Thursday, February 21, 2008

Subprime Is Really SubCRIME: America's Deeper Financial Crisis

Subprime Is Really SubCRIME: America's Deeper Financial Crisis

By Danny Schechter

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At long last, the Democrats are talking about the economy and the need for serious relief and reforms. The reason is simple. The people are feeling the squeeze.

Reports the Baltimore Sun:

"Since January alone, the public's perception about the state of the economy has plummeted -- with just 17 percent calling the nation's economy excellent or good -- down from 26 percent last month. The percentage rating the economy poor has grown from 28 to 45 percent."

Hillary Clinton and Barack Obama now have their instant 10-point plans and programs. They have dipped into John Edwards' tool chest for ideas on fighting poverty and listened to policy advisors who have come up with a laundry list of proposals for stop-gap measures from hikes in the minimum wage and middle-class tax cuts. All of these proposals will take time to implement and probably will be forgotten by the time one of them becomes president, if they do.

Meanwhile the economy is collapsing because of crimes and irresponsibility on Wall Street, and no one is really talking about that. An inequality gap and structural crisis compounded by profiteering in high places goes on and is largely ignored.

The media is not investigating the profiteers and, in fact, continues to contribute to the problem by accepting millions for dubious ads for more loans that end up getting more Americans in debt. Prosecutors are not prosecuting wrong doing. No fundamental new regulations and oversight are being proposed.

The candidates don't even seem to know the extent of damage that is being done by the subprime crisis and its assignees. Andrew Abraham reports:

Bank of America delivered a report last night highlighting the current losses of the "credit crisis." According to the report, the meltdown in the U.S. subprime real estate market has led to a global loss of $7.7 trillion in stock market value since October.

Quoting Bank of America's chief market strategist, Joseph Quinlan, the crisis, which has spread beyond U.S. shores to banks and other sectors worldwide, is "one of the most vicious in financial history."

That number again: $7.7 TRILLION. That phrase again: "the most vicious," that is, worse than 1929 and all the financial crises since.

Who is responsible for this, and who is being made responsible? Why aren't we talking about these massive losses and the growing debt burden? Why is this issue not on the political agenda save for the efforts of a few advocacy groups on the left and Ron Paul on the right?

It was discouraging when our government's leading critic of these practices got so discouraged that he quit last week. David Walker, the comptroller of the currency had warned back in 2005 (as reported in my film In Debt We Trust):

Continuing on this unsustainable path will gradually erode if not suddenly damage our economy, our standard of living and ultimately our national security.

And guess what? Just two years later, our economy was "suddenly damaged." The damage is "affecting our standard of living," and very few public officials or political candidates are connecting the dots. Why not?

When will we condemn the false prophets of the free market and their misguided policies? When will we indict those who cashed in on our country's misery?

Notes scholar Lionel Tiger:

Those who have been operating the managerial levers of the financial system have failed embarrassingly and massively to comprehend the processes for which they are responsible. They have loaned money avidly and recklessly to people who couldn't pay it back. They fudged data to get loans approved and recalculated. Then they sausaged fragile figments of money-reality into new "products" which could be sold around the world to investors eager to enjoy the surprising returns which often accompany theft, managerial incompetence and fraud. When it comes to responsibility for all this, there appears to be no one here but us spring chickens. Not only that, but the overseers of the bitter debacle may lose their jobs for a month but nonetheless fill their wheelbarrows with company money and "severance" when they leave to tide them over until the next corner office becomes available."

And what is to be done about this white-collar crime wave? At long last even shamed executives in the financial industry are joining those of us who long ago charged that subprime is really subcrime. Basil Williams, chief executive officer of Concordia Advisors, a hedge fund, says we need "a safety net for the innocent and a dragnet for the guilty."

Writing in the Record in Bergen County, N.J., he says that the greedy should pay to help the needy:

"The costs can be recouped by going after those who profited handsomely and unfairly from the multitude of transactions that touched the industry, including:

  • Mortgage brokers who originated loans to those who didn't understand the conditions, couldn't afford them and should not have qualified.
  • Appraisers who overvalued homes, knowing that the higher the value they gave a property, the more business they would reap from a dishonest broker.
  • Banks and brokerage firms that purchased, packaged and resold the mortgages for huge fees."

He goes on to discuss ratings agencies and more. This is a litany that the candidates and activists should sign on to.

With millions facing foreclosure, we have to expose those responsible and mount a movement for economic justice. It can be done. It should be done. Who is ready to stand up and organize a national mobilization to stop this outrage? Who is ready to fund it?

Who?

U.S. Economy: Philadelphia Factory Index Declines

U.S. Economy: Philadelphia Factory Index Declines

By Bob Willis and Shobhana Chandra

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The U.S. moved closer to a recession as manufacturing in the Philadelphia area shrank the most in seven years, while a measure of the economy's future performance declined for a fourth month.

The Federal Reserve Bank of Philadelphia's general economic index fell more than forecast this month to minus 24, showing the margin by which more firms reported a decrease in activity instead of an increase. That was the lowest figure since February 2001, weeks before the last downturn began. The Conference Board's index of leading indicators dropped 0.1 percent in January, matching December's decline.

Treasury notes rallied and the dollar weakened after the reports as traders anticipated the Fed will need to keep reducing interest rates. Stocks reversed early gains, and the Standard & Poor's 500 Index closed down 17.50 points, or 1.3 percent, at 1342.53.

``The economy is shrinking and business sentiment is as bad as it can be,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. ``We're very close to a recession.''

A two-year housing slump that has caused the first nationwide decline in prices since the Great Depression, coupled with higher borrowing costs for companies and households, has pushed the economy to the brink of a recession. The Fed, after cutting rates in January at the fastest pace since 1990, has said it is ready to move in a ``timely'' manner to help growth.

Recession Committee

Even as data indicate the economy is deteriorating, two members of the panel that dates U.S. economic cycles said it's too early to say a recession has begun.

``Notwithstanding the darkening clouds, we are still far from the point where the committee would act,'' said Robert Hall, an economist at Stanford University who leads the National Bureau of Economic Research's Business Cycle Dating Committee.

Hall said committee members have had some informal discussions via e-mail since January. Victor Zarnowitz, another panel member, said it's ``impossible'' to know yet whether a recession has begun.

The Philadelphia Fed report provides one of the month's earliest clues to the state of manufacturing nationwide. Similar data from the New York Fed released last week showed manufacturing contracted in the New York region for the first time in almost three years.

Economists' Forecasts

Economists had forecast the Philadelphia manufacturing index would rise to minus 10.0, according to the median of 54 estimates in a Bloomberg News survey. Eighty-five companies responded to this month's survey, which was taken from Feb. 6 to Feb. 18, said Philadelphia Fed spokeswoman Marilyn Wimp.

Last month's drop in the Conference Board's index brings the decline for the last six months to 2 percent, which the Conference Board says can be one of the ``reasonable criteria for a recession warning.''

Four of the 10 indicators in the report had a negative effect on the index, led by falling stock prices.

Consumer and business spending may slow as borrowing costs increase, even after the Fed's rate cuts.

Average 30-year fixed rates on mortgages in excess of $417,000 have jumped to 6.76 percent from 6.46 percent a month ago, according to data compiled by Bankrate.com.

The extra yield investors demand to buy investment-grade U.S. corporate bonds instead of Treasury securities rose to 2.40 percentage points yesterday from 2.11 percentage points at the start of January, Merrill Lynch & Co. data show.

New Orders

The Philadelphia Fed's measure of new orders rose to minus 10.9 from minus 15.2 the prior month, and a measure of shipments fell to minus 12.2 from minus 2.3 the prior month.

A gauge of unfilled orders dropped to minus 10.9 from minus 6.2, while the index of inventories declined to minus 13 from minus 11.7 the prior month.

The employment index gained to 2.5 from minus 1.5 a month earlier, the Philadelphia Fed said. An index of prices paid dropped to 46.6 from 49.8, while a gauge of prices received weakened to 24.3 from 32.

The biggest drag to the leading indicators measure came from the Standard & Poor's 500 index, which averaged 1,379 in January, down from 1,479 the prior month. The S&P 500 has fallen three consecutive months, the longest losing streak since 2003.

Building permits, a sign of future construction, also subtracted from leading indicators. Permits fell 3 percent to a 1.048 million annual rate in January, the Commerce Department reported yesterday.

`Low' Rates

Fed policy makers said ``relatively low'' interest rates may be needed for some time as they cut their growth forecast and voted for the fastest easing of monetary policy in two decades, according to minutes of the Fed's January conference calls and meeting released yesterday.

The Labor Department reported today that the number of Americans remaining on unemployment benefit rolls climbed to the highest since October 2005 as faltering economic growth prompted companies to cut payrolls.

The number of people continuing to collect benefits rose to 2.784 million in the week ended Feb. 9, from 2.736 million a week earlier, the Labor Department said today in Washington. First-time jobless claims decreased by 9,000 to 349,000 in the week ended Feb. 16, from a revised 358,000 a week earlier.

