Political Risk Hits Property Rights
Peter Schiff

“Crony capitalism” is a term often applied to foreign nations where government interference circumvents market forces. The practice is widely associated with tin-pot dictators and second-rate economies. In such a system, support for the ruling regime is the best and only path to economic success. Who you know supersedes what you know, and favoritism trumps the rule of law.

Unfortunately, last week’s events demonstrate that the phrase now more aptly describes our own country.

On Monday, the Supreme Court refused to hear an appeal from Chrysler’s secured creditors based on the government’s argument that the needs of other stakeholders outweighed those of a few creditors. In this case, the Administration concluded the interests of the United Auto Workers outweighed the interests of the Indiana teachers and firemen whose pension fund sued to block the restructuring. Given the enormous financial support that the UAW poured into the Obama campaign, such partiality is hardly surprising.

When making their investment in Chrysler just a few months ago, the Indiana pension fund agreed to commit capital because of the specific assurances received from the company. In allowing this sham bankruptcy to be crammed through the courts, we have shredded the vital principal of the rule of law, and have become a nation of men, rather than one of laws.

The risk that legal contracts can now be arbitrarily set aside will make investors think twice before committing capital to distressed corporations. Oftentimes enforcing contracts imposes hardships. That’s precisely why we have contracts.

Without absolute faith that deals will be honored, it will be extremely difficult for U.S. companies to borrow money. This will be particularly true for those companies already struggling with too much debt. Without the ability to issue secured debt, how will such companies access the necessary capital to turn around? If secured creditors cannot count on the courts to enforce their claims, they will not put their capital at risk. What good is being a secured creditor if courts can allow the assets securing your claim to be sold for the benefit of others?

Another problem with the government imposing losses on secured Chrysler creditors is that in its bailouts of financial companies (like Citigroup and AIG), the government took steps to specifically pay back creditors, even when those creditors should have been wiped out. This inconsistency and lack of equal protection further undermines faith in our economy.

An Uneven Playing Field for Creditors

The message here is clear: loan money to financial entities with friends in Washington and no matter how risky the loan, taxpayers will bail you out if it goes bad. However, loan money to a unionized manufacturer, even if prudently secured by real assets, and you have as much chance of getting your money back as finding Jimmy Hoffa’s body.

As if this wasn’t bad enough, testimony on Thursday from former Bank of America CEO Ken Lewis revealed a concerted effort on the part of Fed Chairman Ben Bernanke and former Treasury Secretary Henry Paulson to pressure Lewis into hiding relevant financial information regarding Merrill Lynch losses from B of A shareholders. Recently released e-mails make it clear that the government threatened to remove corporate leaders if they failed to go through with the merger and keep quiet about the losses.

Again, the justification for the interference seemed to be the “greater economic good” the merger would serve. The right of B of A shareholders to be informed that their company was about to buy a financial black hole was clearly considered to be an acceptable sacrifice.

More importantly, the fact that two of the highest-ranking government officials can conspire to violate both securities laws and private property rights is abhorrent to everything America supposedly stands for. If they get away with it, which I believe they will, the precedent and the message will be chilling.

As a broker who specializes in foreign investments, I am always wary of political risk. I must consider how the threat of arbitrary government action could undermine the value of my investments. However, recent events show that political risk is now greater here than abroad, and U.S. assets, which have historically traded at premium valuations based on faith in our legal system, will soon trade at discounts to reflect this new threat. The fear of having contracts abrogated or property rights violated when doing so serves some contrived greater good will substantially raise our cost of capital and further reduce our competitiveness.

Invest wisely,

Peter Schiff

In 1979, when we were still young and starry-eyed, a revolution took place in Iran. When I asked experts what would happen, they divided into two camps.

