Capitalism as Drama

Somehow the movie Wall Street (1987) still holds up after all these years. Sure, the technology is dated — the cell phones are hilariously huge and the fat-back screens in offices display only green digits — but it hardly matters. The clothing by Alan Flusser is of course amazing and holds up too, but the real merit here runs deeper than appearances alone.

The sensibility of the film, the thrill of commerce and trade, the challenge of the battle between money and morality, and the larger-than-life quality of its main character — the rich, savvy, and unstoppable Gordon Gekko — all combine to make a legendary story that remains strangely inspiring in ways that its maker, Oliver Stone, surely did not entirely intend.

The film ends with a paean to labor unions and governments that save companies from rapacious capitalists, but it seems artificial, like a Victorian novel that had to have a happy ending lest the readers revolt. The overall message concerns the central role of finance and commerce in moving history forward. Even the famed "greed is good" speech gives one pause: he is onto something here, even if it is inelegantly stated.

In the same way that the Godfather movies shaped the culture of organized crime, Wall Street continues to influence the way traders and high-flying capitalists understand themselves.

And it's no wonder. The impression one is left with is all about the courage, the thrill of the fight, the riskiness of entrepreneurship, that struggle to obtain vast wealth, and the striving for the status of "master of the universe." It pictures commerce as a gladiator fight, a magnificent and relentless struggle for progress, an epoch and massively important terrain in which the fate of civilization is determined.

Enticing isn't it? Indeed it is and should be. Not all of commercial life is like this but parts of it are. And some features are universals that don't just apply to high finance. Everywhere and always, the future is uncertain. Those who make good judgments are rewarded. It isn't easy. It isn't for the faint of heart. Competition can be as fierce in a small business setting as in a big business one. Even the tiniest shop faces a daily risk, and this risk affects decision making in every area. Contrary to what Gekko claims, there is no sure thing, even with inside knowledge and even with all the wealth of the world. Indeed, Gekko is ultimately undone by forgetting that there might be someone out there with even better information.

The thing that levels the playing field in this rivalry in the service of society is the ubiquitous reality that no one really knows for sure what is around the corner. And in the end, whether you win or lose depends on that fickle and uncontrollable thing called consumer volition and its confrontation with the other undeniable reality of scarcity in all things.

I was trying to think of another story that captures that amazing element of drama associated with commercial life. It was this feature of the novels of Ayn Rand that most impressed Ludwig von Mises and Murray Rothbard. She gave voice to their own love of economics as high-drama intellectual battles for and against the progress of man.

My own favorite writer in this genre is Garet Garrett and his four novels written in the 1920s.

It is not just his novels. It is Garrett's entire worldview. He saw the market as the tableau for the working out of the great struggles in human history. Unlike Oliver Stone, he favored capitalism for the very reason that it was the engine of progress, and a vibrant and wholly cooperative way to work out the competitive spirit in the human person.

The virtues of steadfastness, valor, bravery, and the impulse to make a dent in the universe, and never, never, never give in (Churchill) are tragically associated with the death and destruction of war, but free enterprise provides a means by which these impulses can be channeled toward creative purposes.

And so, for example, in the Cinder Buggy we are witness to a titanic struggle within a family over whether the future belongs to iron or steel. And the description of the struggle, in the lives of its entrepreneurs, causes the heart to race.

The day of steel was breaking. It was not a brilliant event. It was like a cloudy dawn, unable to make a clean stroke between the light and the dark. Yet everyone had a sense of what was passing in this dimness. Gib, whose disbelief in steel rested as much upon pain memories and hatred as upon reason, was a fanatic; but at the same time great numbers of men with no such romantic bias of mind were violently excited on one side or the other of a fighting dispute. Fate decided the issue. The consequences were such as become fate. They were tremendous, uncontrollable, unimaginable. They changed the face of civilization. Vertical cities, suburbs, subways, industrialism, the rise of a wilderness in two generations to be the paramount nation in the world, victory in the World War, — those were consequences.