Americans are becoming cautious about spending. Best Buy Co., the largest U.S. consumer-electronics chain, on Feb. 15 cut its full-year profit forecast on lower sales of digital cameras, video games and home theaters.

``Soft domestic customer traffic in January, coupled with our near-term outlook, now indicate that our fourth-quarter revenue will fall short of our planned targets,'' Chief Executive Officer Brad Anderson said in a statement.

Treasuries Notes Rise Most This Month on Manufacturing Decline

Treasuries Notes Rise Most This Month on Manufacturing Decline

By Deborah Finestone and Sandra Hernandez

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Treasury notes rose the most this month after a Federal Reserve report showed manufacturing in the Philadelphia region had its biggest decline since February 2001, indicating the economy may be falling into a recession.

The difference between the 10-year note yield and the two- year rate increased for the first time in three days in anticipation of deeper cuts in the target lending rate by the central bank. Policy makers reduced their growth forecast yesterday and signaled they're poised to reverse interest-rate reductions quickly when the U.S. economy rebounds.

``The market is expecting continued easing by the Fed,'' said James Cusser, a portfolio manager in Overland Park, Kansas, who oversees $1.5 billion in investments at Waddell & Reed Inc. ``I've bunched up maturities on the shorter end.''

The two-year note's yield fell 16 basis points, or 0.16 percentage point, to 1.98 percent at 4:08 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 2 1/8 percent note due in January 2010 rose 10/32, or $3.13 per $1,000 face amount, to 100 9/32. A one-point increase in the price of the 10-year security pushed the yield down 12 basis points to 3.77 percent.

Price swings in U.S. government debt became more pronounced this week. Merrill Lynch & Co.'s MOVE index, a measure of expectations for Treasury volatility, increased to 154.30 yesterday, the highest level since Jan. 29.

The spread between two- and 10-year yields rose to 180 basis points after narrowing to 172 basis points earlier today. The two-year note's yield was 193 basis points lower than the 10-year note's yield on Feb. 14, the most since July 2004. The difference was 100 basis points in December.

`Resume Steepening'

``The curve will resume steepening based on our expectation that the economy is already in a recession and will remain weak through 2009,'' said Jane Caron, chief economic strategist in Burlington, Vermont, at Dwight Asset Management Co., which oversees $68 billion of fixed-income assets.

Accelerating inflation may lead investors to question how much global central banks can reduce interest rates, detracting from bets the yield spread will increase, according to Tom Fitzpatrick, chief technical strategist in New York at Citigroup Global Markets Inc.

Two-year note yields may rise as high as 2.55 percent in the next three to four weeks, Fitzpatrick said. They reached 1.82 percent on Feb. 15, the lowest since April 2004.

``Watch out on the steepener,'' he wrote in a note to clients. ``It looks like it is about to become a pain trade.''

Consumer Prices

Consumer prices rose at an annual rate of 4.3 percent in the 12 months through January after a 4.1 percent gain in December, the Labor Department said yesterday. Excluding food and energy, consumer prices rose for a fourth straight month, increasing 2.5 percent in the year through January.

Fed policy makers concluded borrowing costs need to be kept low ``for a time'' and increased their 2008 inflation forecasts, minutes of their Jan. 29-30 meeting showed yesterday. Some foresaw raising interest rates, possibly at a ``rapid'' pace, once the economy recovers.

The central bank cut its target rate for overnight loans between banks by 125 basis points to 3 percent last month, the fastest easing in almost two decades.

Fed funds futures on the Chicago Board of Trade indicate a 94 percent chance policy makers will reduce the target lending rate by a half-percentage point at the March 18 meeting, compared with odds of 92 percent yesterday. The balance of bets is for a cut of three-quarters of a percentage point, a possibility that was ruled out yesterday.

Philadelphia Factories

The Philadelphia Fed's general economic index declined this month to minus 24 from minus 20.9 in January, the bank said today. The median forecast of 54 economists surveyed by Bloomberg News was for a reading of minus 10.0. Readings less than zero signal contraction. The Philadelphia Fed's general economic index averaged 5.1 in 2007.

Treasuries extended their gains as U.S. equities fell on the manufacturing report. The Standard & Poor's 500 Index dropped 1.3 percent.

``There's still plenty of problems out there,'' said Stewart Taylor, a money manager who helps oversee about $4 billion in Boston at Eaton Vance Management. ``People continue to look at Treasuries as a place to hide.''

U.S. Stocks Retreat, Erasing Early Gains, on Recession Concern

U.S. Stocks Retreat, Erasing Early Gains, on Recession Concern

By Michael Patterson

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U.S. stocks fell for the second time this week, led by energy and industrial shares, after a worse- than-forecast manufacturing report and higher stockpiles of oil spurred concern that the economy has fallen into a recession.

Exxon Mobil Corp., Chevron Corp. and General Electric Co. declined, helping erase a 76-point gain in the Dow Jones Industrial Average. Target Corp. led losses in retailers after Citigroup Inc. told clients to sell the shares. SunTrust Banks Inc. fell the most in two months on a reduced credit outlook by Standard & Poor's and Oppenheimer & Co.'s prediction that an imminent takeover of the lender is unlikely.

The Standard & Poor's 500 Index dropped 17.5 points, or 1.3 percent, to 1,342.53, its steepest loss since Feb. 14. The Dow average decreased 142.96, or 1.2 percent, to 12,284.3. The Nasdaq Composite Index slipped 27.32, or 1.2 percent, to 2,299.78. About four stocks fell for every one that rose on the New York Stock Exchange. Shares in Europe and Asia gained.

``The consensus is for economic growth to get weaker,'' said Theodore Parrish, who helps manage $1.3 billion at Henssler Financial Group in Kennesaw, Georgia. ``I wouldn't load up on any of the energy stocks at this point. They've had their run.''

All 10 industry groups in the S&P 500 declined after the Federal Reserve Bank of Philadelphia's general economic index slumped to the lowest in seven years and the Conference Board's gauge of leading economic indicators declined for a fourth straight month.

The S&P 500 has fallen 8.6 percent this year, even after the fastest easing of monetary policy by the Fed in two decades, as evidence builds that the worst housing slump in a quarter century and $146 billion in credit losses at financial firms are dragging down other industries.

Exxon, Chevron

The market's early gains were sparked by technology companies after Citigroup advised buying shares of Cisco Systems Inc. and Research In Motion Ltd. said holiday sales of the BlackBerry e-mail phone were better than expected.

Exxon, the biggest U.S. oil producer, dropped $1.18 to $86.92. Chevron, the second-largest, slid $1.56 to $84.78. The S&P 500 Energy Index of 36 companies, which has gained 25 percent in the past year, lost 2.1 percent today for the biggest drop among 10 industries.

Oil prices slipped 1.5 percent to $98.23 a barrel after the Energy Department said crude inventories climbed by 4.2 million barrels to the highest since November. Crude futures rose to a record $101.32 a barrel yesterday on signs OPEC may cut output.

Economy Watch

General Electric, the second-biggest U.S. company by market value, slumped 36 cents to $33.69. General Motors Corp., the largest automaker, slid $1.24 to $24.30.

The Philadelphia Fed's index declined to minus 24 in February from minus 20.9 the previous month, the bank said today. Economists surveyed by Bloomberg expected a reading of minus 10. Negative readings signal contraction. A drop in the index to at least minus 24 has always corresponded with a U.S. recession, according to data since 1968 compiled by Bespoke Investment Group LLC.

The Conference Board's gauge, which points to the direction of the economy over the next three to six months, fell 0.1 percent, the New York-based group said. Last month's drop in the index brings the decline for the last six months to 2 percent, which the Conference Board says can be one of the ``reasonable criteria for a recession warning.''

Fed Bets

Traders priced in a 94 percent chance that the Fed will lower its benchmark lending rate by 0.5 percentage point to 2.5 percent at its March 18 policy meeting, according to Fed funds futures prices compiled by Bloomberg. The rest of the bets are for a 0.75 point reduction. Traders saw no chance of a three- quarter point cut yesterday.

Target retreated $2.04 to $51.36. The second-largest U.S. discount chain was cut to ``sell'' from ``hold'' at Citigroup because of competition from Wal-Mart Stores Inc. and reduced profitability at its credit-card unit.

SunTrust tumbled $3.19, or 5 percent, to $60.79. The seventh-largest U.S. bank had its credit outlook changed to ``negative'' from ``stable'' by S&P because of rising losses on home loans. Credit problems may spread to other parts of the bank's loan portfolio, S&P said.

Oppenheimer analyst Jennifer Thompson downgraded SunTrust to ``underperform'' from ``perform.'' She wrote in a research note that the current credit environment will delay any acquisition offers for SunTrust.

MBIA, Safeway

MBIA Inc. slipped 28 cents to $11.90. The world's largest bond insurer said financial guarantors should separate their municipal-bond units from other businesses such as insuring collateralized debt obligations. The company severed ties to its trade group because of differences of opinion on the direction of the industry.

