Monday, March 10, 2008

Dow Jones Falls Another 150

Dow Jones Falls Another 150

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Once again as we go into the last hour of trading the Dow is off another 100+ points as I write this issue.

Even solid main stream stocks like Apple and Google are getting pounded, while even with Oil hitting a new record high Oil Shares like COP, DVN, APA are also down.

A few stories of interest in the news worth reading:

Billionaire Investor Predicts Bank Failures The first bank failures will be small regional banks. If you're running a business you might consider taking another look at your bank's solvency and long-term viability. With regard to your investment portfolio please keep in mind that any serious rumor(s) much less bank failures and we'll see the Dow Jones TANK!

Any bank failures will stoke the paranoia fire and we'll hear the big banks will be next.

If you think $108 a barrel for oil is bad considering this story Is Oil really going to $378 a barrel?

Donald H. Rowe of "The Wall Street Digest" made an interesting observation over the weekend...

"The Federal Reserve has already pushed over $300 billion of new M3 money into the banking system since this past December. When you take the ten percent fractional reserve banking system into consideration this $300 billion will expand to over $3 trillion in the coming year. That is a powerful explosion of new money that will produce faster economic growth and higher stock prices by year-end.

"The Fed will probably continue to create new money every week until the financial markets stabilize. I continue to hear that a big government "bailout" will unfold.

"The Fed has made it very clear that it intends to continue lowering rates to deal with recessionary trends. A 50- to 75-basis point cut in the Fed Funds rate on or before the March 18th FOMC meeting is certain given the Fed's effort to brace the falling housing market and address the ongoing credit crisis."

So far the additional liquidity is doing little to calm the financial markets. I have to assume based on the negative days the market has already discounted a half to three quarter point rate cut. Worse, the bond market seems no stronger and between the interest rate cuts and added liquidity the U.S. Dollar continues to slide to new lows."

My biggest fear of a bond market meltdown still remains an imminent threat. A banking crisis could be the catalyst. With all the banking danger, inflationary monetary expansions and negative real interest rates, if you're not buying gold, platinum and silver — you're doing yourself a great disservice in my opinion. The table is being set for $2,500 an ounce gold.

Best Wishes,

James DiGeorgia

The War and the Recession

The War and the Recession

By Dean Baker

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With the release of the February jobs numbers, everyone except for the economists now acknowledges we are in a recession. The economy is shedding jobs at a rapid pace and it is only a matter of time until we see the unemployment rate rising. In addition to greater difficulty finding jobs, workers can look forward to falling wages and reduced access to health care insurance and pension coverage .

Naturally, people are looking for an explanation for the cause of the recession, and many have turned to the Iraq War. This view is wrong. The war is a drain on the economy, but it is not the cause of the recession. The recession is due to the collapse of the $8 trillion ($110,000 per homeowner) housing bubble.

It is understandable people would look to the war as the villain in this story. After all, the war is costing around $180 billion a year (at 1.2 percent of GDP). This is a substantial drain on the federal budget and the economy. This money could have gone to productive uses that would have benefited people and made the economy stronger.

For example, the proposed expansion of the state children's health insurance program (SCHIP) would have cost $7 billion a year, an amount equal to what we spend on the war in two weeks. A proposed $2 billion a year increase in childcare subsidies is equal to four days of spending on the war. The hundreds of millions of dollars each year the federal government devotes to energy conservation amounts to less than a day's spending on the war.

In short, there is a nearly endless list of areas that can be identified in which the money spent on the war could have been spent in ways that would have made the economy stronger. Since the money was diverted from better uses, the war spending has hurt the economy.

There is another way in which war spending hurts the economy: We have to pay for the war. We could have paid for the war with tax increases, but instead, President Bush chose to pay for it by borrowing, making the deficit considerably larger than it would otherwise be. This additional borrowing makes interest rates somewhat higher than they would be otherwise. Higher interest rates can raise the value of the dollar, which makes the trade deficit larger. (A high dollar makes US-made goods relatively more expensive both here and abroad.) Higher interest rates can also reduce investment and homebuilding.

However, the increase in borrowing associated with the war is actually not very large relative to the size of the economy. It can be expected to have a negative effect, but it is relatively modest and only begins to be felt over time. Last year, the Center for Economic and Policy Research commissioned Global Insight, one of the country's leading economic forecasting firms, to project the impact of the war on the economy.

Their model projected the impact would be initially positive (war spending generates demand), but eventually the effect of higher interest rates imposes a drag on growth. By the sixth year, the effect is negative; and by the tenth year, the economy was projected to have lost about half a million jobs, mostly in manufacturing and construction.

This is bad news, but it is not the recession that we are seeing now. This recession has a different group of villains. First and foremost on this list is Alan Greenspan, who at least ignored the housing bubble, if he didn't actively promote it. The list also includes regulators at both the state and federal level who tolerated abuses in the mortgage industry that were completely visible at the time they took place. And there is a long list of politicians and community leaders who encouraged low- and moderate-income families to buy homes in the middle of a housing bubble. And, of course, there are the incompetent economic forecasters (is that redundant?), who could not see an $8 trillion housing bubble in front of their face.

These are the people who deserve the blame for what is likely to be the most severe recession in the post-war period. The public's wrath should be focused on the Fed, the regulators, the Wall Street crooks, and the others responsible for letting a housing bubble wreck havoc on the economy.

There are plenty of good reasons to be opposed to the war and its negative impact on the economy is one of them. But we should not allow the war to be misused to allow some big-time villains to get off the hook. If we had better spent our money over the last five years, we would be better able to withstand the effects of the housing crash - just as a person who eats well and exercises can more quickly recover from a bout of pneumonia. But laziness and a bad diet are not the cause of pneumonia, and the war is not the cause of this recession.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer ( He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.