And look at this. You have to love this material:

And all the time, bad as it was, steel kept coming more and more into use, especially, that is to say, almost exclusively in the form of rails. And the reason the steel rail kept coming into use was that an amazing human society yet unborn, one that should have shapes, aspects, wants, powers and pastimes then undreamed of, was calling for it, — calling especially for the steel rail. The steel men heard it. That was what kept them in hope. The iron men heard it and were struck with fear.

Even the everyday actions of workers become fascinating:

The air was torn, shattered, upheaved, compressed, pierced through, by sounds of shock, strain, impact, clangor, cannonade and shrill whistle blasts, occurring in any order of sequence, and then all at one time dissolving in a moment of vast silence even more amazing to the ear. Conversation would be possible only by shrieks close up. The men seemed never to speak at their work. They did not communicate ideas by signs either. Each man had his place, his part, his own pattern of action, and did what he did with a kind of mechanical inevitability, as if it were something he had never learned. They were related not to each other but to the process, kept their eyes fixedly on it for obvious reasons, and stepped warily. A false gesture might have immediate consequences.

Later in the book, the fight between the dynasties revolves around price movements. One side gets into the nail business. The other side dumps nails on the market to lower the price, attempting to drive all competition out of business, even though it proves harmful to the very firm doing the dumping. The action is driven by spite, and the capitalist deems the price paid worth it for his goal of revenge. The action starts his downward spiral toward death. The firm that hopes to make and sell nails moves on to greater things.

So it is in the real world of commerce. No, the profitability is not always the motivation. Self-interest defines a wide category of human impulses, from benevolence to greed to the desire to destroy. This multiplicity of motivation can no more be ended than human nature itself can be permanently changed. The beauty of the market is its capacity for funneling it all in the service of the consumers, and The Cinder Buggy shows how all this works. Who won from the struggle? Those who needed nails and were glad to pay a lower price.

Price movements are also central to the drama of Satan's Bushel. The reader follows the price of wheat up and down and up again, and watches these price changes shift the fortunes of families, communities, and whole regions. No matter how powerful and rich the players, they are reduced to bit players in the face of larger market trends.

Garrett writes of a wheat speculator what could be said of Gekko in his best moments:

No rule of probability contains him. To say that he acts upon impulse, without reflection, in a headlong manner, is true only so far as it goes. Many people have that weakness. With him it is not a weakness. It is a principle of conduct. The impulse in his case is not ungovernable. It does not possess him and overthrow his judgment. It is the other way around. He takes possession of the impulse, mounting it as it were the enchanted steed of the Arabian Nights, and rides it to its kingdom of consequences. What lies at the end is always a surprise; if it is something he doesn't care for, no matter. Another steed is waiting. Meaning to do this, living for it, he has no baggage. There is nothing behind him. If he has wealth it is portable. He is at any moment ready.

It is the same with The Driver and with Harangue: the wonders of market-based inevitabilities sweep all dreams before it. Whether that dream is for some whacko socialist utopia, a Manichean experiment in living off the raw products of nature, or the goal of reigning in market forces through regulation in order to benefit a few at the expense of the many, the market's love of reality is triumphant. Those who know this in advance are the long-run winners.

Garet Garrett: The Collection

In the movie Wall Street, we are told that we should all love unions and their desire to keep wages as high as possible and fix jobs in place for generation after generation. And yet look around and see: the unions have destroyed the American car companies and they have put a serious dent in the profitability of airlines too. Their wishes are unsustainable because they are not the market's command.

In the end, who is the real destroyer: Gordon Gekko or the unions he fought? The movie ends with the unions and the government on top. History ends with the capitalists on top.

House OK's New Taxes in Health-Care Push

Honduras Crisis Talks Break Down

'Today' Piece Ignores Big Disagreements between Obama, Catholic Church

NBC neglects to report Obama's abortion stance as he meets pope.

RINE MAGGIO Culture and Media Institute

NBC's "Today" covered President Barack Obama's meeting with the current pope, which is "continuing a rite of passage for U.S. presidents." But the morning show glossed over Obama's stance on social policies which directly contradict Catholic teaching on June 10.