Safeway Inc., the third-largest U.S. grocery chain, dropped $2.28 to $29.66. Chief Executive Officer Steven Burd said the company has seen a ``modest'' softening in its same-store sales in the first seven weeks of the first quarter.

Starbucks Corp. declined 43 cents to $17.83. The world's largest chain of coffee shops said it would cut 600 jobs and restructure operations as it seeks to reverse a decline in customer visits.

Career Education Corp. fell $1.79 to $15.71. The for-profit operator of colleges and trade schools said some students face cuts in financial aid from SLM Corp., the biggest U.S. educational lender. That's expected to have ``a material financial impact,'' Career Education said.

Apollo Group Inc., operator of the private University of Phoenix, declined $5.97, or 8.6 percent, to $63.21 for the steepest slide in the S&P 500.

Cisco, RIM

Cisco slipped 1 cent to $23.19 after earlier climbing as much as 3.4 percent. Citigroup raised its recommendation on the stock to ``buy'' from ``hold,'' citing ``attractive'' valuations and ``more reasonable'' earnings expectations. The analysts said a potential slowdown in demand this year won't be as deep for the computer industry as it was in 2001-2002.

Research In Motion jumped $8.78, or 9 percent, to $106.69. The company originally predicted subscriber gains of 1.82 million in the current quarter and now expects as much as 2.18 million. Total subscribers will climb to about 14 million by the end of the quarter, Research In Motion said.

``Technology is a good place to be,'' said Harry Clark, who helps oversee about $1.3 billion as chief executive officer of Clark Capital Management in Philadelphia. ``I'm looking for a real good market for at least the second and third quarters.''

Verizon, AT&T

Verizon Communications Inc., which co-owns Verizon Wireless with Vodafone Group Plc, added 12 cents to $35.36. The company said its new unlimited mobile calling plan will spur sales growth ``over time'' by convincing people to spend more.

Before today, Verizon's stock had dropped 6.8 percent in the two days since Verizon Wireless introduced an unlimited calling plan for $99.99 a month. AT&T Inc., which also announced a flat- rate mobile calling plan this week, gained 11 cents to $34.47.

J.C. Penney Co. increased 8 cents to $48.03. The third- largest U.S. department-store operator said fourth-quarter profit fell less than analysts estimated after the company cut prices earlier than usual to draw holiday shoppers.

Terex Corp. gained $4.52 to $66.73. The world's third- largest maker of construction equipment said fourth-quarter earnings rose 72 percent, helped by international demand. The company forecast 2008 profit and sales that topped analysts' estimates.

ChoicePoint Inc. rose $14.61 to $48.27. Reed Elsevier Plc agreed to buy the biggest U.S. provider of information services for the insurance industry for $3.5 billion, or $50 a share in cash. The offer is 49 percent more than ChoicePoint's closing price yesterday.

Small Caps Slump

The Russell 2000 Index, a benchmark for companies with a median market value of $523.4 million, lost 1.9 percent to 696.28.

Psychiatric Solutions Inc. dropped $4.03 to $27.65. The operator of hospitals for the mentally ill said it expects earnings excluding some items of as much s 43 cents a share in the first quarter. That missed the 45-cent average in a Bloomberg survey of analysts.

Furniture Brands International Inc. rose $2.44 to $12.78. Buyout firm Sun Capital Partners Inc., which owns 9.5 percent of the maker of Broyhill and Thomasville chairs and tables, offered to purchase the company for a ``substantial premium,'' according to a Securities and Exchange Commission filing.

The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, decreased 1.3 percent to 13,576.58. Based on its decline, the value of stocks fell by $227.2 billion.

Pakistan Turns Scary For Bush's War On Terror

Pakistan Turns Scary For Bush's War On Terror

The unraveling of Pervez Musharraf's presidency has dealt a severe blow to Bush's fatally flawed policy in the region.

By Juan Cole

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The party that slavishly supported Pakistani dictator Pervez Musharraf went down to a humiliating defeat in Monday's election, and took the failing fortunes of the Bush administration to a new nadir. Musharraf's main political rivals, the Pakistan People's Party and the Pakistan Muslim League 1-N, together gained a solid majority of seats. Amid a chorus of calls for Musharraf to step down, the two major victors are scheduled to begin talks Thursday on forming a new government. Although George W. Bush and Dick Cheney have built their war on terrorism on a close alliance with Musharraf, that entire hollow pillar of Bush administration policy has been dealt a severe, perhaps fatal, blow.

The new civilian Pakistani government on the verge of forming may be far less amenable to the hard-line, militaristic policies of the Bush-Cheney war on terror. That remains to be seen. But what is clear is that the administration's coddling of Musharraf -- lavishing him with billions of dollars in aid while turning a blind eye to his egregious assault on nascent Pakistani democracy -- has achieved precious little in the way of U.S. national security goals. Vietnam-style search-and-destroy missions, whether carried out at U.S. insistence by the Pakistani military in that country's northwest frontier, or by U.S. troops across the border in Afghanistan, appear only to have grown a new militant Taliban movement on both sides of the border. In the midst of this fundamentalist resurgence in the Pushtun tribal areas, Osama bin Laden remains at large.

The full dimensions of the election catastrophe for Musharraf were clear by Tuesday afternoon. With almost all the results in, Musharraf's Pakistan Muslim League 1-Q, or "king's party," had only 14 percent of the 272 seats in the National Assembly, or lower house of Parliament, for which the public votes directly. The party chairman and former prime minister, Chaudhry Shujaat Hussain, could not even get elected to Parliament, nor could some of Musharraf's Cabinet ministers. The party, now a small minority, admitted that it will have to sit in the opposition as its rivals form a government.

Musharraf's approval rating in polls spiraled down to 15 percent recently, having been in free fall during the past year as he made a series of severe political miscalculations. Chief among them was his conflict with the chief justice of the supreme court, Iftikhar Mohammad Chaudhry, whom he sacked. Some 70 percent of Pakistanis say Musharraf should step down.

Ironically, Musharraf, who came to power in a 1999 military coup, had presided over six years of strong economic growth, adding millions to the urban middle classes. Armed with access to international cable news and feisty new local channels, and wielding some 60 million cellphones, the new middle class vigorously protested the dictator's assault on the rule of law. Last June, Chaudhry addressed a rally of some 50,000 protesters who braved the wrath of the ruling military. Musharraf was forced to reinstate him in July, but then in early November dismissed the entire court and replaced it with his toadies when it became clear the justices would contest his election, while he was still a serving general, to the post of civilian president.

Musharraf's struggle with the judiciary was only one of his missteps. He was also heavy-handed in having his military assault a cultlike group holed up at the Red Mosque seminary in the capital of Islamabad, with much loss of life. The general Pakistani public showed no sympathy with these Pakistani Taliban, who had begun terrorizing video-shop owners and had kidnapped Chinese acupuncturists, accusing them of prostitution. Nevertheless, the images of the attack on the mosque reminded the public of Musharraf's iron fist, which he had earlier been careful to hide behind the velvet glove of political reform and the struggle against corruption and terrorism. Militants in Pakistan's northwest frontier responded violently to the crushing of the Red Mosque movement, unleashing a wave of suicide bombings and attacks on police checkpoints -- suggesting that Musharraf was unable to provide security.

With both the supreme court and the Red Mosque scandals raising questions about his judgment and increasing arrogance, Musharraf faced strong pressure from the Bush administration and from King Abdullah of Saudi Arabia to find a way of shoring up his government's legitimacy. Secretary of State Condoleezza Rice was reported by the New York Times to have developed the idea of having Musharraf resign from the military and become a civilian president, and of having former Prime Minister Benazir Bhutto return to contest parliamentary elections.

Rice apparently hoped that a political cohabitation of Musharraf with Bhutto would restore stability to the country, viewed by Washington as a crucial bulwark against the remnants of the Taliban and al-Qaida based along the Pakistan-Afghanistan border. Washington hoped that Bhutto's Pakistan People's Party, among the longest-established grassroots parties in the country, would be willing to cooperate with the PMLQ, loyalists to Musharraf, in a sort of national unity government.

At the same time, Saudi Arabia -- an oil-rich country that nonetheless needs Sunni Pakistan for military defense, for guest workers and for support against Shiite Iran -- sent back to Pakistan former Prime Minister Nawaz Sharif, whom Musharraf had overthrown in the 1999 coup, and who had been in exile in the Saudi kingdom. In November, Sharif explored an alliance with Bhutto and demanded that the supreme court be reinstated. Saudi Arabia may have been afraid of an unadulterated Bhutto prime ministership, which would support left-of-center secular policies that were anathema to the religious leaders in Riyadh. Sharif and his PMLN, which leaned right of center and were more sympathetic to political Islam, might halt a slide of the Pakistani public toward secular liberalism.

