like consulting firms has put distance between them and their activities. Mercenary corporations' increasing efficiency and self-regulation is influencing the way legitimate governments view mercenaries as instruments of state policy."

In a BBC poll conducted in the wake of the British government's Green Paper about regulating "soldiers of fortune", a reader named Katie raised important points regarding the corporate structure and liabilities of PMC's:

"The UK has a rather poor record of holding corporate officers responsible in any way for their actions ... Maybe military 'companies' should actually be restricted to being partnerships where the owners have unlimited liability similar to a lawyer's practice? Maybe a special class of company needs to be created, for this purpose so they can be audited and tracked and to clarify their relationship with the government (for whom they act). Essentially ... the directors of the company can be held responsible for war crimes as would ranking officers in the army. To some extent the 'corporate veil' needs to be thinner for these companies."

The United Kingdom - and Australia - promote a complete re-think of the concept of national defense. Britain's public-private partnership dubbed the "Private Finance Initiative" revolves around "paying privately for the defence we cannot afford publicly". Thus, transport planes, ships, trucks, training, and accommodation - may all be on long term leases from private firms. The equipment will be leased to other customers during down time, reports the BBC.

After all, when rich countries pay poor countries to send their ill-disciplined, ill-equipped, and ill-trained soldiers on peacekeeping operations - isn't this a mercenary system in all but name? And atrocities are not the preserve of "dogs of war". American regular soldiers committed them in Kosovo and Japan, Nigerian conscripts perpetrated them all over West Africa, "national armies" are feared by their own civilians more than any mercenary troupe. Time to rid ourselves of self-righteous myths and privatize peace as we, alas too often, did war.

Interview granted to Barry Zellen, INTERSEC (UK), February 2008

1. Since the end of the cold war, what has been the role of private contractors in the conduct of war? Has it been on the rise?

A. Private contracting of military functions has been on the rise since the first Gulf War (1991). With the collapse of the USSR, the militaries of the main Western protagonists, the USA and the UK, have been drastically scaled back, a process known as the "peace dividend". At the same time, economists and politicians throughout the world embarked on an ambitious plan involving the privatization of state-owned firms and functions. Inevitably, the two fads coalesced and huge chunks of hitherto state-monopolized warfare were contracted out, outsourced, and even offshored.

2. What have been the primary functions for contractors in war zones, and how has this aided the war efforts of states?

A. Third World countries have always leveraged mercenaries to subdue adversaries at home and abroad. Many armies in Africa and Asia and even in certain parts of Europe (such as the Balkans) were or are being run by third party contractors who sometimes also actively participate in the fighting.

As far as the USA and UK are concerned, until the Iraq war, private contractors were mainly responsible for logistics, training, and security tasks. This narrow definition of their roles is in flux, though. Private soldiers of fortune may yet be hired and rented out even by the governments of the West, though I regard this as extremely unlikely.

3. With the demise of the USSR and the end of bipolarity in international affairs, most of the wars have been to some degree asymmetrical contests between unequal adversaries. Do private contractors help states sustain their warfighting efforts during asymmetrical, protracted and low-intensity conflicts when a full military mobilization is politically and/or economically unfeasible? How would you describe the current role of private contractors in GWOT (Global War on Terror) operations? The numbers appear to be large, perhaps over 100,000 contractors in Iraq alone: what does this tell us about the transformation of war?

A. Though it would make eminent sense, I am not aware of such a role. Granted, private military companies are involved in the provision of logistical, training, and security support to forces on the ground and they also collaborate with field agents of secret services (such as the CIA). But, asymmetrical warfare is still carried out largely by regular armies, backed by intelligence gathered by state-run agencies.

Actual combat is not being transformed by the influx of private contractors. We are simply reverting to earlier times and models when war was a public-private partnership and military camps incorporated entrepreneurial suppliers, contractors, service providers, and hangers-on. The attempt to render modern armies self-sufficient and self-sustaining has clearly failed.

4. Part of Secretary Rumsfeld's Transformation program was a trend toward a decreasing size of our armed forces, and a continued shift toward superior technology to defeat the enemy. Does the increasing role of contractors enable defense organizations to shift their resources on the higher-tech functions, effectively "outsourcing" the lesser skilled functions? Is the "privatization" of the warfighting functions consistent with the Transformation and the Revolution in Military Affairs, as we shift toward leaner, higher-tech, armed forces?

A. Not in my view. Lean, technology-rich armies are an inevitable outcome of budgetary constraints and ever more sophisticated gadgetry. The Transformation program is a response to these trends, not to the changing face of war. Truth be told, the USA has always faced low-intensity asymmetrical warfare. It rarely found itself engaged in conventional battles, mainly in the European theatre.