Savannah Guthrie's brief mention of Obama's meeting with Pope Benedict XVI ignored the president's positions on abortion and stem cell research which go against the Roman Catholic Church's respect and recognition of human life at all stages. Before being elected president, the senator was a known advocate of abortion, who supported partial birth abortion and opposed legislation protecting infant abortion survivors.

Yet, NBC's segment suggest Obama could be "in league" with the pope.

Michael Beschloss, NBC's presidential historian, said, "For Barack Obama to be in league with the pope on all sorts of things will help him a great deal not only with believing Catholics around the world, but among the very many people who respect what the pope stands for."

Guthrie failed to point out past examples of Obama upsetting Catholics on the sanctity of life issue.

One of Obama's first acts as president was to rescind the Mexico City Policy, which prohibited NGO's that receive federal money from providing or promoting abortions in foreign countries. Obama recently overturned Bush's policy on withholding federal funding for embryonic stem cell research. Many Catholics were also angered when the University of Notre Dame bestowed an honorary degree on Obama.

The rift between Obama and Catholics on life issues may come up during the president's meeting with the pope, but instead of explaining the reason for division Guthrie's piece and Beschloss' comment portrayed the pope as a potential ally.

The Obama Agenda Bogs Down

Democrats got what they wanted in the stimulus bill. The public knows it.

FRED BARNES

It usually doesn't happen this quickly in Washington. But President Barack Obama and congressional Democrats are finding that the old maxim that what goes around, comes around applies to them, too. Less than six months into his term, Mr. Obama's top initiatives -- health-care reform and "cap and trade" energy legislation -- are in serious jeopardy and he has himself and his congressional allies to blame.

Their high-pressure tactics in promoting and passing legislation, most notably the economic "stimulus" enacted in February, have backfired. Those tactics include unbridled partisanship, procedural short cuts, demands for swift passage of bills, and promises of quick results.

With large majorities in Congress and an obsequious press corps, Mr. Obama was smitten with the idea of emulating President Franklin Roosevelt's First 100 Days of legislative success in 1933. Like FDR, Mr. Obama tried to push as many liberal bills through Congress in as brief a time as possible.

He made a rookie mistake early on. He let congressional Democrats draft the bills. They're as partisan as any group that has ever controlled Congress, and as impatient. They have little interest in the compromises needed to attract Republican support. As a consequence, what they passed -- especially the $787 billion stimulus -- belongs to Democrats alone. They own the stimulus outright.

That makes them accountable for the hopes of a prompt economic recovery now being dashed. With the economy still faltering and jobs still being lost, Mr. Obama's credibility is sinking and his job approval rating is declining along with the popularity of his initiatives. Republicans, who had insisted the stimulus was wasteful and wouldn't work, are being vindicated.

The political fallout that mattered most, however, has been among Democrats in the House who will face tough re-election fights next year. They're in a state of near-panic over the lingering recession. Their confidence in Mr. Obama is fading, and they no longer believe in quickly passing the president's agenda. Cap and trade has been put off until the fall and health-care reform is starting to stall.

For Mr. Obama, this is all a potentially disastrous turn of events. On Capitol Hill, delay favors the opposition and tends to lead to defeat. The longer a bill sits around, the more its contents are dissected and the less likely it is to pass. Mr. Obama realizes this fact, which is why he is pressing for a quick vote on his health-care reform.

His plan has been to exploit the economic downturn to enact his entire agenda, not just the stimulus. The president's position, which he repeated again this week, is that his health, energy and education reforms are necessary to create a sustainable economic recovery. It's a clever political argument, but it makes little economic sense and few people buy it.

That's not all. The stimulus is such a large increase in spending that it turned the deficit into a political issue. There is a growing national wariness to adding billions (or trillions) to the budget, even for a relatively popular cause like health care.

Had Mr. Obama and Democrats proceeded differently, they'd have better odds now for enacting their agenda. They are victims of their own tactics.