But the Rice plan had already begun to unravel. Bhutto was reluctant to cohabit politically with Musharraf once he had high-handedly replaced the entire supreme court and so violated the rule of law. Then, on Dec. 27, calamity struck when the Bhutto was assassinated. In the aftermath, the PPP stronghold of Sindh Province in the south erupted in an orgy of anti-government violence, with government buildings and banks attacked and rails torn up. Polling showed that 60 percent of Pakistanis blamed Musharraf for Bhutto's death. Musharraf toyed with the idea of canceling the elections -- but backed off under severe pressure from the Bush administration, which was horrified by the thought that he might end up another shah of Iran (overthrown in Khomeini's 1979 revolution).

The campaign season leading up to the Feb. 18 elections was marred by several bombings and sporadic violence. Benazir Bhutto was succeeded as party head in theory by her young son, in college abroad, but in practice by her widower, Asaf Ali Zardari. Zardari, who gained a reputation for corruption in the 1990s, was too unsympathetic a figure to capture a sympathy vote of any significance for the PPP, and it was mainly the Sindhi ethnic group that remained loyal to the party, along with a few districts in Punjab and the North-West Frontier Province. Only 45 percent of the electorate came out to vote, a slightly higher proportion than the past two elections. As of late Tuesday, the Pakistani newspaper Dawn was reporting that the Pakistan People's Party had gained 88 seats of the 272 in contention, only a slight gain over its 2002 performance, when it won 81.

There are three big changes in the shape of Parliament in this election. First, the PMLQ, Musharraf's supporters, dropped from 117 seats to as few as 38. Second, the rival branch of the Muslim League, loyal to Nawaz Sharif, increased its proportion of seats from 7 percent to nearly a quarter. The PMLN also emerged as the biggest party in Punjab Province, giving it a key position in Pakistan's most populous and powerful region.

Third, the coalition of fundamentalist religious parties, the United Action Council (the Urdu acronym is MMA), fell apart because its largest component, the Jama'at-i Islami, refused to participate in the elections unless the supreme court was reinstated and a rule of law restored. Only a much smaller faction ran, gaining only five seats. In 2002, the MMA had been a major force in Parliament, with 17 percent of the seats. The fundamentalists not only lost their position in the federal Parliament, but also lost control of the North-West Frontier Province, where the Pathans, or Pushtun ethnic group, turned against their hard-line religious policies and migrated instead to a secular nationalist party, the Awami National Party, which champions Pushtun rights.

Nawaz Sharif is now in a prime position to ally with the PPP against his old nemesis, Musharraf, and to push for the reinstatement of the supreme court and ultimately for Musharraf's ouster. That outcome would be sweet revenge for Sharif, whom Musharraf overthrew and accused of attempted murder. (Sharif had denied Musharraf's plane, which was running out of fuel, permission to land in Karachi in the course of the general's attempted coup. Local military units rebelled and took control of the airport, averting a crash and allowing Musharraf to come to power.) Musharraf is also a target for Benazir's widower, Zardari, who clearly blames the president for his wife's assassination.

It's possible that the new civilian Pakistani government about to be formed will foster a more stable country, which is ultimately in the interest of Pakistan and of the United States. Meanwhile, President Bush the Wilsonian, who said he wanted to spread democracy across the Muslim world, and President Bush the militarist, who favored invasions and occupations, have been at war with each other for some time now. In Pakistan, the spreading of democracy -- regardless of whether the outcome is in line with U.S. expectations -- may be the only path left for the Bush administration now.

Balkan Intrigues

Balkan Intrigues

The latest country to find its place on the map is sending shockwaves around the world

By Eric Walberg


K
osovo’s declaration of independence 17 February brings the number of statelets born out of the former Yugoslavia, population 23 million, to seven — Slovenia, Croatia, Montenegro, Macedonia, Bosnia-Herzigovina, Serbia, and now Kosovo, which boasts an impressive two million.
Statistics are trotted out to justify independence from Serbia. Nintey per cent of residents are Albanian, it is said, though this excludes 250,000 Serbs who fled when the NATO invaded. Some 120,000 plucky Serbs remained and a brave 18,000 have trickled back in recent years — under armed escort — to hostile neighbourhoods, to reclaim homes seized by Albanian squatters when NATO troops occupied the province. But demographic shifts are no reason to dismember a country.
The province was the heartland of the Serbian Kingdom in the 13th century until conquered by the Ottomans in the 15th century, and only by the end of the 19th century did it have a slight majority of ethnic Albanians for the first time. It suffered mass population transfers of both Serbs and Albanians over the years and finally achieved quasi-state status within the Yugoslav Federation by the 1960s. In the 1970s, the demographic balance was 75-25 Albanian-Serbian. Milosevic owed his rise to the presidency to his defence of Serbs in Kosovo after the death of president Josip Broz Tito in 1980, whose motto was “a weak Serbia means a strong Yugoslavia.” Kosovan nationalists were demanding full republican status within the federation by then, and in 1990 its parliament even declared independence (only recognised by, surprise, Albania). This dissolving of the delicately balanced federation would have been suicide and the movement was suppressed, as similar movements have been in Spain, the Philippines, Sri Lanka and many, many other countries, with nary a whisper of protest by the “international community”.
Milosevic’s attempt in the 1990s to resettle Serbian refugees from civil wars in Croatia and Bosnia prompted the formation of the Kosovo Liberation Army (KLA) in 1995, a rag-tag rebel group financed by drug, arms and human trafficking, which made it to the US State Department’s prestigious list of international terrorist organisations in 1998 — Osama bin Laden made three visits to Kosovo 1994-96, but which the West nonetheless supported in the “liberation” of Kosovo in 1998-99. The denouement — Milosevic being served up to the International Criminal Court by Serbia’s current prime minister, Vojislav Kostunica — did nothing to reverse what was by now a clear policy by the West to carve a new, compliant state out of the remains of Yugoslavia.
As for who threatened who in the lead-up to the current declaration of independence, the 10,000 casualties of the upheaval of 1998-99 included Serbs, Albanians and Roma, with no one group faring much better than the other, and despite intensive efforts by NATO forces, no proof of mass murder of Albanians — the excuse used to justify the NATO bombing — was ever found. Eerily similar to the aftermath of the US pre-emptive invasion of Iraq, in search of non-existent weapons of mass destruction. In any case, with the invasion, it was the Serbs who ended up fleeing rather than the Albanians. The last major outbreak of violence was in 2004 and was against the Serbs.
Kostunica argues that the Serbs should not be held to account for Milosevic’s supposed sins, that self-rule for Kosovo within a federation is an acceptable compromise, that creating such a statelet benefits no one, least of all ordinary Kosovans, and merely acts as a dangerous precedent on the world stage, but only Russia, China and a few others appear to be listening. He vowed the nation would never accept this “gross violation of international law” and angrily pointed the finger at the US, which was “ready to violate the international order for its own military interests”. Even pro-Western Serbian President Boris Tadic said, “I will never give up the fight for our Kosovo.” Russian UN Ambassador Vitaly Churkin called for the United Nations to annul the move, demanding an emergency meeting of the Security Council 18 February. No resolution on Kosovo’s independence was made, with members China, Russia and Indonesia making it clear this was a stillborn child as far as they were concerned.
Western hypocrisy is so thick it can be cut with a knife: EU officials issued a statement acknowledging Kosovo’s independence declaration without explicitly endorsing it, thanks to Spain’s distaste. NATO Secretary-General Jaap de Hoop Scheffer said the alliance would respond “swiftly and firmly against anyone who might resort to violence.” US President George W Bush in Tanzania produced his usual inimitable sound-byte: “The Serbian people can know that they have a friend in America.” The US was low-key, calling on all parties to “exercise the utmost restraint and to refrain from any provocative act”, though it provocatively proceeded to recognise the new republic, along with Britain and France.
But then, why bother to toot one’s horn? US Albanian immigrants did that in any case, streaming into Pristina to dance in frenzied jubilation. Beating drums, waving flags, shooting guns in the air and throwing firecrackers, they chanted: “Independence! Independence! We are free at last!” An outpouring of adulation for the US was evident everywhere, in sharp contrast to the despair, anger and disbelief that gripped Serbia and its ethnic enclaves in northern Kosovo.
Europe has been busy in the Balkans since it helped destroy the Ottoman Empire a century ago. Most recently it welcomed Slovenia to its fold in 2004 and promises Croatia membership next year. NATO has been flexing its muscles, too, having swallowed up Slovenia in 2004 and promising Croatia membership this year. The plan is to bribe Serbia into acquiescing to the loss of Kosovo by giving it a nice, wet Euro-kiss. While Serbia is wise to NATO, it is not clear if its wrecked economy and exhausted people will give in to the lure of euros. In addition to the 16,000 NATO troops, the EU has parachuted in 2000 police, judges and administrators into Kosovo, but insisted Kosovo’s independence will be severely circumscribed. A wise move, that, considering the KLA and Kosovo’s reputation for terrorism and all kinds of trafficking, and the new prime minister’s deep mafia connections. In a faux show of magnanimity, the KLA political leader and Kosovan prime minister, Hashim Thaci, called on displaced Serbs living outside Kosovo to return, guaranteeing them full rights. Thaci was a founding member in 1993 of the Marxist-Leninist oriented People’s Movement of Kosovo, which advocates Pan-Albanianism; his sister just happens to be married to Sejdija Bajrush, the top Albanian mafioso.
The fallout from this latest chapter of Balkan intrigues is already accelerating. At least three shiny new border posts have been burned down and three bombs exploded near Organisation of Security and Cooperation in Europe offices in northern Kosovo. Demonstrators there demanded that the Serbian army mobilise to keep their territories, which make up 15 per cent of Kosovo, part of Serbia. The northern part of Kosovo already has parallel institutional structures and does not recognise the authority of the Kosovo government. Misha Glenny, an expert on the Balkans, warns, “Whatever the outcome of Kosovo’s independence, everyone knows we are heading for de facto partition. But no one is willing to admit it.” Serbian police officers have deserted the multi-ethnic Kosovo police force and given their allegiance to Belgrade.
Next door, Serbian separatists in the Muslim-Croat Federation have stepped up their threats to secede from Bosnia. Macedonia, which has the misfortune of bordering Kosovo, Albania and Serbia, and has a substantial restive Albanian minority to boot, will wait for at least 15 EU countries to recognise Kosovo first. Biljana Vankovska from the Institute for Peace and Defence Studies in Skopje said, “the perspectives of the Kosovo market are a cold comfort for Macedonia’s economy.” Serbian President Boris Tadic says that Serbia will recall its ambassadors from countries that recognise an independent Kosovo, which already include the US, UK, Germany and France. Spain, Greece, Cyprus, Slovakia, Bulgaria and Romania are not planning to recognise Kosovo any time soon. Even Poland is having doubts.
Kosovo’s independence will inevitably lead to separatist efforts by other dissatisfied territories around the world. The very day of the declaration, presidents of two Georgian breakaway provinces — Abhazia’s President Sergei Begapsh and South Ossetia’s President Eduard Kokoity — met with Russian Foreign Minister Sergei Lavrov, and received a commitment for continued support. All residents of Abkhazia and South Ossetia were granted Russian citizenship after heavy-handed Georgian attempts to cow the independent-minded territories in the 1990s. “We are told all the time: Kosovo is a special case,” Putin said recently. “It is all lies. There is no special case and everybody understands it perfectly well.” After his official meeting with Lavrov, Bagapsh said, “Abkhazia will soon ask the Russian Federal Assembly and the UN Security Council to recognise its independence.”
Despite the tragedy of Chechnya, such enthusiasm to team up with Russia by Muslim border states suggests that religion is really not the issue here at all. There are also Trans-Dniester, sandwiched between Ukraine and Moldova, Nagorno-Karabakh, the breakaway Armenian district in Azerbaijan, and farther afield, Taiwan, Kurdistan, Baluchistan, the Tamil Tigers, and many, many other would-be countries and terrorist groups all of which have gained a new lease on “independence” from this latest Balkan intrigue.

