The Iranian Election and the Revolution Test
June 22, 2009

Successful revolutions have three phases. First, a strategically located single or limited segment of society begins vocally to express resentment, asserting itself in the streets of a major city, usually the capital. This segment is joined by other segments in the city and by segments elsewhere as the demonstration spreads to other cities and becomes more assertive, disruptive and potentially violent. As resistance to the regime spreads, the regime deploys its military and security forces. These forces, drawn from resisting social segments and isolated from the rest of society, turn on the regime, and stop following the regime’s orders. This is what happened to the Shah of Iran in 1979; it is also what happened in Russia in 1917 or in Romania in 1989.

Revolutions fail when no one joins the initial segment, meaning the initial demonstrators are the ones who find themselves socially isolated. When the demonstrations do not spread to other cities, the demonstrations either peter out or the regime brings in the security and military forces — who remain loyal to the regime and frequently personally hostile to the demonstrators — and use force to suppress the rising to the extent necessary. This is what happened in Tiananmen Square in China: The students who rose up were not joined by others. Military forces who were not only loyal to the regime but hostile to the students were brought in, and the students were crushed.

A Question of Support
This is also what happened in Iran this week. The global media, obsessively focused on the initial demonstrators — who were supporters of Iranian President Mahmoud Ahmadinejad’s opponents — failed to notice that while large, the demonstrations primarily consisted of the same type of people demonstrating. Amid the breathless reporting on the demonstrations, reporters failed to notice that the uprising was not spreading to other classes and to other areas. In constantly interviewing English-speaking demonstrators, they failed to note just how many of the demonstrators spoke English and had smartphones. The media thus did not recognize these as the signs of a failing revolution.

Later, when Ayatollah Ali Khamenei spoke Friday and called out the Islamic Revolutionary Guard Corps, they failed to understand that the troops — definitely not drawn from what we might call the “Twittering classes,” would remain loyal to the regime for ideological and social reasons. The troops had about as much sympathy for the demonstrators as a small-town boy from Alabama might have for a Harvard postdoc. Failing to understand the social tensions in Iran, the reporters deluded themselves into thinking they were witnessing a general uprising. But this was not St. Petersburg in 1917 or Bucharest in 1989 — it was Tiananmen Square.

In the global discussion last week outside Iran, there was a great deal of confusion about basic facts. For example, it is said that the urban-rural distinction in Iran is not critical any longer because according to the United Nations, 68 percent of Iranians are urbanized. This is an important point because it implies Iran is homogeneous and the demonstrators representative of the country. The problem is the Iranian definition of urban — and this is quite common around the world — includes very small communities (some with only a few thousand people) as “urban.” But the social difference between someone living in a town with 10,000 people and someone living in Tehran is the difference between someone living in Bastrop, Texas and someone living in New York. We can assure you that that difference is not only vast, but that most of the good people of Bastrop and the fine people of New York would probably not see the world the same way. The failure to understand the dramatic diversity of Iranian society led observers to assume that students at Iran’s elite university somehow spoke for the rest of the country.

Tehran proper has about 8 million inhabitants; its suburbs bring it to about 13 million people out of Iran’s total population of 70.5 million. Tehran accounts for about 20 percent of Iran, but as we know, the cab driver and the construction worker are not socially linked to students at elite universities. There are six cities with populations between 1 million and 2.4 million people and 11 with populations of about 500,000. Including Tehran proper, 15.5 million people live in cities with more than 1 million and 19.7 million in cities greater than 500,000. Iran has 80 cities with more than 100,000. But given that Waco, Texas, has more than 100,000 people, inferences of social similarities between cities with 100,000 and 5 million are tenuous. And with metro Oklahoma City having more than a million people, it becomes plain that urbanization has many faces.

Winning the Election With or Without Fraud
We continue to believe two things: that vote fraud occurred, and that Ahmadinejad likely would have won without it. Very little direct evidence has emerged to establish vote fraud, but several things seem suspect.

For example, the speed of the vote count has been taken as a sign of fraud, as it should have been impossible to count votes that fast. The polls originally were to have closed at 7 p.m. local time, but voting hours were extended until 10 p.m. because of the number of voters in line. By 11:45 p.m. about 20 percent of the vote had been counted. By 5:20 a.m. the next day, with almost all votes counted, the election commission declared Ahmadinejad the winner. The vote count thus took about seven hours. (Remember there were no senators, congressmen, city council members or school board members being counted — just the presidential race.) Intriguingly, this is about the same time in took in 2005, though reformists that claimed fraud back then did not stress the counting time in their allegations.

The counting mechanism is simple: Iran has 47,000 voting stations, plus 14,000 roaming stations that travel from tiny village to tiny village, staying there for a short time before moving on. That creates 61,000 ballot boxes designed to receive roughly the same number of votes. That would mean that each station would have been counting about 500 ballots, or about 70 votes per hour. With counting beginning at 10 p.m., concluding seven hours later does not necessarily indicate fraud or anything else. The Iranian presidential election system is designed for simplicity: one race to count in one time zone, and all counting beginning at the same time in all regions, we would expect the numbers to come in a somewhat linear fashion as rural and urban voting patterns would balance each other out — explaining why voting percentages didn’t change much during the night.