Republicans hold 41% of the seats in Congress. That's a position of weakness, but not completely powerlessness. Rather than ignoring GOP proposals, Democrats might have been better off giving Republicans 20% of the stimulus funds to spend. Republicans probably would have spent it on tax reforms that encourage economic growth. Had that happened, the stimulus might have provided a mild boost to the economy by now.

Or what if Democrats had heeded Republican advice and trimmed the size of the stimulus? The economy wouldn't be any worse for it, but the deficit and public fear of it would be smaller.

During the presidential campaign last year, Mr. Obama said he was committed to bipartisanship. But congressional Democrats aren't, as he surely knew. They rejected input from House Republicans on the stimulus -- without a peep of protest from the president. Minor concessions to three Republicans gave them the 60 votes to pass the bill in the Senate.

The president's vow of bipartisanship wasn't the only promise to crumble. Democrats said they'd give Republicans (and the public) 48 hours to read a bill before a vote. But the final version of the 1,071-page stimulus package was unveiled in the House at 1 a.m. on Feb. 13 and passed later that day after one hour of substantive debate. Every Republican voted no. The Senate vote came 16 hours after the three renegade Republicans agreed to an amended version of the stimulus.

In urging fast action, Mr. Obama sounded apocalyptic: "If we do not move swiftly to sign the [stimulus] into law, an economy that is already in crisis will be faced with catastrophe. . . . Millions more Americans will lose their jobs. Homes will be lost. Families will go without health care."

Once the stimulus passed, Democrats said the impact would be practically instant. House Majority Leader Steny Hoyer (D., Md.) predicted "an immediate jolt." Economic adviser Larry Summers said, "You'll see the effects almost immediately." White House Budget Director Peter Orszag said it would "take only weeks or months" to be felt.

A similar sequence of appeals, claims, promises and a speedy vote was followed when the cap and trade bill, which would put a ceiling on greenhouse gas emissions, came before the House on June 28. The bill's architect, Rep. Henry Waxman (D., Calif.), presented a crucial 300-page amendment at 3 a.m. It passed 16 hours later.

But even that was not fast enough. Mr. Waxman was irritated by House Republican leader John Boehner's hour-long address in opposition. As Mr. Boehner spoke, Mr. Waxman demanded he be cut off. He wasn't, but after Mr. Boehner finished, Mr. Waxman asked the presiding officer, who was then Rep. Ellen Tauscher (D., Calif.), how long the "two minute speech" had lasted. "The customary amount of time" for the minority leader, she replied.

Mr. Waxman's testiness won't make final passage of cap and trade easier. Nor will the Obama administration gain from its crude attempt last week to punish -- and silence -- Sen. Jon Kyl (R., Ariz.) for saying the stimulus should be cancelled. Four cabinet members wrote to his governor, Republican Jan Brewer, to ask if she wanted to forfeit stimulus money for her state.

Mr. Obama's health-care and energy initiatives, the core of his far-reaching agenda, were bound to face serious opposition in Congress in any case. Hardball tactics and false promises have only made the hill he has to climb steeper. Now he may lose on both. The president and his congressional allies should have known better.

Mr. Barnes is executive editor of the Weekly Standard and a commentator on Fox News Channel.

Europe Thumps U.S., Again

First lower taxes, now freer trade.

On present trends, most of Europe will soon have lower income tax rates than most of America. And now the European Union is stealing another competitive march on Washington, this time on a free trade deal with the world's 13th largest economy, fast-growing South Korea.

Last week Brussels and Seoul finished the outline of a new trade agreement, and the two sides will now write up the technical language to codify it. As for the pending U.S.-Korea trade agreement, Congress has done . . . nothing.

South Korea has made negotiating trade deals a centerpiece of its foreign and economic policy. The U.S. FTA, signed in 2007 but still not ratified, is one example. Negotiations are planned or under way with a long list of countries, including India, Canada and Australia. On the EU side, the Commission is vigorously defending the pact against domestic critics, including the European auto industry. EU approval isn't a sure thing, but Swedish Prime Minister Fredrik Reinfeldt is aiming to finish it by December.