Surging Costs of Groceries Hit Home

Surging Costs of Groceries Hit Home

By Robert Gavin

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Bread, eggs, milk prices up sharply.

American families, already pinched by soaring energy costs, are taking another big hit to household budgets as food prices increase at the fastest rate since 1990.

After nearly two decades of low food inflation, prices for staples such as bread, milk, eggs, and flour are rising sharply, surging in the past year at double-digit rates, according to the Labor Department. Milk prices, for example, increased 26 percent over the year. Egg prices jumped 40 percent.

Escalating food costs could present a greater problem than soaring oil prices for the national economy because the average household spends three times as much for food as for gasoline. Food accounts for about 13 percent of household spending compared with about 4 percent for gas.

Rising food prices can be particularly corrosive to consumer confidence because people are so frequently exposed to the cost increases. "It's the biggest risk we face economically, and it might be the thing that does us in," said Rich Yamarone, director of economic research at Argus Research Corp. in New York. "There's nothing really worse than having a job, making money, and forking most of it over just so you can have the same amount of food. You're running in place, and it really weighs on you."

As with energy, higher food costs cut into discretionary income that buys everything from cars to computers to movie tickets and drives the consumer-based US economy. Falling home values and a faltering stock market have battered consumer confidence, spurring a retrenchment in spending that is contributing to recent job losses and pulling the economy toward recession.

Many analysts expect consumers to keep paying more for food. Wholesale food prices, an indicator of where supermarket prices are headed, rose last month at the fastest rate since 2003, with egg prices jumping 60 percent from a year ago, pasta products 30 percent, and fruits and vegetables 20 percent, according to the Labor Department.

"No retailer can absorb cost increases indefinitely," said Laura Sen, president of BJ's Wholesale Club, the Natick chain of discount warehouse stores. "Given what we are seeing, all retail channels need to raise prices, and from our observations, are doing so."

Amy Brnger, 43, of Portsmouth, N.H., just needs to look at her grocery receipts. For a long time, feeding her family of three used to cost around $125 a week. Suddenly this winter, her bill leaped to about $200.

Quickly, Brnger, a school counselor and mother of a 9-year-old daughter, looked for ways to save. She buys fewer organic products, which can cost twice as much as conventional goods. Instead of buying chicken breasts, she buys whole chickens and cuts them into parts, saving about $2 a pound. She buys dried beans, instead of canned. And she is baking her own bread.

"I can't believe a loaf of bread is like $4," she said. "I'm just being a lot more conscious of buying things."

Several factors contribute to higher food prices, analysts say, but none more than record prices for oil, which last week closed above $105 a barrel. Oil is not only driving up production and transportation costs, but also adding to demand for corn and soybeans, used to make alternative fuels such as ethanol and biodiesel.

As a result, corn prices have more than doubled in commodity markets over two years, and soybeans nearly tripled, according to DTN, a commodities analysis firm in Omaha. Meanwhile, with poor harvests in major wheat-producing regions, wheat prices have more than tripled.

These crops have a profound impact on food prices because they form foundations for many products, including oils, sweeteners, and flour. Corn, for example, is a key ingredient in livestock feed. When the price of corn rises, so does the price of feed, and ultimately, so do the prices of meat, poultry, and eggs.

Darin Newsom, senior analyst at DTN, said the same dynamics pushing oil prices to new highs are at work in agricultural commodities. They start with strong global demand, growing as living standards improve in developing nations such as China and India and food consumption increases.

The weak US dollar, at or near historic lows against the euro and other currencies, adds more pressure. Oil and other commodities trade in dollars, so when the dollar is worth less, producers demand higher prices to make up for the loss in value. This pressure raises inflation fears, which in turn make commodities attractive to investors, who view them as holding value during inflationary periods. As investors buy, demand grows and commodity prices go even higher.

This combination of a weak dollar, soaring energy prices, and global demand recalls the 1970s, when retail food prices rose an average of nearly 9 percent a year, said Bill Lapp, president of Advanced Economic Solutions, an Omaha research firm. Over the past year, Lapp said, food prices rose nearly 5 percent, more than double the average rate of the previous 10 years. Prices will rise even faster the next five years, he forecasts, increasing at an annual rate of 7.5 percent.

"Much as we saw in the '70s," he said, "these sharp increases are going to be sustained."

The US Department of Agriculture forecasts overall food prices this year will rise about 4 percent, about half Lapp's forecast, but still faster than recent years.

Anthony Conti, executive vice president at Agar Supply Inc., a Taunton food distributor, said there is little doubt consumers will continue to pay more. "Every day we get notices from manufacturers that prices are going up," he said.

Agar sells to supermarkets, restaurants, and other outlets, and it is paying some of the highest prices ever, Conti said. Cheese prices have doubled from a year ago, and beef prices have risen more than 50 percent. On top of these costs, Agar is paying about $3.70 a gallon for diesel - more than $1 above last year's prices - for a truck fleet that travels about 4 million miles per year.

It all adds up to even higher prices in grocery aisles and restaurants as costs get passed down the supply chain. Barb Phillips of Medway, for example, said the price on a case of formula for her 7-month-old son recently jumped from $32 to $38. Phillips, a loan processor who earns less than $40,000 a year, said she has stopped buying snacks and fresh produce for herself because prices are too high and stretches her meat purchases by making soups and stews.

"Everything just keeps going up," said Phillips, 41. "It's all really grim."

Our Three-Decade Recession

Our Three-Decade Recession

By Robert Costanza

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The American quality of life has been going downhill since 1975.

The news media and the government are fixated on the fact that the U.S. economy may be headed into a recession - defined as two or more successive quarters of declining gross domestic product. The situation is actually much worse. By some measures of economic performance, the United States has been in a recession since 1975 - a recession in quality of life, or well-being.