It has been pointed out that some of the candidates didn’t even carry their own provinces or districts. We remember that Al Gore didn’t carry Tennessee in 2000. We also remember Ralph Nader, who also didn’t carry his home precinct in part because people didn’t want to spend their vote on someone unlikely to win — an effect probably felt by the two smaller candidates in the Iranian election.

That Mousavi didn’t carry his own province is more interesting. Flynt Leverett and Hillary Mann Leverett writing in Politico make some interesting points on this. As an ethnic Azeri, it was assumed that Mousavi would carry his Azeri-named and -dominated home province. But they also point out that Ahmadinejad also speaks Azeri, and made multiple campaign appearances in the district. They also point out that Khamenei is Azeri. In sum, winning that district was by no means certain for Mousavi, so losing it does not automatically signal fraud. It raised suspicions, but by no means was a smoking gun.

We do not doubt that fraud occurred during Iranian election. For example, 99.4 percent of potential voters voted in Mazandaran province, a mostly secular area home to the shah’s family. Ahmadinejad carried the province by a 2.2 to 1 ratio. That is one heck of a turnout and level of support for a province that lost everything when the mullahs took over 30 years ago. But even if you take all of the suspect cases and added them together, it would not have changed the outcome. The fact is that Ahmadinejad’s vote in 2009 was extremely close to his victory percentage in 2005. And while the Western media portrayed Ahmadinejad’s performance in the presidential debates ahead of the election as dismal, embarrassing and indicative of an imminent electoral defeat, many Iranians who viewed those debates — including some of the most hardcore Mousavi supporters — acknowledge that Ahmadinejad outperformed his opponents by a landslide.

Mousavi persuasively detailed his fraud claims Sunday, and they have yet to be rebutted. But if his claims of the extent of fraud were true, the protests should have spread rapidly by social segment and geography to the millions of people who even the central government asserts voted for him. Certainly, Mousavi supporters believed they would win the election based in part on highly flawed polls, and when they didn’t, they assumed they were robbed and took to the streets.

But critically, the protesters were not joined by any of the millions whose votes the protesters alleged were stolen. In a complete hijacking of the election by some 13 million votes by an extremely unpopular candidate, we would have expected to see the core of Mousavi’s supporters joined by others who had been disenfranchised. On last Monday, Tuesday and Wednesday, when the demonstrations were at their height, the millions of Mousavi voters should have made their appearance. They didn’t. We might assume that the security apparatus intimidated some, but surely more than just the Tehran professional and student classes posses civic courage. While appearing large, the demonstrations actually comprised a small fraction of society.

Tensions Among the Political Elite
All of this not to say there are not tremendous tensions within the Iranian political elite. That no revolution broke out does not mean there isn’t a crisis in the political elite, particularly among the clerics. But that crisis does not cut the way Western common sense would have it. Many of Iran’s religious leaders see Ahmadinejad as hostile to their interests, as threatening their financial prerogatives, and as taking international risks they don’t want to take. Ahmadinejad’s political popularity in fact rests on his populist hostility to what he sees as the corruption of the clerics and their families and his strong stand on Iranian national security issues.

The clerics are divided among themselves, but many wanted to see Ahmadinejad lose to protect their own interests. Khamenei, the supreme leader, faced a difficult choice last Friday. He could demand a major recount or even new elections, or he could validate what happened. Khamenei speaks for a sizable chunk of the ruling elite, but also has had to rule by consensus among both clerical and non-clerical forces. Many powerful clerics like Ali Akbar Hashemi Rafsanjani wanted Khamenei to reverse the election, and we suspect Khamenei wished he could have found a way to do it. But as the defender of the regime, he was afraid to. Mousavi supporters’ demonstrations would have been nothing compared to the firestorm among Ahmadinejad supporters — both voters and the security forces — had their candidate been denied. Khamenei wasn’t going to flirt with disaster, so he endorsed the outcome.

The Western media misunderstood this because they didn’t understand that Ahmadinejad does not speak for the clerics but against them, that many of the clerics were working for his defeat, and that Ahmadinejad has enormous pull in the country’s security apparatus. The reason Western media missed this is because they bought into the concept of the stolen election, therefore failing to see Ahmadinejad’s support and the widespread dissatisfaction with the old clerical elite. The Western media simply didn’t understand that the most traditional and pious segments of Iranian society support Ahmadinejad because he opposes the old ruling elite. Instead, they assumed this was like Prague or Budapest in 1989, with a broad-based uprising in favor of liberalism against an unpopular regime.