Compare that to the U.S., where the FTA with Korea is bogged down in Big Labor politics. Bashing the deal became de rigueur in the Democratic Party primary before last year's Presidential election. Candidates Barack Obama and Hillary Clinton both claimed the deal wouldn't open Korea's auto market to U.S. imports, all evidence to the contrary. Now, with Democrats running both the White House and Congress, prospects are bleak for any trade deal. Colombia has also been left hanging, even though its goods already enter the U.S. duty free under the Andean preferences program.

Don't count on progress any time soon. President Obama's trade representative, Ron Kirk, rose from his slumbers last week to give his first big speech but he failed to mention either South Korea or Colombia. Instead, he focused on "trade enforcement," by which he seems to mean picking fights with U.S. trading partners. This will include, Mr. Kirk said, investigating "labor violations" inside other countries. "And if they don't fix their labor problems, we will exercise our legal options," he said. Just what our friends want to see when global trade is contracting: Another U.S. excuse for protectionism.

Korea's progress with the EU shows how risky U.S. delays are. The European Commission says the EU-Korea deal will eliminate $2.2 billion in duties Korea currently imposes each year on European goods -- and cut duties and eliminate nontariff barriers on imports of European cars. American companies could gain similar benefits if only Congress would approve the U.S.-Korea pact.

Across the globe, countries are moving ahead with similar bilateral trade deals, often giving their own national companies an edge over U.S. competitors. In a perfect world, all countries would be able to benefit from multilateral trade opening under the Doha Round. But for now bilateral deals are better than nothing, and America is leaving itself behind.

The U.S. Steers Left on Honduras

Why would Hugo Chavez expect Obama to help him?

By MARY ANASTASIA O'GRADY

When Hugo Chávez makes a personal appeal to Washington for help, as he did 11 days ago, it raises serious questions about the signals that President Barack Obama is sending to the hemisphere's most dangerous dictator.

Associated Press

Ousted Honduran President Manuel Zelaya (left) with Costa Rican President Oscar Arias.

At issue is Mr. Chávez's determination to restore deposed Honduran president Manuel Zelaya to power through multilateral pressure. His phone call to a State Department official showed that his campaign was not going well and that he thought he could get U.S. help.

This is not good news for the region. The Venezuelan may feel that his aims have enough support from the U.S. and the Organization of American States (OAS) that he would be justified in forcing Mr. Zelaya on Honduras by supporting a violent overthrow of the current government. That he has reason to harbor such a view is yet another sign that the Obama administration is on the wrong side of history.

In the three weeks since the Honduran Congress moved to defend the country's constitution by relieving Mr. Zelaya of his presidential duties, it has become clear that his arrest was both lawful and a necessary precaution against violence.

The Americas in the News

Get the latest information in Spanish from The Wall Street Journal's Americas page.

Mr. Zelaya was trying to use mob rule to undermine Honduras's institutions in much the same way that Mr. Chávez has done in Venezuela. But as Washington lawyer Miguel Estrada pointed out in the Los Angeles Times on July 10, Mr. Zelaya's actions were expressly forbidden by the Honduran constitution.

"Article 239," Mr. Estrada noted, "specifically states that any president who so much as proposes the permissibility of reelection 'shall cease forthwith' in his duties, and Article 4 provides that any 'infraction' of the succession rules constitutes treason." Congress had little choice but to take its next step. It convened "immediately after Zelaya's arrest," Mr. Estrada wrote, "condemning his illegal conduct, and overwhelmingly voting (122-6) to remove him from office."

Mr. Zelaya was shipped out of the country because Honduras believed that jailing him would make him a lightning rod for violence. Interim President Roberto Micheletti promised that presidential elections scheduled for November would go forward.

That might have been the end of it if the U.S. had supported the Honduran rule of law, or simply refrained from meddling. Instead President Obama and the State Department joined Mr. Chávez and his allies in demanding that Mr. Zelaya be restored to power. This has emboldened Venezuela.