The first group of Iran experts argued that the Shah of Iran would certainly survive, that the unrest was simply a cyclical event readily manageable by his security, and that the Iranian people were united behind the Iranian monarch’s modernization program. These experts developed this view by talking to the same Iranian officials and businessmen they had been talking to for years — Iranians who had grown wealthy and powerful under the shah and who spoke English, since Iran experts frequently didn’t speak Farsi all that well.

The second group of Iran experts regarded the shah as a repressive brute, and saw the revolution as aimed at liberalizing the country. Their sources were the professionals and academics who supported the uprising — Iranians who knew what former Supreme Leader Ayatollah Ruholla Khomeini believed, but didn’t think he had much popular support. They thought the revolution would result in an increase in human rights and liberty. The experts in this group spoke even less Farsi than the those in the first group.

Misreading Sentiment in Iran

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On June 4, 2009, Walter Kendall Myers and his wife, Gwendolyn Steingraber Myers, were arrested by the FBI and charged with spying for the government of Cuba. According to court documents filed in the case, the Myers allegedly were recruited by the Cuban intelligence service in 1979 and worked for them as agents until 2007. On June 10, 2009, a U.S. Magistrate Judge ruled that the couple posed a flight risk and ordered them held without bond.

The criminal complaint filed by the FBI in the U.S. District Court for the District of Columbia on June 4 and the grand jury indictment returned in the case have been released to the public, and these two documents provide a fascinating and detailed historical account of the activities of Kendall and Gwendolyn Myers. Perhaps more importantly, however, these documents provide an excellent opportunity to understand how the Cuban intelligence service works and serve as a primer on Cuba’s espionage efforts inside the United States.

Case Details
According to the criminal complaint filed by the FBI, Kendall Myers served from 1959 to 1962 in the U.S. Army Security Agency (ASA), which was the Army’s signal intelligence branch at that time. Myers reportedly worked for the ASA as a linguist who was assigned to work translating intercepted messages from Eastern Bloc countries in Europe.

In 1972, Myers earned a Ph.D. from the Johns Hopkins University School of Advanced International Studies (SAIS), in Washington, D.C. Myers then worked as an assistant professor of European Studies at SAIS and became a part-time contract instructor in August 1977 at the State Department’s Foreign Service Institute (FSI) teaching European studies.

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While employed as a contractor at the FSI, Myers attended a lecture at the FSI on Cuba that was presented by a Cuban intelligence officer assigned to the Cuban permanent mission to the United Nations. The intelligence officer (identified in the complaint only as co-conspirator “A”) then reportedly invited Myers and two of his colleagues to travel to Cuba on an academic visit. According to the FBI, Myers traveled to Cuba for a two-week trip in December 1978. The complaint contained several entries from a journal that Myers allegedly kept during the trip, and was obtained during a search of Myers’ residence. In the journal entries, Myers fawned over the Cuban revolution and Cuban leader Fidel Castro, whom Myers said was “certainly one of the great political leaders of our time.”

According the complaint, approximately six months after Myers returned from his trip to Cuba, he and Gwendolyn were visited at their home in South Dakota by “A” who, according to the FBI, pitched and recruited the Myers to work for the Cuban intelligence service. While they were recruited in 1979, the couple stated that they did not begin actively working for the Cuban intelligence service until 1981. This timeline seems to match Myers’ job search efforts.

After being recruited, Kendall Myers was allegedly instructed by his handler to move back to Washington and seek government employment in order to gain access to information deemed valuable to the Cubans. In 1981, he applied for a job at the Central Intelligence Agency and in 1982, he returned to working as a part-time contract instructor at the FSI, and became the chairman for Western European studies. In 1985, he applied for a full-time job at the FSI teaching Western European studies, and in 1999, Myers took a position at the State Department’s Bureau of Intelligence and Research (INR), as the senior European analyst. Myers stayed in that position until his retirement in 2007. After his retirement from the State Department in 2007, Myers returned to SAIS and worked there until his arrest.