Inside the world of war profiteers

Inside the world of war profiteers

From prostitutes to Super bowl tickets, a federal probe reveals how contractors in Iraq cheated the U.S.

By David Jackson and Jason Grotto

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R
OCK ISLAND, Ill.—Inside the stout federal courthouse of this Mississippi River town, the dirty secrets of Iraq war profiteering keep pouring out.

Hundreds of pages of recently unsealed court records detail how kickbacks shaped the war's largest troop support contract months before the first wave of U.S. soldiers plunged their boots into Iraqi sand.

The graft continued well beyond the 2004 congressional hearings that first called attention to it. And the massive fraud endangered the health of American soldiers even as it lined contractors' pockets, records show.

Federal prosecutors in Rock Island have indicted four former supervisors from KBR, the giant defense firm that holds the contract, along with a decorated Army officer and five executives from KBR subcontractors based in the U.S. or the Middle East. Those defendants, along with two other KBR employees who have pleaded guilty in Virginia, account for a third of the 36 people indicted to date on Iraq war-contract crimes, Justice Department records show.

On Wednesday, a federal judge in Rock Island sentenced the Army official, Chief Warrant Officer Peleti "Pete" Peleti Jr., to 28 months in prison for taking bribes. One Middle Eastern subcontractor treated him to a trip to the 2006 Super Bowl, a defense investigator said.

Prosecutors would not confirm or deny ongoing grand jury activity. But court records identify a dozen FBI, IRS and military investigative agents who have been assigned to the case. Interviews as well as testimony at the sentencing for Peleti, who has cooperated with authorities, suggest an active probe.

Rock Island serves as a center for the probe of war profiteering because Army brass at the arsenal here administer KBR's so-called LOGCAP III contract to feed, shelter and support U.S. soldiers, and to help restore Iraq's oil infrastructure.

In one case, a freight-shipping subcontractor confessed to giving $25,000 in illegal gratuities to five unnamed KBR employees "to build relationships to get additional business," according to the man's December 2007 statement to a federal judge in the Rock Island court. Separately, Peleti named five military colleagues who allegedly accepted bribes. Prosecutors also have identified three senior KBR executives who allegedly approved inflated bids. None of those 13 people has been charged.

A common thread runs through these cases and other KBR scandals in Iraq, from allegations the firm failed to protect employees sexually assaulted by co-workers to findings that it charged $45 per can of soda: The Pentagon has outsourced crucial troop support jobs while slashing the number of government contract watchdogs.

The dollar value of Army contracts quadrupled from $23.3 billion in 1992 to $100.6 billion in 2006, according to a recent report by a Pentagon panel. But the number of Army contract supervisors was cut from 10,000 in 1990 to 5,500 currently.

Last week, the Army pledged to add 1,400 positions to its contracting command. But even those embroiled in the frauds acknowledge the impact of so much war privatization.

"I think we downsized past the point of general competency," said subcontractor Christopher Cahill, who for a decade prepared military supply depots under LOGCAP. Now serving 30 months in federal prison for fraud, Cahill added: "The point of a standing army is to have them equipped."

KBR, a former subsidiary of Halliburton Co., says it has been paid $28 billion under LOGCAP III. The firm says it quickly reports all instances of suspected fraud and has repaid the Defense Department more than $1 million for questionable invoices.

In a statement, KBR said its roughly 20,000 employees and 40,000 subcontractors have performed laudably in a war zone where Army demands shift rapidly and local suppliers don't always maintain ledger books. Spokeswoman Heather Browne wrote: "Ethics and integrity are core values for KBR."

But a wiretapped transcript recently released in Rock Island underscores the brazen nature of the exceptions.

In October 2005, with federal agents tailing them, three war contractors slipped through London's posh Cumberland hotel before meeting in a quiet lounge. For the rest of that afternoon, the men sipped cognac and whiskey and discussed the bribes that had greased contracts to supply U.S. troops in Iraq.

Former KBR procurement manager Stephen Seamans, who was wearing a wire strapped on by a Rock Island agent, wondered aloud whether to return $65,000 in kickbacks he got from his two companions, executives from the Saudi conglomerate Tamimi Global Co.

One of the men, Tamimi operations director Shabbir Khan, urged him to hide the money by concocting phony business records.

"Just do the paperwork," Khan said.

Party houses, prostitutes

In October 2002, five months before the U.S.-led invasion of Iraq, Khan threw a birthday party for Seamans at a Tamimi "party house" near the Kuwait base known as Camp Arifjan. Khan "provided Seamans with a prostitute as a present," Rock Island prosecutors wrote in court papers. Driving Seamans back to his quarters, Khan offered kickbacks that would total $130,000.

Five days later, with Seamans and Khan hammering out the fine print, KBR awarded Tamimi the war's first $14.4 million mess hall subcontract, court records show.

In April 2003, as American troops poured into Iraq, Seamans gave Khan inside information that enabled Tamimi to secure a $2 million KBR subcontract to establish a mess hall at a Baghdad palace. Seamans submitted change orders that inflated that subcontract to $7.4 million.

By June, Seamans and fellow KBR procurement manager Jeff Mazon, a Country Club Hills resident, had executed subcontracts worth $321 million. At least one deal put U.S. soldiers at risk.

The Army LOGCAP contract required KBR to medically screen the thousands of kitchen workers that subcontractors like Tamimi imported from impoverished villages in Nepal, Pakistan, India and Bangladesh.

But when Pentagon officials asked for medical records in March 2004, Khan presented "bogus" files for 550 Tamimi workers, Assistant U.S. Atty. Jeffrey Lang said in a court hearing last year.

KBR retested those 550 workers at a Kuwait City clinic and found 172 positive for exposure to hepatitis A, Lang told the judge. Khan tried to suppress those findings, warning the clinic director that Tamimi would do no more business with his medical office if he "told KBR about these results," Lang said in court. The infectious virus can cause fatigue and other symptoms that arise weeks after contact.

Retesting of the 172 found that none had contagious hepatitis A, Lang said, and Khan's attorneys said in court that no soldiers caught diseases from the workers or from meals they prepared. It remains unclear if that is because the workers were treated or because they did not remain infectious after the onset of symptoms.

Still, the incident shows how even mundane meal contracts can put troops at risk. Similar disease-testing breaches cropped up at cafeterias outsourced to firms besides Tamimi, former KBR Area Supervisor Rene Robinson said in a Tribune interview.