How can this be? One first needs to understand what GDP measures to see why it is not an appropriate gauge of our national well-being.

GDP measures the total market value of all goods and services produced in a country in a given period. But it includes only those goods and services traded for money. It also adds everything together, without discerning desirable, well-being-enhancing economic activity from undesirable, well-being-reducing activity. An oil spill, for example, increases GDP because someone has to clean it up, but it obviously detracts from well-being. More crime, more sickness, more war, more pollution, more fires, storms and pestilence are all potentially positives for the GDP because they can spur an increase in economic activity.

GDP also ignores activity that may enhance well-being but is outside the market. The unpaid work of parents caring for their children at home doesn't show up in GDP, but if they decide to work outside the home and pay for child care, GDP suddenly increases. And even though $1 in income means a lot more to the poor than to the rich, GDP takes no account of income distribution.

In short, GDP was never intended to be a measure of citizens' welfare - and it functions poorly as such. Yet it is used as a surrogate appraisal of national well-being in far too many circumstances.

The shortcomings of GDP are well known, and several researchers have proposed alternatives that address them, including William Nordhaus' and James Tobin's Measure of Economic Welfare, developed in 1972; Herman Daly's and John Cobb's Index of Sustainable Economic Welfare, developed in 1989; and the Redefining Progress think tank's more recent variation, the Genuine Progress Indicator. Although these alternatives - which, like GDP, are measured in monetary terms - are not perfect and need more research and refinement, they are much better approximations to a measure of true national well-being.

The formula for calculating GPI, for instance, starts with personal consumption expenditures, a major component of GDP, but makes several crucial adjustments. First, it accounts for income distribution. It then adds positive contributions that GDP ignores, such as the value of household and volunteer work. Finally, it subtracts things that are well-being-reducing, such as the loss of leisure time and the costs of crime, commuting and pollution.

While the U.S. GDP has steadily increased since 1950 (with the occasional recession), GPI peaked about 1975 and has been relatively flat or declining ever since. That's consistent with life-satisfaction surveys, which also show flat or dropping scores over the last several decades.

This is a very different picture of the economy from the one we normally read about, and it requires different policy responses. We are now in a period of what Daly - a former World Bank economist now at the University of Maryland - has called "uneconomic growth," in which further growth in economic activity (that is, GDP) is actually reducing national well-being.

How can we get out of this 33-year downturn in quality of life? Several policies have been suggested that might be thought of as a national quality-of-life stimulus package.

To start, the U.S. needs to make national well-being - not increased GDP - its primary policy goal, funding efforts to better measure and report it. There's already been some movement in this direction around the world. Bhutan, for example, recently made "gross national happiness" its explicit policy goal. Canada is developing an Index of Well-being, and the Australian Treasury considers increasing "real well-being," rather than mere GDP, its primary goal.

Once Americans' well-being becomes the basis for measuring our success, other reforms should follow. We should tax bads (carbon emissions, depletion of natural resources) rather than goods (labor, savings, investment). We should recognize the negative effects of growing income disparities and take steps to address them.

International trade also will have to be reformed so that environmental protection, labor rights and democratic self-determination are not subjugated to the blind pursuit of increased GDP.

But the most important step may be the first one: Recognizing that the U.S. is mired in a 33-year-old quality-of-life recession and that our continued national focus on growing GDP is blinding us to the way out.

How to End the Subprime Crisis

How to End the Subprime Crisis

By Paul Craig Roberts

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Reforms often do more harm than good. This is currently the case with the “mark-to-market” rule, which is imploding the US financial system by requiring financial institutions to value subprime mortgages at their current market values.

This makes a big problem for balance sheets. These financial instruments became troubled prior to a market being established for them, as they were marketed direct from issuers to investors. Now that they are troubled and with their true values unknown, no one wants them. Their lack of liquidity assigns them a low value.

The result is tremendous pressure on balance sheets. The plummeting value of subprime derivatives is pushing institutions that own them into insolvency, destroying their own stock values and forcing the financial institutions to sell untroubled liquid assets, thus resulting in an overall decline in the stock market.

The solution is to suspend the mark-to-market rule. Instead, allow financial institutions to keep the troubled instruments at book value, or 85-90% of book value, until a market forms that can sort out values, and allow financial institutions to write down the subprime mortgages and other troubled instruments over time.

Suspending the mark-to-market rule would take pressure off the stock market and make it unnecessary for the Fed to lower interest rates in an effort to force liquidity into the economy through an impaired banking system. The problem is not a general lack of liquidity, but liquidity for poorly conceived new financial instruments. Low US interest rates could worsen the crisis by accelerating the dollar’s decline. Now that inflation has raised its head, more liquidity from the Fed adds to the economic distress.

It is mindless to allow a “reform” to cause a financial crisis, but that is what is happening. Unfortunately, there are people who argue that anything less than financial armageddon would create a “moral hazard.”

It is certainly true that securitized subprime mortgage instruments were a bad idea, that a lot of people who should have known better opened floodgates to greed and fraud, and that “somebody should pay.” But it shouldn’t be the general public and the economy that pays.

It is also true that without the Federal Reserve’s irresponsible low interest rate monetary policy, which produced a housing boom, the subprime instruments would not have been created, or at least not in such amounts. Rapidly rising real estate prices were expected to make the risky loans good. What were issuers and the Federal Reserve thinking?

No doubt but that greed, fraud, and bad policy all played their roles. But at the heart of the problem is a 1999 “reform” that repealed an earlier reform known as the Glass-Steagall Act.

In 1933 the Glass-Steagall Act separated commercial banking from the securities business. It prevented securities speculation from destroying bank capital and shrinking bank deposits from bank failures and runs on banks by depositors. Congress and President Bill Clinton foolishly repealed the Glass-Steagall Act in 1999.