On the afternoon of April 15, 2009, Myers was approached by an FBI undercover source while leaving SAIS. The undercover source told Myers that he had been sent to contact Myers by a Cuban intelligence officer (identified in the complaint as co-conspirator “D”). The undercover source told Myers that the reason for the contact was because of the changes taking place in Cuba and the new U.S. administration. The source also wished Myers a happy birthday and gave him a Cuban cigar. Myers, convinced the undercover source was authentic, agreed to bring his wife to a meeting with the source at a Washington hotel later that evening.

Spilling the Beans
According to the complaint, the FBI undercover source met with the Myers on three occasions, April 15, April 16 and April 30, at different Washington-area hotels. During these meetings, they divulged a great deal of information pertaining to their work as Cuban agents. They provided information regarding what they passed to the Cuban government, how Kendall obtained the information and how they passed the information to their handlers. They also detailed their meetings with handlers and the methods they used to communicate with them.

According to the complaint, Kendall Myers proudly told the source that he provided information at the Secret and Top Secret levels to the Cubans. When asked by the source if he had furnished information from the CIA, Kendall Myers responded “all the time.” He said that he preferred to take notes on classified documents rather than smuggle them out directly, but at times, he smuggled classified material out of the State Department in his briefcase, only to return the documents the next day after he had duplicated them. This information was then passed to handlers during meetings or by brush passes. Many of the meetings took place in New York, and the Myers felt those meetings were very dangerous. Gwendolyn admitted to having passed documents by exchanging shopping carts in a grocery store. The Myers also told the source about a shortwave radio set that they used to receive coded messages from their handler.

After the September 2001 arrest of Ana Montes, the Defense Intelligence Agency’s (DIA) senior Cuba analyst (who admitted to spying for Cuba for ideological motives), the Myers became much more careful about contacts with their handler, and most face-to-face contact after that time was accomplished outside of the United States. They told the source that between January 2002 and December 2005, they traveled to Trinidad and Tobago, Jamaica, Ecuador, Brazil, Argentina and Mexico in order to meet with Cuban handlers. The FBI was able to verify all these trips through official records.

After a confrontation with a supervisor at INR after returning from a 2006 trip to China, the Myers became very concerned that they had been identified and placed on a watch list by the INR supervisor. At that time, they told the source, they destroyed all their clandestine communications equipment, except for their shortwave radio and their false travel documents. They refused to travel to Mexico after this point because they believed it was too dangerous.

The Myers continued to receive periodic messages from their handler, who had begun to communicate via e-mail, following the Montes case. They also passed encrypted messages to their handler via e-mail. Gwendolyn noted that they would never use their own computer for such communication but used computers at Internet cafes instead.

The complaint provided the details of two e-mail messages the Myers received in December 2008 and March 2009 from a Cuban intelligence officer in Mexico, who asked for a meeting with them in Mexico. The intelligence officer was operating under the guise of an art dealer named Peter Herrera. The e-mails asked the Myers to come and see what he had for them. They responded to the e-mails saying they were delighted to hear from Peter and to learn that his art gallery was still open to them, but that they had not yet made travel plans for the coming year. The Myers told the source that they thought traveling to Mexico for a meeting with Peter was too risky. They also confirmed that Peter was a pseudonym used by a Cuban intelligence officer.

When the source asked the Myers during the third meeting if their trip to Mexico in 2005 had been “the end” (meaning the end of their work for the Cuban intelligence service), Kendall Myers replied that their work would continue, but that he wanted to work in more of a reserve status, where he would talk to contacts, rather than resume work as a full-time U.S. government employee. When the source told the Myers he was going to send a report to Cuba with information pertaining to them, Gwendolyn reportedly said, “be sure and tell them we love them.”

They arranged to meet with the source on June 4, at yet another Washington-area hotel, and were arrested by the FBI when they appeared for that meeting. If the recordings of the three meetings have been accurately represented in the complaint, they are going to be very damaging to the Myers. Additionally, several of the physical items recovered during a search conducted on the Myers residence will also be strong evidence, such as the shortwave radio set and a travel guide printed in Cuba in the mid- to late-1990s, which would seem to substantiate their illicit 1995 visit.