"That was an ongoing problem," Robinson said. "When the military asked for paperwork, it was spotty." KBR was forced to begin vaccinating the employees at their work sites, he added.

Tamimi and its U.S. lawyers did not respond to requests for comment. The company has said it is cooperating with federal authorities.

By July 2005, Tamimi had secured some 30 KBR troop feeding subcontracts worth $793.5 million, records show. Khan continued to negotiate Iraq war subcontracts for Tamimi until shortly before he was arrested in Rock Island in March 2006.

He is now serving a 51-month prison sentence for lying to federal agents about the kickbacks he wired to Seamans, who pleaded guilty and served a year and a day in prison. Both declined to comment.

Seamans, a 46-year-old Air Force veteran, once taught ethics to junior KBR employees. At his December 2006 sentencing hearing, he expressed remorse for taking the kickbacks, telling the judge: "It is not the way that Americans do business."

It was another repentant LOGCAP veteran standing before a Rock Island judge on Wednesday. Peleti, formerly the military's top food service adviser for the Middle East, wept as he admitted taking bribes from Tamimi and three other subcontractors between 2003 and early 2006.

Ribbons and badges glittered across Peleti's pressed green Army shirt. "I stand here before you today to convey my remorse and sincere regret," he said, then broke down.

One subcontractor, Public Warehousing Co., took Peleti and another top Army official to the Super Bowl, a defense investigator said in court Wednesday. The firm has denied wrongdoing. Khan also bribed Peleti to influence LOGCAP contracts with cash. Peleti was arrested in 2006 while re-entering the U.S. at Dover Air Force Base with a duffel bag stuffed with watches and jewelry as well as about $40,000 concealed in his clothing.

While prosecutors documented kickbacks in only the first two of Tamimi's mess hall subcontracts, they contend that the tone was set to corrupt the system.

"Tamimi and Mr. Khan have their hooks into Mr. Seamans, they have their hooks into KBR," Lang said in court last year. "It is difficult to assess the kind of damage that did to the integrity of the subcontracting process when the first two subcontracts are corrupted."

Auditors in the basement



Military auditors say they closely monitor the layers of KBR subcontractors who actually perform most of the LOGCAP work, stationing teams in Iraq. But one Rock Island search warrant said auditors working back in the U.S. could manage only limited reviews of the cascade of deals.

In the basement of one of KBR's Houston office buildings, a 25-member team from the Defense Contract Audit Agency had "no communications" with "personnel on the ground," so they could not confirm whether goods and services actually were delivered, the search warrant application said.

In the absence of oversight, some Middle Eastern businessmen would offer "Rolex watches, leather jackets, prostitutes, and the KBR guys weren't shy about bragging about the fact that they were being treated to all that stuff," said Paul Morrell, whose firm The Event Source ran several mess halls as a KBR subcontractor.

Such questionable relationships continued long after early procurement managers like Seamans had been rooted out. Early subcontractors such as Tamimi became almost indispensable in part by outfitting Army cafeterias with expensive power generators and refrigeration systems, records and interviews show.

"If you ever gave Tamimi a hard time, you'd get a call," former KBR subcontract manager Harry DeWolf told the Tribune.

When subcontracts came up for renegotiation, DeWolf said, companies like Tamimi "would say, 'Fine, we're going to pull out all of our people and equipment.' They really had KBR and the government over the barrel."

Complicating the investigation of war-contract crimes, the government of Kuwait has denied a U.S. request to extradite two Middle Eastern businessmen accused of LOGCAP fraud. The country's ambassador last year sent letters to the Justice Department asking the U.S. to drop its case against one of them, arguing that international agreements forbid U.S. prosecution of Kuwaiti residents for crimes allegedly committed on Kuwaiti soil. Prosecutors disagree, but a judge is considering Kuwait's assertion.

Investigators also have faced challenges in dealing with KBR. The company has withheld some internal company documents relating to Mazon, Seaman's fellow KBR procurement manager, the firm's attorneys wrote in court filings.

In response to one subpoena, the firm gave agents about 2,760 of Mazon's computer files but withheld 398 others, saying they were covered by attorney-client privilege or other protections.

Federal prosecutors say they have given KBR no special treatment and that the company has legal rights afforded to all firms whose employees have been charged with wrongdoing. "We did withhold some documents as being privileged," a KBR spokeswoman wrote, but added that the company has provided statements and grand jury testimony.

Mazon has pleaded not guilty to charges that he inflated a fuel contract. His attorneys say the fuel subcontract was accidentally inflated when figures were converted from U.S. dollars to Kuwaiti dinars then back again. At least 22 KBR troop support subcontracts were inflated through similar errors, Mazon's attorney J. Scott Arthur wrote in papers filed in Rock Island.

KBR attorneys said the company informed federal officials of three similar "double conversions" on other subcontracts. But KBR said it "has not undertaken an exhaustive search of its millions of pages of procurement documents" to determine whether other such errors exist.

When the Terrorists Were 'Our Guys'

When the Terrorists Were 'Our Guys'

In 1976, when George H.W. Bush was CIA director, the U.S. government tolerated right-wing terrorist cells inside the United States and mostly looked the other way when these killers topped even Palestinian terrorists in spilling blood, including a lethal car bombing in Washington, D.C., according to newly obtained internal government documents.

That car bombing on Sept. 21, 1976, on Washington’s Embassy Row, killed Chile’s former Foreign Minister Orlando Letelier and an American co-worker Ronni Moffitt, while wounding Moffitt’s husband.

It soon became clear to the FBI and other federal investigators that the attack likely was a joint operation of DINA, the fearsome Chilean intelligence agency of military dictator Augusto Pinochet, and U.S.-based right-wing Cuban exiles.

But Bush’s CIA steered attention away from the real assassins toward leftists who supposedly killed Letelier to create a martyr for their cause. Eventually, the CIA’s cover story collapsed and – during the Carter administration – at least some of the lower-level conspirators were prosecuted, though the full story was never told.

Recently obtained internal FBI records and notes from a U.S. prosecutor involved in counter-terrorism cases make clear that the connections among Bush’s CIA, DINA and the Cuban Nationalist Movement (CNM) – which supplied the trigger men for the Letelier bombing – were closer than was understood at the time.

DINA provided intelligence training for CNM terrorists who acted like a “sleeper cell” inside the United States; federal prosecutions of right-wing Cuban terrorists were routinely frustrated; and the CIA did all it could to cover for its anticommunist allies who were part of a broader international terror campaign called Operation Condor.

Beginning in late 1975, Operation Condor -- named after Chile's national bird -- was a joint operation of right-wing South American military dictatorships, working closely with U.S.-based Cuban and other anticommunist extremists on cross-border assassinations of political dissidents as far away as Europe.

This meant that during George H.W. Bush’s year at the CIA’s helm, the United States both harbored domestic terrorist cells and served as a base for international terrorism. Yet no U.S. official was ever held accountable -- and in many cases, just the opposite.

George H.W. Bush rose to be Vice President four years later and to be President eight years after that, with his son now sitting in the Oval Office. Former President Bill Clinton has said his wife's first act as President would be to dispatch him and George H.W. Bush on a worldwide fence-mending tour.

The Letelier Plot

Regarding the DINA-CNM alliance, Chile’s star assassin Michael Townley told FBI interrogators after his arrest in 1978 that Cuban exiles involved in the Letelier murder had received DINA training, including CNM member Virgilio Paz, who “attended a one-month ‘quickie’ intelligence course sponsored by DINA,” the internal FBI report said.

Townley, a fiercely anticommunist American expatriate who had emerged as DINA’s chief overseas assassin, told the FBI that Paz’s training was personally approved by DINA’s director, Col. Manuel Contreras, who – the CIA later acknowledged – was an asset of the U.S. spy agency.

Paz lived at Townley’s residence during his three-month stay in Chile and DINA paid for Paz’s frequent calls back home to the United States, Townley said, recalling that Paz left Chile close to his son Brian’s birthday on June 6, 1976.

About a month later, Colonel Pedro Espinoza, DINA’s director of operations, summoned Townley to a meeting near St. Georges School in suburban Santiago. Townley recalled driving his DINA-supplied Fiat 125 sedan to the early-morning meeting and taking a thermos of coffee.

Espinoza asked Townley if he’d be available for a special operation outside Chile. Townley complained “that he had spent a majority of 1975 in Europe on DINA missions and that he felt he was neglecting his family with constant travel on behalf of DINA,” according to the FBI report.

(Only later would investigators learn that Townley had been working with European neo-fascists in hunting down Chilean dissidents in Europe, including Christian Democratic leader Bernard Leighton, who was severely wounded along with his wife in an assassination attempt in Rome on Oct. 6, 1975.)

In late July 1976, Townley said he drove a stubby metallic green MG 1300 to a second meeting and spoke with Colonel Espinoza outside the car. Espinoza informed Townley that his mission would be the assassination of Orlando Letelier, who had emerged as an articulate critic of Pinochet’s dictatorship and was putting an unwanted spotlight on Chile’s central role in the spreading human rights calamity across South America.