The repeal of the 1933 law was driven by profit lust in the banking industry and by “free market” ideology, which claims the unfettered marketplace is always superior to regulation. In pushing the repeal forward, Congress and Clinton ignored warnings from the General Accounting Office that the banks needed to build up their capital levels before being permitted to enter a broad range of securities businesses. The GAO also noted that there were no regulatory structures in place to monitor the new financial networks that would result from removing the wall between commercial and investment banking.

However, greed and ideology won over sound advice. The result is a crisis that, if mishandled, will be calamitous.

Paul Craig Roberts was Assistant Secretary of the Treasury during President Reagan’s first term. He was Associate Editor of the Wall Street Journal. He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. He was awarded the Legion of Honor by French President Francois Mitterrand.

US gasoline price should hit record Tuesday -AAA

US gasoline price should hit record Tuesday -AAA

By Matthew Robinson

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U.S. average gasoline prices should hit an all-time peak on Tuesday and may break $4 a gallon in some areas this summer, battering consumers already reeling from high energy costs, according to travel and auto group AAA.

Monday's surge in crude to near $108 a barrel should be enough to lift gasoline prices averaging $3.222 a gallon now above the current record $3.227, said Geoff Sundstrom, AAA fuel price analyst.

"I would anticipate we'd hit a new record price tomorrow," said Sundstrom. "It's primarily due to the crude price."

Gasoline prices in the world's largest consumer traditionally peak later in the year, either in the spring when refiners are gearing up for the summer holiday season or during the summer itself.

But speculative investment has been driving up oil prices and boosting gasoline prices earlier than normal this year, Sundstrom said. The early record does not bode well for motor travel during the peak summer demand season, he added.

"The last time we set a price record, the price of crude was $60-65 a barrel," he said. "I think the concern that AAA has right now is what the gasoline prices might portend for the travel industry this summer."

Consumers have faced a series of record pump prices since hurricanes damaged a swathe of Gulf Coast refiners in 2005, and Sunstrom said U.S. average prices could reach $3.50 a gallon this spring with some locations expected to pay $4.

U.S. motorists already have begun adjusting their habits due to high fuel costs, with mass transit use hitting a 50-year high last year in the gas-guzzling nation as more drivers left their vehicles behind to travel. nN10373383

With the U.S. mortgage crisis and the credit crunch also hitting the wallets of consumers, and AAA is looking for signs they are scaling back travel plans further.

"We do believe that the American economy is seeing an erosion of demand for gasoline that has been ongoing since the Christmas/New Year holiday period," Sundstrom said.

"We'll be watching very carefully what travelers are telling us about their plans for the spring break period and later on what they anticipate doing over the Memorial Day holiday."

DHS Holds Cyber Storm II Exercise to Further Cyber Security Preparedness and Response Capabilities

DHS Holds Cyber Storm II Exercise to Further Cyber Security Preparedness and Response Capabilities

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Release Date: March 10, 2008

For Immediate Release
Office of the Press Secretary
Contact: 202-282-8010

The U.S. Department of Homeland Security (DHS) is conducting the largest cyber security exercise ever organized. Cyber Storm II is being held from March 10-14 in Washington, D.C. and brings together participants from federal, state and local governments, the private sector, and the international community.

Cyber Storm II is the second in a series of congressionally mandated exercises that will examine the nation’s cyber security preparedness and response capabilities. The exercise will simulate a coordinated cyber attack on information technology, communications, chemical, and transportation systems and assets.

“Securing cyberspace is vital to maintaining America’s strategic interests, public safety, and economic prosperity,” said Greg Garcia, Homeland Security Assistant Secretary for Cyber Security and Communications. “Exercises like Cyber Storm II help to ensure that the public and private sectors are prepared for an effective response to attacks against our critical systems and networks.”

Cyber Storm II will include 18 federal departments and agencies, nine states (Calif., Colo., Del., Ill., Mich., N.C., Pa., Texas and Va.), five countries (United States, Australia, Canada, New Zealand and the United Kingdom), and more than 40 private sector companies. They include ABB, Inc., Air Products, Cisco, Dow Chemical Company Inc., Harris Corporation, Juniper Networks, McAfee, Microsoft, NeuStar, PPG Industries, and Wachovia.

Cyber Storm II objectives include:

  • Examining the capabilities of participating organizations to prepare for, protect against, and respond to the potential effects of cyber attacks
  • Exercising strategic decision making and interagency coordination of incident response in accordance with national level policy and procedures
  • Validating information sharing relationships and communications paths for the collection and dissemination of cyber incident situational awareness, response and recovery information
  • Examining means and processes through which to share sensitive information across boundaries and sectors without compromising proprietary or national security interests

For more information on Cyber Storm II visit:

Kosovo’s Independence: A matter of Western oil interests, not democracy

Kosovo’s Independence: A matter of Western oil interests, not democracy

By Aditya Ganapathiraju

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"Kosovo, a small territory where primarily ethnic Albanians reside, announced its independence from Serbia last month. While Western leaders have celebrated this unilateral secession as a great moment for democracy, the actual details of the secession paint a different picture.

In 1999, the United States led NATO in bombing the former Yugoslavia under the pretense of preventing Serbian aggression against Kosovar Albanians. Former president of Serbia, Slobodan Milosevic, whom the United States once supported, played a key role in the aggression.

While bombing was said to be essential to prevent genocide, in 2005 senior Clinton official John Norris wrote differently in his novel Collision Course.

“It was Yugoslavia’s resistance to the broader trends of political and economic reform — not the plight of the Kosovar Albanians — that best explains NATO’s war,” he wrote.