‘I’ — The Cuban Staple
When discussing espionage cases, we often refer to an old Cold War acronym — MICE — to explain the motivations of spies. MICE stands for money, ideology, compromise and ego. Traditionally, money has proved to be the No. 1 motivation, but as seen in Kendall Myers’ journal entries and in the meetings with the source, the Myers were motivated solely by ideology and not by money. In fact, the complaint provides no indication that the Myers had ever sought or accepted money from the Cuban intelligence service for their espionage activities.

According to the complaint, the Myers were scathing in their criticism of the United States during their meetings with the source. In addition to their criticism of U.S. government policy, they were also very critical of American people, whom they referred to as “North Americans.” Myers said the problem with the United States is that it is full of too many North Americans.

The Myers also expressed their love for Cuba and for the ideals of the Cuban revolution. In the first meeting with the source, Kendall asked the source, “How is everybody at home?” referring to Cuba. Gwendolyn expressed her desire to use the couple’s boat to “sail home,” meaning travel to Cuba.

The couple also provided the source with details of a January 1995 trip they took to Cuba. According to the Myers, in addition to receiving “lots of medals” from the Cuban government (something commonly awarded to ideological spies by the Soviet KGB), the best thing they received was the opportunity to meet Fidel Castro. The couple stated they had the opportunity to spend about four hours one evening with the Cuban leader. According to the FBI complaint, Kendall told the source that Castro was “wonderful, just wonderful” and Gwendolyn added, “He’s the most incredible statesman for a hundred years for goodness sake.”

During the third meeting, the couple also allegedly talked to the source about Ana Montes. Kendall told the source that Montes is a “hero … but she took too many chances … in my opinion … she wasn’t paranoid enough.” Gwendolyn added “but she loved it, she did what she loved to do.” Kendall added, “We have a great admiration for Ana Montes.” Gwendolyn also noted that, “I envy her being able to love what she was doing and say what she was doing and why she was doing it ‘cause I can’t do that.” This is significant because during her trial, Montes was unrepentant and railed against the United States when she read a statement during her sentencing hearing. Gwendolyn appeared to be responding to Montes’ public statement.

In view of the Myers’ case, the Montes case and other cases, like that involving Carlos and Elsa Alvarez, the Cubans clearly prefer to use agents who are ideologically motivated.

Lessons
In addition to the Cuban preference for ideologically motivated agents, perhaps one of the greatest lessons that can be taken from the Myers’ case is simply a reminder that espionage did not end with the conclusion of the Cold War. According to the FBI complaint, a Cuban intelligence officer attempted to contact the Myers as recently as March 2009.

This case also shows that the Cuban intelligence service is very patient and is willing to wait for the agents it recruits to move into sensitive positions within the U.S. government. It took several years for Myers to get situated in a job with access to highly classified information. The Myers investigation also shows that the Cuban agents are not always obviously people working on Cuban issues — Myers was a European affairs specialist. There is also a possibility that the Cubans sold or traded intelligence they gained from Myers pertaining to Europe to their Soviet (and later Russian) friends.

While at INR, it is significant that Myers not only had access to information collected by State Department employees in the field, but also was privy to all-source intelligence reporting from the rest of the intelligence community (CIA, FBI, NSA, DIA, etc.) According to the complaint, an analysis of Myers’ work computer revealed that from August 2006 to October 2007, Myers looked at more than 200 intelligence reports pertaining to Cuba; 75 of those reports made no mention of countries within Myers’ area of interest (Europe), and most of the documents were classified either Secret or Top Secret.