Private contractors merely substitute for existing structures. Their functions are not always low-skilled, quite the contrary. Moreover, the army duplicates the functions of private contractors. This redundancy may appear wasteful but it stems from the deep and justified distrust professional soldiers hold towards civilian contractors.

5. Looking ahead to the future, will we see an even more prominent role of private companies in future wars?

A. Quantitatively, yes, but not qualitatively. PMCs and private contractors will grow in number, stature, and contribution to the war effort. But they are unlikely to replace the professional soldier in actual combat or the field agent in HUMINT. Their functions will remain largely limited to logistical support and training.

6. What does this private/public partnership mean in terms of the ability of states to engage in multiple engagements at once without a general mobilization - is an 'outsourcing model' smart economics? And what about the political and diplomatic implications -- are there dangers of the perception of too great a role of private contractors in the conduct of war, and potential problems with the chain of command? Back to the GWOT and its emphasis on low-intensity conflict, counter-terrorist and counter-insurgent operations, and pre-emptive strikes against rogue states and non-state actors, does the role of private contractors complement the war aims of the coalition of states aligned in the "long war" against terrorism?

A. Private contractors are not GIs. They provide no substitute for the fighting men and women of the armed services. I doubt if they ever will. Thus, they do not alter the military equation in any meaningful way. Their involvement has no bearing on whether to draft and mobilize fighting age conscripts.

Incredibly, there are no serious studies that decide the question whether private contracting is a clever move, from the pecuniary point of view. Anecdotal evidence suggests that it is not and that waste and corruption are as rife there as among the traditional state bureaucracy.

Chain of command issues are inevitable. This is especially true when contractors are granted immunity to the consequences of their delinquency, crime, waste, and venality. There is no love lost between the fighting corps and private contractors. As we have seen in Iraq, the involvement of PMCs is often resented by host governments and leads to diplomatic and other incidents.

The solution, of course, is to hold private contractors accountable for their actions and misdeeds.

7. I was thinking about how Xenophon and many of the battle-hardened Greek warriors hired themselves out to the Persians in an effort to foster regime change there 2.5 millennia ago -- resulting in his infamous "march of the 10,000" back to Greece after the effort failed. It seems that there has been a very long history of private entities participating in warfare -- lots of military theorists have examined the topic, Machiavelli comes to mind. I am curious your thoughts on this long history -- in some ways it seems like an old phenomenon; but then again, something seems new as well. With Napoleon's levee-en-masse transforming the conduct of modern warfare, resulting in the emergence of total war, and later a series of world wars, I am wondering, does the recent trend toward "privatization" suggest a return to the classical roots of war seen in ancient and early modern days, and a shift away from total war toward more limited engagements -- or might this be temporary, until a new peer adversary such as China rises to shift things back toward mass warfare?

A. The modern armies that emerged after the Crimea War are a historic aberration. With the exception of the last 150 years, armed forces throughout history were composed of professional soldiers for hire augmented by ad hoc, short-term bodies of conscripted vassals or citizenry or militias. The erstwhile fighting corpus in its camp incorporated hordes of suppliers of goods and services ("private contractors" in today's parlance).

The attempt to render modern armies self-sufficient and self-sustaining by getting rid of these "parasites" has clearly failed. We are back to where we started: the traditional army.

It is also completely wrong to postulate that "Total War" is a modern phenomenon. It is at least as old as the Bible. The ancient Hebrews were instructed by God to eradicate their enemies, men, women, and children and to confiscate the property of their vanquished foes. How more Total can it get?

Mankind has always cycled between geographically-limited, guerrilla type skirmishes and all-out warfare. Top-heavy Goliath forces, armed with the latest technologies always faced pebble-slinging, nimble, "low intensity" Davids. There's nothing new about that. We are simply in an interim period between two classical wars. Call it a respite.

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Con Man Cometh

Swathed in luminosity, we stir with measured competence our amber drinks in long-stemmed glasses. You are weighing my offer and I am waiting for your answer with hushed endurance. The armchairs are soft, the lobby is luxurious, as befits five-star hotels. I am not tense. I have anticipated your response even before I made my move.

Soon, temples sheathed in perspiration, you use the outfit's thick paper napkins to wipe it off. Loosen your tie. Pretend to be immersed in calculations. You express strident dissatisfaction and I feign recoil, as though intimidated by your loudness. Withdrawing to my second line of defense, I surrender to your simulated wrath.

The signs are here, the gestures, the infinitesimal movements that you cannot control. I lurk. I know that definite look, that imperceptible twitch, the inevitability of your surrender.