Bill Richardson, Clinton’s secretary of energy, also brought up underlying reasons for the bombing.

“This is about America’s energy security,” he said months after the bombing.

At the time, the U.N. Security Council passed resolution 1244, which guaranteed a commitment of all member states to the “sovereignty and territorial integrity” of the Federal Republic of Yugoslavia.

Serbian and Russian political officials have said Kosovo’s declaration of independence was in gross violation of 1244 and a breach of international law, while the United States asserts that Kosovo’s independence was fully consistent with 1244, said Zalmay Khalilzad, the U.S. ambassador to the United Nations, in a security council press release.

“I’m very torn,” said Stephen Zunes, a UC San Francisco professor of international studies, in an interview with “I have supported the Kosovo Albanians’ struggle for self-determination for quite a few years now, and yet … the nature of the current Kosovo-Albanian leadership and the hypocrisy and double standards of the United States and other Western powers makes this a time that should be one of celebration to one of, frankly, great apprehension.”

Zunes and others point to the hypocrisy of Western powers in supporting Kosovo’s right to secede but ignoring other regions with similar aspirations, like Tibet, Western Sahara, the Basque country in Spain, Kashmir, Taiwan, Palestine and Kurdistan.

Asia Times columnist Pepe Escobar said to look at Camp Bondsteel and the Albanian Macedonian Bulgarian Oil Corp. (AMBO) for answers as to why the United States is interested in Kosovo’s independence.

The $1.1 billion AMBO pipeline will take oil from the Caspian Sea, bypassing the heavily trafficked Aegean and Mediterranean seas and routing it through Macedonia to the U.S.-friendly Albanian port of Vlora, ultimately taking the oil to refineries in the United States for significantly less cost than it now incurs.

Camp Bondsteel will serve to provide “security” in the region, defending critical pipeline areas while also serving as “a sort of smaller — and friendlier — five-star Guantanamo, with perks like Thai massage and loads of junk food,” Escobar said.

Kosovo’s independence may have little to do with its autonomy. Officials in Brussels have confirmed that thousands of EU bureaucrats will be sent to the nation-state to form another “EU (and NATO) protectorate,” Escobar wrote.

Meanwhile, Iraqi Kurdistan has been denied its independence. Turkey officials are furious at the precedent Kosovo has set and invaded Northern Iraq with 10,000 troops to show the world that Kurdish secession is not an option.

“An array of European analysts, not to mention Russians, has compared the current, dangerous state of play in the Balkans to Sarajevo in 1914 that led to the outbreak of World War II,” Escobar wrote.

The Democrats' Problem With Democracy

The Democrats' Problem With Democracy

By Dr. Wilmer J. Leon III

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If the Democrats fail to elect their presidential candidate and allow the "Super delegates" to select him/her in the smoke-filled back rooms at the convention in Denver, the Democrats could create a long-term problem with their base. This, along with the decision to disenfranchise the Democratic voters in Florida and Michigan, could prove to be the Democrats' problem with democracy. In order to understand why the super delegate issue could be a problem, it is important to understand why the rules were created in the first place. For that, you have to go back to the 1968 Democratic National Convention in Chicago, Illinois.

1968 was a very tumultuous year in American history and politics. Rev. Dr. Martin Luther King Jr. was assassinated in April and Sen. Robert Kennedy (D-New York) was assassinated in June. Protests for civil rights and against the Vietnam War were at their height. These issues and others carried over into the 1968 Democratic National Convention in Chicago, Illinois, resulting in violent protests as students and others struggled to have their voices heard by the Democratic Party leadership. As a result of these clashes, the Democratic Party modified its rules for future elections to make the committed delegate selection process of their presidential nominee more inclusive and Democratic. The process would reflect the votes and interests of women and minorities, and not necessarily the wishes of the party leadership.

Well, democracy is not an exact science, and in 1972, following the new rules, the Democrats nominated Sen. George McGovern as their presidential candidate. As an anti-Vietnam war advocate and liberal, Senator McGovern was soundly beaten by incumbent President Richard Nixon. In 1976, the Democrats nominated Jimmy Carter and the country elected the relatively unknown governor, even though Carter was not the favorite of party leadership.

As a result of these experiences and based upon the desire to reclaim control of the nominating process, the Democratic Party leadership implemented the "unpledged party leader and elected official delegates," or the "super delegate." Super delegates are a group of approximately 794 Democratic senators, members of Congress, governors, former presidents and vice presidents, and other party officials. These individuals are not committed to candidates, as is the case with state delegates. They can vote for whomever they choose.

Neither Senator Obama nor Senator Clinton will arrive in Denver in August with the 2,024 delegates needed to secure the nomination on the first ballot. It looks like Senator Obama will go to the Democratic National Convention with more committed delegates than Senator Clinton, but shy of the 2,024 needed to clinch the nomination. His argument will be that the party elites should not override what a majority of the Democratic electorate has indicated. Senator Obama will talk about expanding the party. He will point to the independents and moderate Republicans that have joined his "movement." He will argue that if the party elites ignore his coalition ,it will be the death knell of Democratic politics for decades to come.

Senator Clinton will make the electability argument. The calculus is since it will take 270 of the 538 available electoral votes to win, there are six states, the "Big Six," that must be won in order to capture the White House. These states are California (55), New York (31), Pennsylvania (21), Illinois (21), Michigan (17) and Ohio (20), for a total of 165 electoral votes. Since she has already won primaries in New York, California, Ohio, and other states that a Democrat must win, she is more electable. In her mind, she stands the better chance of beating Senator McCain in November.

Both arguments have merit, and this issue will cause great consternation at the Democratic convention. The Democratic process is designed to allow "We the People" to express our views and have our elected officials carry them out. On the other hand, the nominating process is designed to field the candidate that puts his/her party in the best position to be elected. After all, a politician's primary job is to get elected.