The government will have to conduct a damage assessment that will attempt to trace everything Myers had access to during his entire career, which will no doubt encompass thousands of documents. As the State Department’s representative to the intelligence community, INR is also involved in crafting policy papers and national intelligence estimates. Myers began working at the State Department before there was electronic access to records, so it will be very difficult to identify every document he had access to. But in addition to the actual documents he viewed, Myers also had the opportunity to chat with many colleagues about what they were working on and to ask their opinions of policies and events, so the damage goes much further than just documents, which complicates the damage assessment. He was also in charge of training new INR analysts, which could have allowed him an opportunity to assess which analysts were the best possible targets for Cuban recruitment efforts.

The information Myers could have provided while at the FSI is more subtle, but no less valuable from an intelligence operational perspective. Myers could have acted as a spotter, letting his handlers know which officers were moving through the institute, where they were going to be assigned, and perhaps even indicating which ones he thought were the best candidates for recruitment based on observed vulnerabilities. He could have served a similar function while at SAIS, pointing out promising students for the Cubans to focus on — especially students who agreed with his view of American policy, and who might be targeted for recruitment using an ideological approach. While Montes did graduate with a master’s degree from SAIS in 1988, she was already working at the DIA (and for the Cubans) by the time she began her graduate work there, so it is unlikely that Myers was involved in her recruitment. In the end, it will likely take months, if not years, for the government to do a full damage assessment on this case.

One of the other interesting factors regarding this case is that in spite of Myers’ strong anti-American political beliefs — which were reportedly expressed in his classes — none of the background investigations conducted on him by the State Department provided any indication of concern. Furthermore, he was cleared for access to Top Secret material in 1985 and Sensitive Compartmentalized Information (SCI) in 1999 — 20 years after he was recruited by the Cubans. Apparently the agents and investigators who conducted his background investigations did not dig deeply enough uncover the warning signs of his radical beliefs, or the people they interviewed knowingly withheld such information.

With Montes arrested at DIA, and now Myers from INR, it certainly makes one wonder where the next ideologically driven Cuban agent will be found inside the U.S. intelligence community.

The Iranian election is currently in turmoil. Both Iranian President Mahmoud Ahmadinejad and challenger Mir Hossein Mousavi are claiming to be ahead in the vote. Preliminary results from the presidential vote show Ahmadinejad leading; Iranian Election Commission chief Kamran Danesho held a press conference at 11:45 p.m. local time and announced that with some 20 percent of the votes counted, the president was leading with 3,462,548 votes (69.04 percent), while his main challenger, Mousavi, had 1, 425,678 (28.42 percent). Sources tell STRATFOR that these preliminary numbers pertain to the votes from the smaller towns and villages, where the president has considerable influence, as he has distributed a lot of cash to the poor.

However, Iran’s state-run Press TV is saying that only 10 million of 24 million votes, or around 42 percent of the vote, have been counted. At the same time, they are also claiming that 69 percent of the vote has been counted. Obviously the numbers are not adding up, and the agencies themselves appear to be in chaos.

Prior to the announcement of the results, Mousavi held a press conference in which he said he was the winner of the election. The opposition camp is greatly concerned about fraud, and STRATFOR has been told that Mousavi has vowed to resist any fraud, even if it entails taking to the streets. This means there is considerable risk of unrest should Ahmadinejad emerge as the winner. But so far there is no evidence that the government is mobilizing security forces to deal with any such eventuality.

The situation is being monitored carefully, as it is potentially explosive.

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West Bank Settlements and the Future of U.S.-Israeli Relations

Amid the rhetoric of U.S. President Barack Obama’s speech June 4 in Cairo, there was one substantial indication of change, not in the U.S. relationship to the Islamic world but in the U.S. relationship to Israel. This shift actually emerged prior to the speech, and the speech merely touched on it. But it is not a minor change and it must not be underestimated. It has every opportunity of growing into a major breach between Israel and the United States.