I am a con man and you are my victim. The swindle is unfolding here and now, in this very atrium, amid all the extravagance. I am selling your soul and collecting the change. I am sharpened, like a raw nerve firing impulses to you, receiving yours, an electrical-chemical dialog, consisting of your smelly sweat, my scented exudation. I permeate your cracks. I broker an alliance with your fears, your pains, defense compensatory mechanisms.

I know you.

I've got to meld us into one. As dusk gives way to night, you trust me as you do yourself, for now I am nothing less than you. Having adopted your particular gesticulation, I nod approvingly with every mention of your family. You do not like me. You sense the danger. Your nostrils flare. Your eyes amok. Your hands so restless. You know me for a bilker, you realize I'll break your heart. I know you comprehend we both are choiceless.

It's not about money. Emotions are at stake. I share your depths of loneliness and pain. Sitting opposed, I see the child in you, the adolescent. I discern the pleading sparkle in your eyes, your shoulders stooping in the very second you've decided to succumb. I am hurting for what I do to you. My only consolation is the inexorability of nature - mine and yours, this world's (in which we find ourselves and not of our choice). Still, we are here, you know.

I empathize with you without speech or motion. Your solitary sadness, the anguish, and your fears. I am your only friend, monopolist of your invisible cries, your inner hemorrhage of salty tears, the tissued scar that has become your being. Like me, the product of uncounted blows (which you sometimes crave).

Being abused is being understood, having some meaning, forming a narrative. Without it, your life is nothing but an anecdotal stream of randomness. I deal the final, overwhelming coup-de-grace that will transform the torn sheets of your biography into a plot. It isn't everyday one meets a cheat. Such confident encounters can render everything explained. Don't give it up. It is a gift of life, not to be frivolously dispensed with. It is a test of worthiness.

I think you qualify and I am the structure and the target you've been searching for and here I am.

Now we are bound by money and by blood. In our common veins flows the same alliance that dilates our pupils. We hail from one beginning. We separated only to unite, at once, in this hotel, this late, and you exclaim: "I need to trust you like I do not trust a soul". You beseech me not to betray your faith. Perhaps not so explicitly, but both your eyes are moist, reflecting your vulnerability.

I gravely radiate my utter guarantee of splendid outcomes. No hint of treason here. Concurrently I am plotting your emotional demise. At your request, not mine. It is an act of amity, to rid you of the very cause of your infirmity. I am the instrument of your delivery and liberation. I will deprive you of your ability to feel, to trust, and to believe. When we diverge, I will have molded you anew - much less susceptible, much more immune, the essence of resilience.

It is my gift to you and you are surely grateful in advance. Thus, when you demand my fealty, you say: "Do not forget our verbal understanding".

And when I vow my loyalty, I answer: "I shall not forget to stab you in the back."

And now, to the transaction. I study you. I train you to ignore my presence and argue with yourself with the utmost sincerity. I teach you not to resent your weaknesses.

So, you admit to them and I record all your confessions to be used against you to your benefit. Denuded of defenses, I leave you wounded by embezzlement, a cold, contemptible exposure. And, in the meantime, it's only warmth and safety, the intimacy of empathy, the propinquity of mutual understanding.

I only ask of you one thing: the fullest trust, a willingness to yield. I remember having seen the following in an art house movie, it was a test: to fall, spread-eagled from a high embankment and to believe that I am there to catch you and break your lethal plunge.

I am telling you I'll be there, yet you know I won't. Your caving in is none of my concern. I only undertook to bring you to the brink and I fulfilled this promise. It's up to you to climb it, it's up to you to tumble. I must not halt your crash, you have to recompose. It is my contribution to the transformation that metastasized in you long before we met.

But you are not yet at the stage of internalizing these veracities. You still naively link feigned geniality to constancy, intimacy and confidence in me and in my deeds, proximity and full disclosure. You are so terrified and mutilated, you come devalued. You cost me merely a whiskey tumbler and a compendium of ordinary words. One tear enough to alter your allegiances. You are malleable to the point of having no identity.

You crave my touch and my affection. I crave your information and unbridled faith. "Here is my friendship and my caring, my tenderness and amity, here is a hug. I am your parent and your shrink, your buddy and your family." - so go the words of this inaudible dialog - "Give me your utter, blind, trust but limit it to one point only: your money or your life."

I need to know about your funds, the riddles of your boardroom, commercial secrets, your skeletons, some intimate detail, a fear, resurgent hatred, the envy that consumes. I don't presume to be your confidant. Our sharing is confined to the pecuniary. I lull you into the relief that comes with much reduced demands. But you are an experienced businessman! You surely recognize my tactics and employ them, too!

Still, you are both seduced and tempted, though on condition of maintaining "independent thinking". Well, almost independent. There is a tiny crack in your cerebral armor and I am there to thrust right through it. I am ready to habituate you. "I am in full control" - you'd say - "So, where's the threat?" And, truly, there is none.