Espinoza said Paraguayan travel documents would be used for the operation and the preferred method of death was an arranged traffic accident while Letelier was alone.

“Colonel Espinosa [sic] instructed him [Townley] that Cuban exile terrorists were to be utilized to carry out the actual assassination, and that his and [his DINA accomplice’s] role would be to plan the assassination and then withdraw leaving its execution to the Cubans,” the FBI report said.

“Based on his [Townley’s] recent favorable association with Paz and the latter’s recent training under DINA sponsorship, he [Townley] told Colonel Espinosa [sic] that he believed the assassination in the United States might be arranged,” the FBI document said.

The CORU Umbrella

By June 1976, CNM also had joined in another campaign of right-wing terrorism, this one organized by Cuban exile Orlando Bosch under an umbrella group called the Coordination of United Revolutionary Organizations (CORU), which targeted Fidel Castro’s Cuba.

According to the federal prosecutor’s notes, the CORU organizational meeting in the Dominican Republic in June 1976 brought together CNM and four other exile groups, including the “Force Fourteen (F-14, led by a CIA asset),” meaning the U.S. spy agency surely knew about CORU’s plans from the start.

In early July 1976, after getting the assignment to murder Letelier, Townley said he contacted Paz and other CNM members to assist him.

First, however, Townley and his DINA accomplice, Chilean Army Lieutenant Armando Fernandez Larios, went to Paraguay to arrange visas for a trip to the United States, using the false names, Juan Williams and Alejandro Romeral.

Their cover story was that they were investigating suspected leftists working for Chile’s state copper company in New York and that – while in the United States – they would meet with Bush’s CIA deputy, Lt. Gen. Vernon Walters.

A senior Paraguayan official, Conrado Pappalardo, urged U.S. Ambassador George Landau to cooperate, citing a direct appeal from Pinochet. An alarmed Landau recognized the visa request as highly unusual, since such operations were normally coordinated with the CIA station in the host country and were cleared with CIA headquarters in Langley, Virginia.

Though granting the visas, Landau took the precaution of sending an urgent cable to Walters and photostatic copies of the fake passports to the CIA. Landau said he received an urgent cable back signed by CIA Director Bush, reporting that Walters, who was in the process of retiring, was out of town.

When Walters returned a few days later, he cabled Landau that he had “nothing to do with this” mission. Landau immediately canceled the visas, but the U.S. government apparently never delivered a specific warning to DINA to call off the operation.

To this day, it remains unclear what – if anything – Bush’s CIA did after learning about the “Paraguayan caper.”

Nevertheless, Townley said he and DINA’s Col. Espinoza worried about delays in getting the original visas, which suggested that the Paraguayan approach was compromised, Townley said in his FBI interrogation.

To allay any U.S. suspicions, DINA did dispatch two other Chilean operatives using the phony names Juan Williams and Alejandro Romeral. After they arrived in the United States on Aug. 22, 1976, they made a point of having the Chilean Embassy notify Walters’s office, but the CIA again demonstrated little curiosity about the mission.

‘Beyond Belief’

“It is quite beyond belief that the CIA is so lax in its counterespionage functions that it would simply have ignored a clandestine operation by a foreign intelligence service in Washington, D.C., or elsewhere in the United States,” wrote John Dinges and Saul Landau in their 1980 book, Assassination on Embassy Row.

“It is equally implausible that Bush, Walters, Landau and other officials were unaware of the chain of international assassinations that had been attributed to DINA.”

As for the Letelier assassination, DINA was soon plotting another way to carry out the killing. In late August 1976, DINA dispatched a preliminary team, consisting of Larios Fernandez and a female agent, to do surveillance on Letelier as he moved around Washington.

Then, on Sept. 8, 1976, Townley followed, using an official Chilean passport under the fictitious name of Hans Petersen Silva.

After arriving at New York’s Kennedy International Airport, Townley said he contacted Virgilio Paz by telephone and then rented a car to drive to Union City, New Jersey, to meet Paz at a restaurant named “Bottom of the Barrel,” according to the FBI report.

The next night, Paz brought members of the Cuban Nationalist Movement to Townley’s motel room, including Guillermo Novo Sampol and Jose Dionisio Suarez Esquivel, Townley said.

“Cuban exiles present at the meeting agreed that the CNM would assist DINA in assassinating Letelier,” the FBI report said. “Shortly thereafter he [Townley] traveled to Washington, D.C. in the automobile of Virgilio Paz in order to conduct additional surveillance on Letelier and to purchase additional materials necessary to make the bomb which would be utilized to kill Letelier.

“Basically, the bomb was made up of TNT and a substance which he [Townley] believed to be C-3 plastic. Several months previously he modified a CB Fanon Courier … receiver in Chile at the request of the CNM to be utilized at a future date. …

“The crystal on the receiver was set at 31.040 megahurts [sic]. A major modification made by Townley was to remove the speaker from the receiver and put in a transformer. A standard blasting cap was used in the construction of the bomb. The bomb was contained in an aluminum baking tin.”

Townley’s remark about DINA’s preparation of the explosive device for the U.S.-based Cuban extremists further indicates that the DINA-CNM relationship represented an active penetration of the United States by an international terrorist cabal operating under the nose of U.S. intelligence.

Final Plans

After arriving in Washington and checking into a downtown Holiday Inn, Townley and Paz spent several days conducting surveillance of Letelier. After another CNM operative Suarez Equivel arrived, the assassination team took the next step, heading to Letelier’s house in suburban Maryland.

Late that Saturday night, Sept. 18, or early Sunday morning, Sept. 19, Paz drove Townley to Letelier’s neighborhood. Townley “was dropped off at the top of a hill in a cul-de-sac street, immediately adjacent to the Letelier home. [After crawling under Letelier’s Chevelle] he affixed the bomb to the cross-member and recalled he had some trepidation as to whether the bomb would remain attached since he ran out of tape," the FBI report said.

“The bomb contained a safety switch which he placed in the ‘on’ position after covering the switch with tape. … While he was placing the bomb he recalled that a police cruiser passed by … however, he was undetected. After placing the bomb he walked down the hill and joined Virgilio Paz in the latter’s automobile and they left the area and returned to their hotel.”

On Sunday morning, Townley flew from Washington National Airport to Newark where he met CNM leader Novo Sampol for breakfast. Then they drove to New York City where Novo had a meeting with an “attorney apparently connected with the local New York City government,” the FBI report said.

After a family visit in Westchester County, Townley flew to Miami where he saw his parents at their Boca Raton home before meeting with Miami CNM member Felipe Rivero Diaz, who pressed Townley for more assistance from DINA, the FBI report said.

By Monday evening, Townley had become “troubled that no news had been received concerning Letelier and he suspected that something had gone wrong with the plan to assassinate him.”

Early Tuesday morning, Sept. 21, Townley called Virgilio Paz to find out what had happened. “Paz was extremely angry at the early hour of the call and the use of the telephone from a security standpoint. Paz furnished no information concerning the Letelier bomb,” the report said.

“Later on during the morning he [Townley] contacted Ignacio Novo Sampol in Miami and they arranged to have lunch at a Miami restaurant. During the telephone conversation, Novo informed him that something had happened in Washington, D.C. Subsequent news broadcast the death of Letelier as a result of a bomb which detonated in the latter’s automobile.”

Next, Townley said he “eliminated the identity of Hans Petersen Silva and returned to Chile utilizing a United States passport under the name of Kenneth Enyart.”

Slowly into Focus

Back in Washington, the facts of the assassination slowly came into focus. The explosion that ripped apart Letelier’s Chevelle had shattered a quiet morning in the stately section of the capital where embassies line Massachusetts Avenue, what is called Embassy Row.

The blast ripped off Letelier’s legs and punctured a hole in Ronni Moffitt’s jugular vein. She drowned in her own blood at the scene; Letelier died after being taken to George Washington University Hospital. Ronni’s husband, Michael Moffitt, survived.

At the time, the attack represented the worst act of international terrorism on U.S. soil and remains the most notorious terror attack sponsored by a foreign government inside the United States.

Adding to the potential for scandal, the terrorism had been carried out by a regime that was an ostensible ally of the United States, one that had gained power in 1973 with the help of the Nixon administration and the CIA.

The scandal also jeopardized the reputation of CIA Director George H.W. Bush and the political future of his boss, President Gerald Ford, who was in the midst of a heated presidential campaign against Democrat Jimmy Carter.

Within hours of the bombing, Letelier’s associates accused the Pinochet regime, citing its hatred of Letelier and its record for brutality. The Chilean government, however, heatedly denied any responsibility.

That night, at a dinner at the Jordanian Embassy, Sen. James Abourezk, a South Dakota Democrat, spotted Bush and approached the CIA director. Abourezk said he was a friend of Letelier’s and beseeched Bush to use the CIA “to find the bastards who killed him.”

Abourezk said Bush responded: “I’ll see what I can do. We are not without assets in Chile.” [See Robert Parry's Secrecy & Privilege.]