Tehran in 2009, however, was a struggle between two main factions, both of which supported the Islamic republic as it was. There were the clerics, who have dominated the regime since 1979 and had grown wealthy in the process. And there was Ahmadinejad, who felt the ruling clerical elite had betrayed the revolution with their personal excesses. And there also was the small faction the BBC and CNN kept focusing on — the demonstrators in the streets who want to dramatically liberalize the Islamic republic. This faction never stood a chance of taking power, whether by election or revolution. The two main factions used the third smaller faction in various ways, however. Ahmadinejad used it to make his case that the clerics who supported them, like Rafsanjani, would risk the revolution and play into the hands of the Americans and British to protect their own wealth. Meanwhile, Rafsanjani argued behind the scenes that the unrest was the tip of the iceberg, and that Ahmadinejad had to be replaced. Khamenei, an astute politician, examined the data and supported Ahmadinejad.

Now, as we saw after Tiananmen Square, we will see a reshuffling among the elite. Those who backed Mousavi will be on the defensive. By contrast, those who supported Ahmadinejad are in a powerful position. There is a massive crisis in the elite, but this crisis has nothing to do with liberalization: It has to do with power and prerogatives among the elite. Having been forced by the election and Khamenei to live with Ahmadinejad, some will make deals while some will fight — but Ahmadinejad is well-positioned to win this battle.

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Elizabeth “Liz” Becton, a staffer to Rep. Jim McDermott of Washington. A lobbyist, unnamed by Mullins, had written to Becton to request a meeting on behalf of a client:

Days later, the assistant checked back in and unfortunately began the e-mail with “Hi Liz.”

Becton curtly replied, “Who is Liz?”

When the assistant wrote back with an apology, Becton turned up the heat. “I do not go by Liz. Where did you get your information?” she asked.

The back-and-forth went on for 19 e-mails, with the assistant apologizing six times if she had “offended” Becton, while Becton lectured about name-calling.

Becton told the assistant that if someone said using “Liz” was acceptable, then “they are [sic] not your friend,” and “If I wanted you to call me by any other name, I would have offered that to you.” Plus, it’s “rude when people don’t even ask permission and take all sorts of liberties with your name,” she said, adding: “Please do not ever call me by a nickname again.”

But the tirade didn’t end there. Becton continued her riff–responding that the assistant “got played” by someone who was trying to “tick” Becton off. Becton’s final, searing missive stated: “In the future, you should be VERY careful about such things. People like to brag about their connections in D.C. It’s a pastime for some. It’s also dangerous to eavesdrop, as you have just found out. Quit apologizing and never call me anything but Elizabeth again. Also, make sure you correct anyone who attempts to call me by any other name but Elizabeth. Are we clear on this?  Like I said, it’s a hot button for me. And please don’t call the office and not leave a message. My colleague told me you called while I was away. . . . I do sometimes leave my desk.”

Surely there’s no place for this sort of bullying. We hope Becton’s friends tease her mercilessly about this. We suggest they nickname her “Queen Elizabeth,” or “Queen” for short.

AN OPEN LETTER TO PRESIDENT OBAMA

Lou Pritchett is a former vice president of Procter & Gamble whose career at that company spanned 36 years before his retirement in 1989, and he is the author of the 1995 business book, Stop Paddling & Start Rocking the Boat. Mr. Pritchett confirmed to us that he was indeed the author of the much-circulated “open letter” quoted above:

Dear President Obama:

You are the thirteenth President under whom I have lived and unlike any of the others, you truly scare me.

You scare me because after months of exposure, I know nothing about you.

You scare me because I do not know how you paid for your expensive Ivy League education and your upscale lifestyle and housing with no visible signs of support.

You scare me because you did not spend the formative years of youth growing up in America and culturally you are not an American.

You scare me because you have never run a company or met a payroll.

You scare me because you have never had military experience, thus don’t understand it at its core..

You scare me because you lack humility and ‘class’, always blaming others.

You scare me because for over half your life you have aligned yourself with radical extremists who hate America and you refuse to publicly denounce these radicals who wish to see America fail.

You scare me because you are a cheerleader for the ‘blame America’ crowd and deliver this message abroad.

You scare me because you want to change America to a European style country where the government sector dominates instead of the private sector.

You scare me because you want to replace our health care system with a government controlled one.

You scare me because you prefer ‘wind mills’ to responsibly capitalizing on our own vast oil, coal and shale reserves.

You scare me because you want to kill the American capitalist goose that lays the golden egg which provides the highest standard of living in the world.

You scare me because you have begun to use ‘extortion’ tactics against certain banks and corporations.

You scare me because your own political party shrinks from challenging you on your wild and irresponsible spending proposals.

You scare me because you will not openly listen to or even consider opposing points of view from intelligent people.

You scare me because you falsely believe that you are both omnipotent and omniscient.

You scare me because the media gives you a free pass on everything you do.

You scare me because you demonize and want to silence the Limbaughs, Hannitys,O’Relllys and Becks who offer opposing, conservative points of view.

You scare me because you prefer controlling over governing.

Finally, you scare me because if you serve a second term I will probably not feel safe in writing a similar letter in 8 years.

Lou Pritchett

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

….read more HERE.