The immediate issue concerns Israeli settlements on the West Bank. The United States has long expressed opposition to increasing settlements but has not moved much beyond rhetoric. Certainly the continued expansion and development of new settlements on the West Bank did not cause prior administrations to shift their policies toward Israel. And while the Israelis have occasionally modified their policies, they have continued to build settlements. The basic understanding between the two sides has been that the United States would oppose settlements formally but that this would not evolve into a fundamental disagreement.

The United States has clearly decided to change the game. Obama has said that, “The United States does not accept the legitimacy of continued Israeli settlements. This construction violates previous agreements and undermines efforts to achieve peace. It is time for these settlements to stop.” Israeli Prime Minister Benjamin Netanyahu has agreed to stop building new settlements, but not to halt what he called the “natural growth” of existing settlements.

Obama has positioned the settlement issue in such a way that it would be difficult for him to back down. He has repeated it several times, including in his speech to the Islamic world. It is an issue on which he is simply following the formal positions of prior administrations. It is an issue on which prior Israeli governments made commitments. What Obama has done is restated formal U.S. policy, on which there are prior Israeli agreements, and demanded Israeli compliance. Given his initiative in the Islamic world, Obama, having elevated the issue to this level, is going to have problems backing off.

Obama is also aware that Netanyahu is not in a political position to comply with the demand, even if he were inclined to. Netanyahu is leading a patchwork coalition in which support from the right is critical. For the Israeli right, settling in what it calls Samaria and Judea is a fundamental principle on which it cannot bend. Unlike Ariel Sharon, a man of the right who was politically powerful, Netanyahu is a man of the right who is politically weak. Netanyahu gave all he could give on this issue when he said there would be no new settlements created. Netanyahu doesn’t have the political ability to give Obama what he is demanding. Netanyahu is locked into place, unless he wants to try to restructure his Cabinet or persuade people like Avigdor Lieberman, his right-wing foreign minister, to change their fundamental view of the world.

Therefore, Obama has decided to create a crisis with Israel. He has chosen a subject on which Republican and Democratic administrations have had the same formal position. He has also picked a subject that does not affect Israeli national security in any immediate sense (he has not made demands for changes of policy toward Gaza, for example). Obama struck at an issue where he had precedent on his side, and where Israel’s immediate safety is not at stake. He also picked an issue on which he would have substantial support in the United States, and he has done this to have a symbolic showdown with Israel. The more Netanyahu resists, the more Obama gets what he wants.

Obama’s read of the Arab-Israeli situation is that it is not insoluble. He believes in the two-state solution, for better or worse. In order to institute the two-state solution, Obama must establish the principle that the West Bank is Palestinian territory by right and not Israeli territory on which the Israelis might make concessions. The settlements issue is fundamental to establishing this principle. Israel has previously agreed both to the two-state solution and to not expanding settlements. If Obama can force Netanyahu to concede on the settlements issue, then he will break the back of the Israeli right and open the door to a rightist-negotiated settlement of the two-state solution.

In the course of all of this, Obama is opening doors in the Islamic world a little wider by demonstrating that the United States is prepared to force Israel to make concessions. By subtext, he wants to drive home the idea that Israel does not control U.S. policy but that, in fact, Israel and the United States are two separate countries with different and sometimes conflicting views. Obama wouldn’t mind an open battle on the settlements one bit.

For Netanyahu, this is the worst terrain on which to fight. If he could have gotten Obama to attack by demanding that Israel not respond to missiles launched from Gaza or Lebanon, Netanyahu would have had the upper hand in the United States. Israel has support in the United States and in Congress, and any action that would appear to leave Israel’s security at risk would trigger an instant strengthening of that support.

But there is not much support in the United States for settlements on the West Bank. This is not a subject around which Israel’s supporters are going to rally very intensely, in large part because there is substantial support for a two-state solution and very little understanding or sympathy for the historic claim of Jews to Judea and Samaria. Obama has picked a topic on which he has political room for maneuver and on which Netanyahu is politically locked in.