A problem, however, was that one of the CIA’s best-placed assets – DINA chief Manuel Contreras – would turn out to be a mastermind of the assassination.

Wiley Gilstrap, the CIA’s Santiago station chief, did approach Contreras with questions about the Letelier bombing and wired back to Langley Contreras’s assurance that the Chilean government wasn’t involved.

Following the strategy of public misdirection that DINA already had used in hundreds of “disappearances” of dissidents, Contreras pointed the finger at the Chilean Left. Contreras suggested that leftists had killed Letelier to turn him into a martyr.

Evidence of Lying

The Ford administration had plenty of reasons to disbelieve Contreras.

“The CIA had substantive evidence to show that Contreras was lying,” researcher Peter Kornbluh wrote in his 2004 book, The Pinochet File. “The Agency had concrete knowledge that DINA had murdered other political opponents abroad, using the same modus operandi as the Letelier case. The Agency had substantive intelligence on Condor, and Chile’s involvement in planning murders of political opponents in Europe.”

Rather than fulfilling his promise to Abourezk to “see what I can do,” Bush ignored leads that would have taken him into a confrontation with Pinochet.
As the Ford administration dawdled and Bush’s CIA kept its head down, right-wing Cuban terrorists stepped up their war against leftists in general and Fidel Castro’s communist government in particular.

On Oct. 6, 1976, a Cubana airliner, flying the Cuban Olympic fencing team and other passengers to Cuba, exploded after taking off in Barbados, killing everyone onboard. At the time, this sort of mid-air bombing was unprecedented, and the evidence quickly pointed to Cuban extremists linked to CORU and the CIA.

But the U.S. government either resisted putting the pieces together or chose to avoid the obvious conclusions.

On Oct. 6, the day of the Cubana Airline bombing, a CIA informant in Chile went to the CIA station in Santiago and relayed an account of Pinochet denouncing Letelier, with the dictator calling Letelier’s criticism of the government “unacceptable.”

The source “believes that the Chilean Government is directly involved in Letelier’s death and feels that investigation into the incident will so indicate,” the CIA field report said.

But Bush’s CIA chose to accept Contreras’s denials and even began leaking information that pointed away from the real killers.

Newsweek reported in the magazine’s Oct. 11, 1976, issue that “the Chilean secret police were not involved. …. The [Central Intelligence] agency reached its decision because the bomb was too crude to be the work of experts and because the murder, coming while Chile’s rulers were wooing U.S. support, could only damage the Santiago regime.”

Similar stories ran in other newspapers. On Nov. 1, 1976, the day before the presidential election, the Washington Post became another vehicle for trumpeting Pinochet’s innocence.

“Operatives of the present Chilean military Junta did not take part in Letelier’s killing,” the Post wrote, citing CIA officials. “CIA Director Bush expressed this view in a conversation late last week with Secretary of State [Henry] Kissinger.”

Despite Bush’s success in keeping the truth about the Letelier assassination under wraps, Democrat Jimmy Carter narrowly defeated Ford on Nov. 2, 1976.

Cracking the Case

Over the next two years, federal investigators would crack the case, successfully bringing charges against Townley and several Cuban-American conspirators. But prosecutor Eugene Propper told me that the CIA didn’t volunteer the crucial information about the Paraguayan gambit or hand over the photo of the chief assassin, Townley.

“Nothing the agency gave us helped us break this case,” Propper said.

According to the recently obtained prosecutor’s notes, one of the breaks in the Letelier case came from Rolando Otero, a Cuban exile who was believed to be the youngest member of the CIA-trained Bay of Pigs invasion force in 1961 and who was implicated in a string of 1975-76 bombings in Miami (though ultimately acquitted).

Otero had worked with Chile’s DINA, but – according to John Dinges’s 2005 book, The Condor Years – was a double agent for Venezuela’s intelligence service, DISIP, causing his Chilean controllers to jail and torture him before expelling him to the United States.

According to the prosecutor’s notes, “Otero became the witness who gave a Washington, D.C. AUSA [assistant U.S. attorney] the key to the car-bombing of Orlando Letelier. … The AUSA cut a deal with Otero that if Otero talked about the Letelier case, he would not have to give any information about [terrorism] cases … in Miami.”

The prosecutor’s notes also complained of a wider lack of cooperation from Washington in the many cases of Cuban-exile terrorism in Miami.

Regarding the information generated by the Letelier prosecution, the Miami prosecutor asked, “why wasn’t that information ever communicated to Miami, the Cuban exile stronghold, where the most devious and clandestine plots were discussed on a regular basis? The links to Miami were so thick, the exchange of communication so thin.”

As for the CIA's initial Letelier cover-up, neither Bush nor Walters was ever pressed to provide a full explanation.

When I submitted questions to Bush in 1988 – while he was running for president and I was a Newsweek correspondent preparing a story on his year as CIA director – Bush’s chief of staff Craig Fuller responded, saying “the Vice President generally does not comment on issues related to the time he was at the Central Intelligence Agency and he will have no comment on the specific issues raised in your letter.”

Newsweek editors subsequently killed my critical story about Bush’s CIA tenure, even though he was citing that experience as an important element of his résumé for the presidency. Walters also rebuffed interview requests on the Letelier topic prior to his death on Feb. 10, 2002, in West Palm Beach, Florida.

New Cover-up

In 1995, after the Pinochet dictatorship had ended, DINA chief Contreras and his assistant Espinoza were convicted in Chile for the Letelier assassination and sentenced to seven and six years, respectively. Contreras began implicating Pinochet in the Letelier case and other acts of terrorism, saying Pinochet knew and approved all of these actions.

As for Pinochet, former President Bush didn’t hold a grudge against this foreign leader who allegedly had sponsored a terrorist attack under the nose of the U.S. government at a time when Bush was chief of U.S. intelligence.

In 1998, when Pinochet was detained in Great Britain on an extradition request from Spanish Judge Baltasar Garzon, who was pursuing Pinochet for killing Spanish citizens, George H.W. Bush was one of the world leaders who rallied to Pinochet’s defense.

Bush called the case against Pinochet “a travesty of justice” and demanded that Pinochet be sent home to Chile “as soon as possible,” which the British courts did.

However, Garzon’s initiative prompted the Clinton administration to take a second look at the Letelier case in 2000. An FBI team reviewed new evidence that had become available and recommended the indictment of Pinochet.

But the final decision was left to the incoming administration of George W. Bush. In effect, the baton of the Letelier-Moffitt-murder cover-up was passed to a new Bush generation. Besides failing to act on the FBI’s recommendation, the Bush II administration continued to withhold relevant documents from Chilean investigators.

The younger George Bush – and his brother Florida Gov. Jeb Bush – also helped out in protecting the old Cuban terrorists who were implicated in the Cubana Airline bombing, Orlando Bosch and Luis Posada Carriles. Both have been allowed to live out their golden years in the relative safety and comfort of the United States.

As for Pinochet, the aging general never had to face justice for his acts of international terrorism or for his domestic human rights crimes. Pinochet died of a heart attack on Dec. 10, 2006, at the age of 91.

‘Blood Boil’

When I tracked down former Assistant U.S. Attorney Jerry Sanford, who was assigned to the Cuban terrorism cases in the mid-1970s, he still sounded frustrated at the lack of support he got from Washington to pursue these killers who inflicted death both inside and outside the United States.

“My blood starts to boil when I think of how much we could have done but how badly we were kept in the dark,” said Sanford, now 66, living in northern Florida. “I asked for stuff and never got it.”

Sanford recalled that when CIA Director Bush visited Miami at the end of the bloody year 1976, FBI agents “asked him for information from the CIA on where explosives [for the Cuban exiles] were stashed.” The response from Bush, according to Sanford, was “forget about it.”

Referring to the umbrella organization CORU, Sanford said, “it was the only terrorist group that ever exported terrorism from the United States.”

Ironically, the CIA’s analytical division reached a similar, troubling conclusion in an annual report entitled “International Terrorism in 1976” that was published in July 1977, after CIA Director Bush had left office.

“Cuban exile groups operating under the aegis of a new alliance called the Coordination of United Revolutionary Organizations [CORU] were particularly active during the second half of the year,” the CIA reported. “They were responsible for no less than 17 acts of international terrorism (at least three of which took place in the US).

“Statistically, this matches the record compiled by the various Palestinian terrorist groups during the same period. But largely because the Cuban exile operations included the October bombing of a Cubana Airlines passenger aircraft, their consequences were far more bloody.”

In other words, Cuban exiles based in the United States – during George H.W. Bush’s year in charge of the CIA – outpaced Palestinian terrorists in terms of a total body count.

After the 9/11 terror attacks in 2001, the U.S. government presented itself as the innocent victim of international terrorism with a moral right not only to pursue the “bad guys” across the globe but to subject some captives to torture, to lock others up indefinitely without trial, and to launch attacks that have killed many thousands of innocents.

In the years that have followed, there were few recollections of the days under the current president’s father when the bloodiest terrorists were “our guys.”