The Democratic Party elite must do some real soul searching and ask themselves what the party truly stand for. Are they willing to risk a Democratic Party implosion if Senator Obama maintains his lead in pledged delegates, but the super delegates select Senator Clinton as their nominee? Even though the super delegate process is within the rules of the party, African-Americans, in particular, would feel totally disenfranchised by the party that has benefited from their uncompromising loyalty for more than 40 years. This move would only validate the pitch that Republicans have been making to African-Americans about the minimal rewards for blind loyalty. Why continue to provide your support to a party that refuses to support you? Independents and other moderate voters would also be well within their rights to abandon the party that did not carry out their wishes. It could create a very real and long-term problem for a short-term risk that has no guarantee of paying off.

The Democrats, other problem is risking the alienation of voters in Michigan and Florida, two states that have very strong Democratic ties. As it stands today, neither state's Democratic citizenry will have their voices heard in a primary nor will they have their delegates seated at the convention. This seems to have been no more than a power play on behalf of the party leadership for the sake of a power play. Again, it is a perceived short-term gain that has created a real long-term problem.

Here's the simple solution: In Florida, the Republican-led state government will not agree to foot the bill at state taxpayers' expense, nor should they. Since both the Clinton and Obama campaigns signed onto this bad idea, both campaigns and the Democratic Party should pay for a revote if this can be done in time. Why would the Obama campaign agree to this? Even if he loses this primary, the delegates Senator Clinton gains would not dramatically cut into his lead. He is selling the sleeves off of his vest. He gains more in the long run in the court of public opinion by looking magnanimous and truly committed to the democratic process.

In Michigan, since Senator Obama agreed to stay off the ballot, but Senator Clinton remained on the ballot as "uncommitted," the Obama campaign and the Democratic Party should split the cost of a revote there. In both states, it's more important to secure the confidence of Democratic voters than risk alienating their base in future elections.

John Adams once said, "Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There never was a democracy yet that did not commit suicide." If the Democrats don't follow the will of their voters and fail to reconcile with Michigan and Florida, they will, as they did in 2000 and 2004, snatch defeat from the jaws of victory. It will be political suicide. The Democrats will be accused of having a problem with democracy.


Dr. Wilmer Leon is the producer/host of the nationally broadcast call-in talk radio program "On With Leon," Producer/host of the television program "Inside the Issues With Wilmer Leon," a regular guest on CNN's "Lou Dobb's Tonight," and a teaching associate in the Department of Political Science at Howard University in Washington, DC. Go to or email:

Nadler Disses Voters on Impeachment

Nadler Disses Voters on Impeachment

You would not know it for the news blackout, but New Yorkers of Congressman Jerrold Nadler’s district held a Town Hall/Impeachment Forum on Sunday to encourage Nadler, chair of the House Judiciary Subcommittee on the Constitution, to begin impeachment proceedings against Vice President Dick Cheney.

Panelists included former congresswoman Liz Holtzman, former Reagan Justice Department attorney Bruce Fein, human rights attorney and Harpers commentator Scott Horton, and John Nirenberg, the activist who at the turn of the year walked from Boston to Washington, D.C., in a futile attempt to meet with House Speaker Nancy Pelosi on impeachment.

The organizers had asked me to be on the panel, but I had to send regrets and submitted a statement instead (see below). A video of the proceedings will be posted on

Taking Stock

In a post mortem Sunday evening, the organizers reportedly painted a mixed picture of good and bad news.

On the positive side, Judson Memorial Church was crammed to overflowing, with 300 folks to hear the panelists. And this, despite the fact that most were already aware that Nadler had announced (late Friday afternoon) that he would be a no-show. He did not even send a representative.

The panelists’ remarks were compelling. Blame for inaction on impeachment was laid squarely on our invertebrate Congress (but, I’m sorry, that familiar whining can get a bit tiresome). The audience was described as well-educated, non-fringe, and polite.

On the negative side, despite Herculean efforts to interest the “mainstream media,” no one showed.

And the enthusiasm of those trying to spur action on impeachment was dampened by continuing frustration at the obstacles, as politicians like Nadler continue to put political expedience above their sworn duty to protect and defend the Constitution.

Tories Back in Charge

It took some 230 years, but the Tories are back in charge—I mean the Nadlers, the Conyers, the Pelosis, who so clearly lack the courage of our forebears to defy a new King George, preferring to let him dis us the people and trash the Constitution.

Remember the final words of the Declaration of Independence? “We mutually pledge to each other our lives, our fortunes, and our sacred honor.”

Many of our forebears were also well-educated and non-fringe; fortunately, they were NOT polite.

Is it not clear, finally, that the time for politeness is over?

It is up to us, now, whether we shall have Constitutional separation of powers or shall have kings. It is up to us whether an unrestrained Executive will be able to march our children and grandchildren off to an endless series of resource wars likely to dominate this century.

The time for talking is over. Impeachment proceedings must begin. And no one is going to get that done but we.

One of the hurdles is outrage fatigue; it is hard to decide where to start among the many high crimes and misdemeanors of which Vice President Cheney is demonstrably culpable.

From my perspective as a former intelligence analyst, we certainly cannot allow to escape censure his conjuring up false “intelligence” to justify what Nuremberg defined as the “supreme international crime”—a war of aggression—in Iraq.

The Founders knew that, human nature being what it is, such abuses would be inevitable somewhere down the line. That’s why they took such pains to provide an orderly political procedure to enable us to deal promptly and responsibly with such high crimes and misdemeanors.

The process is called impeachment; the rules are clear.

All it takes is courage. And I do not refer here to the invertebrates in Congress.

I mean us.