Given that, the question is where Obama is going with this. From Obama’s point of view, he wins no matter what Netanyahu decides to do. If Netanyahu gives in, then he has established the principle that the United States can demand concessions from a Likud-controlled government in Israel and get them. There will be more demands. If Netanyahu doesn’t give in, Obama can create a split with Israel over the one issue he can get public support for in the United States (a halt to settlement expansion in the West Bank), and use that split as a lever with Islamic states.

Thus, the question is what Netanyahu is going to do. His best move is to say that this is just a disagreement between friends and assume that the rest of the U.S.-Israeli relationship is intact, from aid to technology transfer to intelligence sharing. That’s where Obama is going to have to make his decision. He has elevated the issue to the forefront of U.S.-Israeli relations. The Israelis have refused to comply. If Obama proceeds with the relationship as if nothing has happened, then he is back where he began.

Obama did not start this confrontation to wind up there. He calculated carefully when he raised this issue and knew perfectly well that Netanyahu couldn’t make concessions on it, so he had to have known that he was going to come to this point. Obviously, he could have made this confrontation as a part of his initiative to the Islamic world. But it is unlikely that he saw that initiative as ending with the speech, and he understands that, for the Islamic world, his relation to Israel is important. Even Islamic countries not warmly inclined toward Palestinians, like Jordan or Egypt, don’t want the United States to back off on this issue.

Netanyahu has argued in the past that Israel’s relationship to the United States was not as important to Israel as it once was. U.S. aid as a percentage of Israel’s gross domestic product has plunged. Israel is not facing powerful states, and it is not facing a situation like 1973, when Israeli survival depended on aid being rushed in from the United States. The technology transfer now runs both ways, and the United States relies on Israeli intelligence quite a bit. In other words, over the past generation, Israel has moved from a dependent relationship with the United States to one of mutual dependence.

This is very much Netanyahu’s point of view, and from this point of view follows the idea that he might simply say no to the United States on the settlements issue and live easily with the consequences. The weakness in this argument is that, while Israel does not now face strategic issues it can’t handle, it could in the future. Indeed, while Netanyahu is urging action on Iran, he knows that action is impossible without U.S. involvement.

This leads to a political problem. As much as the right would like to blow off the United States, the center and the left would be appalled. For Israel, the United States has been the centerpiece of the national psyche since 1967. A breach with the United States would create a massive crisis on the left and could well bring the government down if Ehud Barak and his Labor Party, for example, bolted from the ruling coalition. Netanyahu’s problem is the problem Israel has continually had. It is a politically fragmented country, and there is never an Israeli government that does not consist of fragments. A government that contains Lieberman and Barak is not one likely to be able to make bold moves.

It is therefore difficult to see how Netanyahu can both deal with Obama and hold his government together. It is even harder to see how Obama can reduce the pressure. Indeed, we would expect to see him increase the pressure by suspending minor exchanges and programs. Obama is playing to the Israeli center and left, who would oppose any breach with the United States.

Obama has the strong hand and the options. Netanyahu has the weak hand and fewer options. It is hard to see how he will solve the problem. And that’s what Obama wants. He wants Netanyahu struggling with the problem. In the end, he wants Netanyahu to fold on the settlements issue and keep on folding until he presides over a political settlement with the Palestinians. Obama wants Netanyahu and the right to be responsible for the agreement, as Menachem Begin was responsible for the treaty with Egypt and withdrawal from the Sinai.

We find it difficult to imagine how a two-state solution would work, but that concept is at the heart of U.S. policy and Obama wants the victory. He has put into motion processes to create that solution, first of all, by backing Netanyahu into a corner. Left out of Obama’s equation is the Palestinian interest, willingness and ability to reach a treaty with Israel, but from Obama’s point of view, if the Palestinians reject or undermine an agreement, he will still have leverage in the Islamic world. Right now, given Iraq and Afghanistan, that is where he wants leverage, and backing Netanyahu into a corner is more important than where it all leads in the end.

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