On July 5, Mr. Zelaya boarded a plane manned by a Venezuelan crew bound for Tegucigalpa, knowing full well that he would not be allowed to land. It didn't matter. His intention was to incite a mob on the ground and force a confrontation between his supporters and the military. It worked. One person was killed in clashes near the airport.

Yet the tragedy did not produce the desired condemnation of the Micheletti government. Rather, it empowered Honduran patriots. Perhaps this is because the airport violence reinforced the claim that Mr. Zelaya is a threat to the peace.

He was not the only one to lose credibility that day. OAS Secretary General José Miguel Insulza had encouraged the fly-over stunt despite its obvious risks. He even traveled in a separate plane behind Mr. Zelaya to show support. The incident destroyed any possibility that Mr. Insulza could be considered an honest broker. It also proved the charge that by insisting on Mr. Zelaya's return the U.S. was playing with fire.

The next day Costa Rican President Oscar Arias offered to act as a mediator between Mr. Zelaya and the new government. Mr. Arias would seem to be far from an impartial referee given that he is a supporter of Mr. Zelaya. Yet it is also true that Central America has the most to lose if Honduras descends into civil war. It follows that the San José venue offers better odds for the Honduran democracy than, say, the auspices of the OAS.

Other influential Central Americans have expressed support for Honduras. Last week the Honduran daily El Heraldo reported that Salvador's OAS ambassador said he hopes to see the resolution that suspended Honduras from the group revoked under the new permanent-council president. Catholic Cardinal Oscar Rodriguez Maradiaga has condemned Mr. Zelaya's violent tactics and says that Honduras does not want to emulate Venezuela.

Mr. Chávez understands that Mr. Zelaya's star is fading, which is why he called Tom Shannon, the State Department's assistant secretary for the Western Hemisphere at home at 11:15 p.m on July 9. Mr. Shannon told me that Mr. Chávez "again made the case for the unconditional return of Mr. Zelaya, though he did so in a less bombastic manner than he has in the past."

Mr. Shannon says that in response he "suggested to him that Venezuela and its [allies] address the fear factor by calling for free and fair elections and a peaceful transition to a new government." That, Mr. Shannon, says, "hasn't happened."

Nor is it likely to. Yet the U.S. continues exerting enormous pressure for the return of Mr. Zelaya. If it prevails, it is unlikely that Mr. Zelaya's mobs or Mr. Chávez will suddenly be tamed.

Stocks See Broad Gains

New economic data and bullish calls from Goldman Sachs and Bank of America nudged stocks higher Monday.

Although the gains in major indexes were broad-based, they were mild compared with buying last week, when the Dow Jones Industrial Average surged 7.3%.

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The Dow was recently up 38 points, or 0.4%, at 8781.60. Caterpillar rose 5.6%, helped by an upgrade to a "buy" rating from Bank of America analysts, who said construction machinery sales reached a cyclical bottom during the second quarter.

The Nasdaq Composite Index rose 0.4%. The S&P 500 was up 0.4% to 943.88, with only its trio of traditional safe-haven sectors posting declines: health care, utilities, and consumer staples. The S&P's basic-materials and industrial sectors were its strongest categories, up almost 1% each.

Goldman on Monday raised its annual forecast for the S&P 500, saying an improvement in earnings will drive a sharp second-half rally. Goldman raised its year-end S&P 500 target to 1060 from 940, reflecting a potential price return of about 13% from current levels.

Further driving Monday's stock gains, the June index of leading economic indicators continued to march higher. The index increased 0.7% last month, after a revised 1.3% gain in May, the Conference Board reported Monday.

Oil service shares trade mixed as Weatherford misses its profit target. Halliburton rises slightly, even as it tempers hopes for a rebound this year. MarketWatch's Steve Gelsi reports.

Elsewhere, Human Genome Sciences nearly tripled to trade near $10 a share after it issued a statement with GlaxoSmithKline PLC that a new lupus drug they are developing is showing promise in clinical trials, a rare success in the fight against lupus. Shares of GlaxoSmithKline were up about 3% recently.