The statement I prepared for Sunday’s event follows:

Is Impeachment Necessary to Protect the Constitution?
Judson Memorial Church, 55 Washington Square South, NYC
March 9, 2008

Statement by Ray McGovern

Congressman Nadler, I am Ray McGovern, born and bred in the Bronx a bit north of your district.

I regret not being able to be with you in person to give my perspective on whether impeachment is necessary to protect the Constitution—and specifically, whether the manufacturing of false intelligence to “justify” an unprovoked war fits the category of “high crime or misdemeanor.”

I was an analyst at the CIA for 27 years, after serving as an Army infantry/intelligence officer in the early Sixties. You may recall that we first met on June 16, 2005, in the basement of the Capitol, the only room made available to Congressman John Conyers to take testimony on the Downing Street Minutes.

The minutes were the official British record of a briefing of then-Prime Minister Tony Blair on July 23, 2002. At that briefing, the chief of British intelligence reported on his discussions with his counterpart in Washington, who told him three days earlier that, President George W. Bush had decided to make war on Iraq, and that “the intelligence and facts were being fixed around the policy.”

In my testimony in the Capitol that day I drew attention to the words of Vice President Dick Cheney on August 26, 2002—words that framed the discussion for the next 45 days during which Congress was deliberately misled into giving the president approval to make war on Iraq.

This is what Cheney said:

“We now know that Saddam has resumed his efforts to acquire nuclear weapons. Among other sources, we’ve gotten this from the firsthand testimony of defectors—including Saddam’s own son-in-law.”

This was a lie.

Saddam’s son-in-law told us just the opposite when he defected in 1995.

You can find it on page 13 of his debriefing report. He said: “All weapons – biological, chemical, missile, nuclear were destroyed.”

Cheney continued:

“Simply stated, there is no doubt that Saddam Hussein now has weapons of mass destruction...Many of us are convinced that [Saddam] will acquire nuclear weapons fairly soon.”

In a memoir published last year, then-CIA director George Tenet complained that Cheney did not follow the usual practice of clearing the speech with the CIA, and that what Cheney said “went well beyond what our analysis could support.”

Tenet added his “impression” that “the president really wasn’t any more aware of what his number-two was going to say.” Yet, Tenet admits that he did not raise the issue with either the president or vice president. Tenet was all too well aware that the intelligence was being “fixed around the policy.”

The Power to Intimidate

Intimidated by the vice president, Tenet ended up ordering his analysts, my former colleagues, to prepare a National Intelligence Estimate to Cheney’s terms of reference—you remember, the one that said Iraq had weapons of mass destruction and ties with al-Qaeda; the NIE that appeared just ten days before Congress voted to give the president the power to make war on Iraq.

Col. Lawrence Wilkerson, who was chief of staff to then-Secretary of State Colin Powell, and who chaired the preparation of Powell’s Feb. 5, 2003, speech at the UN, was asked about all this when Wilkerson testified before Congress on June 26, 2006.

The question came from Republican Congressman Walter Jones of North Carolina: Why was it that a small number of individuals got so much power in the administration that they “had more influence than the professionals?”

Wilkerson gave a three-word answer: “The Vice President.”


It is an open secret that Vice President Cheney was, and continues to be the prime mover behind torture. As some will recall, speaking on open radio Cheney called the use of waterboarding a “no-brainer.”

It was his lawyer, David Addington, who prepared the Jan. 25, 2002, memorandum signed by then-White House Counsel Alberto Gonzales recommending that the laws against torture could be circumvented.

George Bush applied that advice in his own presidential memorandum of Feb. 7, 2002, launching our country onto “the dark side,” as Cheney has put it.

That memorandum opened the gaping loophole through which the administration drove the Mack truck of torture.

High crimes? Misdemeanors? Who will argue the point?

The Constitution

Congressman Nadler, articles of impeachment for Dick Cheney have sat in your in-box since last November. You are Chair of the House Judiciary Subcommittee on the Constitution; you have refused to take action.

As an Army officer I took an oath to protect and defend the Constitution of the United States from all enemies, foreign and domestic. You took that same basic oath as a congressman.

With all due respect, let me suggest you have a duty to act on that oath—and not on some promise you may have made to avoid anything that could be viewed as divisive and thus jeopardize Democratic Party election wins in November.

I hope you will agree that the transcendent value is to protect the Constitution, and for that, impeachment is indeed necessary. Please take the articles of impeachment regarding Dick Cheney out of your in-box and launch the investigation.

Thank you.

Ray McGovern
Steering Group, Veteran Intelligence Professionals for Sanity

Clinton's Up-Is-Down World

Clinton's Up-Is-Down World

Throughout history, it’s been common for politicians to shade the truth when caught in a tight spot. But sometimes politicians push the limits, crossing the line into an Orwellian world where up is down, where bullies are victims, where people objecting to the lies are shouted down.

If that world seems familiar to Americans, it should. It is the world in which we’ve lived for the past seven or eight years under George W. Bush, as his clever operatives routinely turn truth inside out. Now, Hillary Clinton’s campaign is applying many of these same head-spinning tactics to win the Democratic presidential race.

As for Bush, remember how Iraq War critics were treated in 2002-03. Anyone who spoke up against the rush to invade – the likes of Al Gore, weapons inspector Scott Ritter and the Dixie Chicks – saw their loyalty, their motives and even their sanity questioned.

Gore was bitter and delusional. Ritter was a Saddam Hussein sympathizer for questioning Bush’s clams about Iraqi WMD. For disrespecting Bush, the Dixie Chicks deserved to face boycotts, have their CDs crushed under trucks, and even have their lives threatened.

Angered that France urged caution on Iraq, Bush’s backers poured French wine into gutters and re-named “French fries” as “Freedom Fries.” At a lower level, our articles, which objected to the twisted pre-war intelligence and to the wishful thinking about the war, drew a flood of venomous e-mails.