There's only certainty. The certitude I offer you throughout our game. Sometimes I even venture: "I am a crook to be avoided". You listen with your occidental manners, head tilted obliquely, and when I am finished warning you, you say: "But where the danger lies? My trust in you is limited!" Indeed - but it is there!

I lurk, awaiting your capitulation, inhabiting the margins, the twilight zone twixt greed and paranoia. I am a viral premonition, invading avaricious membranes, preaching a gospel of death and resurrection. Your death, your rising from the dead. Assuming the contours of my host, I abandon you deformed in dissolution.

There's no respite, not even for a day. You are addicted to my nagging, to my penetrating gaze, instinctive sympathy, you're haunted. I don't let go. You are engulfed, cocooned, I am a soul mate of eerie insight, unselfish acumen. I vitiate myself for your minutest needs. I thrive on servitude. I leave no doubt that my self-love is exceeded only by my love for you.

I am useful and you are a user. I am available and you avail yourself. But haven't you heard that there are no free lunches? My restaurant is classy, the prices most exorbitant, the invoices accumulate with every smile, with every word of reassurance, with every anxious inquiry as to your health, with every sacrifice I make, however insubstantial.

I keep accounts in my unstated books and you rely on me for every double entry. The voices I instill in you: "He gives so of himself though largely unrewarded". You feel ashamed, compelled to compensate. A seed of Trojan guilt. I harp on it by mentioning others who deprived me. I count on you to do the rest. There's nothing more potent than egotistic love combined with raging culpability. You are mine to do with as I wish, it is your wish that I embody and possess.

The vise is tightened. Now it's time to ponder whether to feed on you at once or scavenge. You are already dying and in your mental carcass I am grown, an alien. Invoking your immunity, as I am wont to do, will further make you ill and conflict will erupt between your white cells and your black, the twin abodes of your awakened feelings.

You hope against all odds that I am a soul-mate. How does it feel, the solitude? Few days with me - and you cannot recall! But I cannot remember how it feels to be together. I cannot waive my loneliness, my staunch companion. When I am with you, it prospers. And you must pay for that.

I have no choice but to abscond with your possessions, lest I remain bereft. With utmost ethics, I keep you well-informed of these dynamics and you acknowledge my fragility which makes you desirous to salve my wounds.

But I maintain the benefit of your surprise, the flowing motion. Always at an advantage over you, the interchangeable. I, on the other hand, cannot be replaced, as far as you're concerned. You are a loyal subject of your psychic state while I am a denizen of the eternal hunting grounds. No limits there, nor boundaries, only the nostrils quivering at the game, the surging musculature, the body fluids, the scent of decadence.

Sometime, the prey becomes the predator, but only for a while. Admittedly, it's possible and you might turn the tables. But you don't want to. You crave so to be hunted. The orgiastic moment of my proverbial bullets penetrating willing flesh, the rape, the violation, the metaphoric blood and love, you are no longer satisfied with compromises.

You want to die having experienced this eruption once. For what is life without such infringement if not mere ripening concluding in decay. What sets us, Man, apart from beast is our ability to self-deceive and swindle others. The rogue's advantage over quarry is his capacity to have his lies transmuted till you believe them true.

I trek the unpaved pathways between my truth and your delusions. What am I, fiend or angel? A weak, disintegrating apparition - or a triumphant growth? I am devoid of conscience in my own reflection. It is a cause for mirth. My complex is binary: to fight or flight, I'm well or ill, it should have been this way or I was led astray.

I am the blinding murkiness that never sets, not even when I sleep. It overwhelms me, too, but also renders me farsighted. It taught me my survival: strike ere you are struck, abandon ere you're trashed, control ere you are subjugated.

So what do you say to it now? I told you everything and haven't said a word. You knew it all before. You grasp how dire my need is for your blood, your hurt, the traumatic coma that will follow. They say one's death bequeaths another's life. It is the most profound destination, to will existence to your pining duplicate.

I am plump and short, my face is uncontrived and smiling. When I am serious, I am told, I am like a battered and deserted child and this provokes in you an ancient cuddling instinct. When I am proximate, your body and your soul are unrestrained. I watch you kindly and the artificial lighting of this magnific vestibule bounces off my glasses.

My eyes are cradled in blackened pouches of withered skin. I draw your gaze by sighing sadly and rubbing them with weary hands. You incline our body, gulp the piquant libation, and sign the document. Then, leaning back, you shut exhausted eyes. There is no doubt: you realize your error.

It's not too late. The document lies there, it's ready for the tearing. But you refrain. You will not do it.

"Another drink?" - You ask

I smile, my chubby cheeks and wire glasses sparkle.

"No, thanks" - I say.

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