Earnings season will continue to be a major focus for investors throughout this week. Through July 17, 71% of the 55 S&P 500 components that have reported results have beaten expectations, 9% have matched them and 20% have missed, according to data compiled by Thomson Reuters.

Reporting on Monday, Hasbro Inc. said second-quarter profit rose 5%, beating its earnings-per-share estimate by two cents. Its shares rose 3%.

Japanese markets were shut for the Marine Day holiday. In Hong Kong, the Hang Seng rallied 3.7%.

Banks helped drive European shares higher, with the Dow Jones Stoxx 600 rising 1.5% in morning action.

The dollar was mixed. One euro cost $1.4207, up from $1.4099 late Friday. One dollar fetched 94.51 Japanese yen, up from 94.36 yen.

Treasurys were little changed. The two-year note fell 1/32 to yield 1.003%. The 10-year note rose 1/32 to yield 3.561%.

For Sale: One Leopard-Skin Rolex and Maybe Some Frozen Sharks

All Were Seized From Drug Lords in Mexico, Along With a Secret Hot-Tub Lair

JOHN LYONS

MEXICO CITY -- When a Mexican drug lord gets busted, what happens to his emerald-encrusted pistols?

The answer lies at a little-known branch of the Finance Ministry that manages the over-the-top mansions, armor-plated Hummers and other assets seized in the Mexican government's escalating war on drug cartels. The agency is called the Asset Administration and Disposal Service, or SAE as it's known for short in Spanish.

"You realize that the mansions in movies like 'Scarface' aren't exaggerations," says Omar Yaffar, a 36-year-old manager at the agency. "The real thing can be more amazing."

Mexico's Narco-Bling

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Omar Torres/AFP/Getty Images

Peek inside the vault holding some of the possessions seized as part of the Mexican government's war on powerful drug cartels.

One recent Thursday, Mr. Yaffar went to check out a house the agency is about to take over from Mexico's Federal Police, who last year surprised a group of Colombian drug traffickers as they partied in the chalet-style hideout. If the defendants are convicted, their lair likely will be auctioned off.

The three-story house is like Hansel and Gretel meets Pablo Escobar, replete with gingerbread-like carvings featuring Christian and Buddhist figures, goats, fish and other animals. The grounds are a labyrinth of garden trails among man-made ponds fed by waterfalls. The compound also has stables, a suit of armor and a disco with stripper pole.

Some of the traffickers were caught in a cave-like underground hot-tub complex about the size of a backyard swimming pool, featuring faux stalactites and a fireplace. A glass skylight allowed bathers to gaze up at lions or a pair of albino tigers that dwelled in a cage on the roof.

"Some people have barking dogs living next door, but imagine lions," says Mr. Yaffar.

Police at the scene said the neighbors apparently never complained about the lions' roars, perhaps because they thought better of tangling with the big cats' owners. The alleged traffickers' menagerie -- including not only lions and tigers, but panthers and one gorilla -- was donated to zoos.

From the outside, alleged drug figure Zhenli Ye Gon put up a modest facade. Mr. Ye, a Chinese-Mexican businessman whom U.S. and Mexican authorities have charged with knowingly providing precursor chemicals to the methamphetamine trade, lives on a quiet lane in Mexico City's wealthy Lomas neighborhood. His three-story home, largely hidden from the street, was built to look like it has only two.

Inside his home, investigators found $205 million in cash hidden in a secret room hidden behind Mr. Ye's dressing-room mirror. When he was arrested, he had just received a shipment of Versace dinnerware to go with his Baccarat wine glasses and Lalique Champagne flutes, all of it still in boxes.

Mr. Ye denies the charges, and U.S. prosecutors have moved to scrap their case against him, which would open the way for extradition to Mexico to face similar charges. Mr. Ye's lawyers say he plans to fight extradition.

His lawyers also say they are pleased with the SAE's stewardship of Mr. Ye's property, which their client can recoup if his name is cleared. But they are less happy that the Mexican government already spent the $205 million seized from him, as is permitted under Mexican law.

The globalized drug trade can put SAE agents in tricky diplomatic situations. When a delegation of Chinese investigators interested in the case came to Mexico, Victor Aznar, a senior SAE official, said it was all he could do to keep the Chinese from pocketing dragon statuettes and other objects during a tour of the house.

"They kept pleading with me that it was evidence they needed to take back to China," says Mr. Aznar. "I politely told them, 'no.' "

Officials at the Chinese embassy in Mexico didn't return phone and email messages seeking comment.

SAE agents deal with an astonishing variety of goods, from Boeing DC-10 aircraft used to ferry drugs, to herds of cattle grazing on a trafficker's ranch. In July, when customs officials discovered a shipment of cocaine hidden in the bellies of frozen sharks, the officials called the police to pick up the drugs. The SAE was called in to deal with the sharks.

The sharks (which remain frozen) may be sold to fish markets if it can be determined that they are safe to eat, and were fished legally. Otherwise they will be destroyed.

A peek inside a SAE vault is a primer in Mexican narco-bling: A Rolex watch and band custom-jeweled to resemble leopard's skin; De La Cour watches featuring skull or marijuana-leaf motifs; a pair of gold pistol grips with raised eagle busts adorned with diamonds and emeralds.

Perhaps reflecting proximity of death for many drug traffickers, often the jewels have religious themes, such as a palm-sized gold and diamond necklace ornament depicting St. Jude, the patron saint of hopeless causes.

Works by some of Mexico's most important artists, such as Diego Rivera and Rufino Tamayo, also sit in the vault, awaiting auction. Proceeds from the auctions are evenly divided among the attorney general's office, the health ministry and the court system.

The fact that the artwork, jewels and cars seized by police have made it into a government vault marks a change from the past. As recently as the 1990s, before the SAE was created, assets seized by police had a way of disappearing, government officials say. The SAE also manages and disposes of assets from corporate bankruptcies and illegally imported goods like knockoff clothing.

Associated Press

Police seized Zhenli Ye Gon's home and $205 million in a secret room.

The agency is considered a model of efficiency and transparency, according to experts on Mexico's economy. Regular auctions of confiscated goods happen at upscale hotels, and over the Internet using eBay's online auction software. Defense lawyers for alleged drug traffickers say even their clients like the agency: They now have a better chance of recovering their belongings if they win their legal cases.

Some alleged drug traffickers attempt to buy back their stuff. To prevent this, the agency doesn't accept cash and keeps a registry of buyers.

Ricardo Hernandez, a 36-year-old SAE agent, says he is still unnerved by what he saw at a house in one of Mexico's roughest neighbors, where kidnappers held the sister of a famous Mexican singer.

The dingy house was decorated as a monument to evil. A painting of the Last Supper hung on the wall, the faces of Jesus and his disciples distorted in horrifying ways, he said. One room appeared to be a shrine to Santa Muerte, a grim reaper figure worshipped as a saint by Mexican criminals. Bizarre elf figurines were placed about.

"I don't like seeing kidnappers' houses," Mr. Hernandez says. "That really affected me."

SAE agents, dressed in white shirts and ties, usually stand out at crime scenes among federal cops wearing bullet-resistant vests and ominous ski masks to hide their identities.

That doesn't mean they never see action. In 2006, Mr. Yaffar traveled in a convoy of armed federal police to take control of five ranches in Sonora, a northern state, whose owners had been arrested.

When they arrived at the first ranch, they found it still occupied by armed men. One officer thrust an assault rifle into Mr. Yaffar's arms. "If they come at us, start firing," Mr. Yaffar recalls being told.

Luckily, the men were arrested with no shots fired.

The other four ranches were occupied only by some cattle that had wandered in from neighboring ranches. That brought a new challenge, Mr. Yaffar says: Persuading the police officers to help him clear the cows off the property.

THE LIBERTARIAN

Monday, July 20, 2009