Even though Bush’s aides encouraged this bullying and Bush winked at the harsh treatment of dissenters, much of the U.S. news media treated him as the victim. In this view, he was the target of irrational hatred from crazed Americans suffering from what was termed “Bush Derangement Syndrome.”

Reality had no place in Bush World. When Iraq’s WMD never materialized, Bush blamed Saddam Hussein for not letting U.N. inspectors in, although the inspectors had been scouring Iraq for months until Bush forced them to leave in March 2003, just before the invasion. [For more details on Bush’s lies, see our book, Neck Deep.]

Hillary’s Version

What’s been striking about recent turns in the Democratic presidential contest is how the tactics of Hillary Clinton’s campaign have come to mirror the Bush strategies – simultaneously playing the bully and the victim, asserting that up is down, and bashing anyone who notices the contradictions.

Stunned by Obama’s surprising successes and his delegate lead, Clinton’s campaign has thrown what it calls the “kitchen sink” at the Illinois senator – including overt attacks on his ethics and sub rosa insinuations about his race and religion.

On Feb. 26, Internet gossip Matt Drudge reported that a Clinton staffer e-mailed around a photo taken of Obama during a 2006 trip to Kenya when he was dressed in a turban and other traditional garb of a Somali Elder. That reinforced earlier rumors spread about Obama as a secret Muslim, though he has long belonged to a Christian church in Chicago.

Obama’s campaign manager David Plouffe denounced the Clinton campaign for circulating the photo, complaining of “shameful offensive fear-mongering.”

Instead of showing remorse, the Clinton campaign denied knowledge of the photo and went on the attack. “If Barack Obama’s campaign wants to suggest that a photo of him wearing traditional Somali clothing is divisive, they should be ashamed,” said Clinton campaign manager Maggie Williams.

Some Clinton defenders went further, arguing that Sen. Clinton was the real victim, since there was no hard evidence that the Clinton campaign was orchestrating the Internet smears of Obama, which also have been spread by right-wing operatives in talk radio and on the Internet.

On March 2, however, when Hillary Clinton had a chance to slam the door on these tactics, she didn’t.

Asked on CBS’s “60 Minutes” whether she believed rumors claiming that Obama was a closet Muslim, Clinton responded in a way that left the question open. “No, no, why would I?” she said, before adding: “there is nothing to base that on. As far as I know.”

New York Times columnist Bob Herbert called Clinton’s response “one of the sleaziest moments of the campaign. … As far as I know. If she had been asked if she thought President Bush was a Muslim, would her response have included the caveat ‘as far as I know’? What about Senator McCain? Why then, with Senator Obama?” [NYT, March 8, 2008]

But the Clinton campaign has been filled with such moments of injecting doubts about Obama’s truthfulness and integrity, a nasty strategy that the Clintons used to call “the politics of personal destruction” – when they were on the receiving end in the 1990s.

Now, Hillary Clinton has become a chief practitioner of this brand of politics, taking even minor questions about Obama and hyping them into character issues.

‘Change You Can Xerox’

At the Feb. 21 debate, Clinton lashed out at Obama for alleged “plagiarism” – or “change you can Xerox” – in his borrowing of a rhetorical phrase about the importance of words that was used previously and recommended to him by his friend, Massachusetts Gov. Deval Patrick.

Though politicians frequently copy phrases and ideas from one another, plagiarism – the unauthorized use of someone else’s words usually in printed form – is considered a serious ethical violation and was clearly meant to suggest dishonesty by Obama.

However, during the same debate in which she leveled the plagiarism charge, Clinton twice used wording that appeared lifted from former Sen. John Edwards and her own husband. (Her campaign dismissed those complaints about plagiarism as silly and insignificant.)

Again, there was a similarity to Bush’s behavior, such as when he and his supporters attack their critics for lacking realism or not facing the facts – when it is the Bush camp that has demonstrated a breathtaking contempt for reality.

This throwing-stones-from-a-glass-house audacity may achieve some psychological advantage, creating confusion about who’s really at fault or at least giving pause to anyone who might dare point out the discrepancies.

Even earlier in the Democratic campaign, the Clintons had put this approach on display, attacking Obama over his positions – on the Iraq War, positive comments about Ronald Reagan, and Obama’s relationship with a sleazy real-estate developer – when the Clintons were arguably more vulnerable on the exact same points.

Hillary Clinton voted to give President Bush authorization to invade Iraq (while Obama opposed the invasion); the Clintons both have praised Reagan far more than Obama has; and the Clintons had closer ties to an ethically challenged developer, Whitewater’s James McDougal, than Obama apparently had with Tony Rezko. [See’s “The Clinton Audacity.”]

Distasteful Medicine

Beyond the arrogance of this holier-than-thou behavior, it often is mixed with an annoying dose of victimhood whenever someone tries to give them a taste of their own medicine.

For instance, after scoring political points in Ohio and Texas by bashing Obama’s ethics, the Clinton campaign was outraged when Obama suggested that the Clintons should follow his lead and release their tax returns.

A New York Times editorial and many good-government activists had made the same point – and during the Feb. 26 debate, NBC’s Washington bureau chief Tim Russert asked Sen. Clinton to release her tax returns before the Texas and Ohio primaries, noting that she had loaned her campaign $5 million and that much of Bill Clinton’s income came from “overseas business dealings.”

In response, Clinton offered a disingenuous answer.

“Well, I can’t get it together by then, but I will certainly work to get it together. I’m a little busy right now. I hardly have time to sleep,” she said.

The truth is that she could have her tax returns released with one or two phone calls to her accountant and her press office. She appears instead to have something in those returns that she doesn’t want the voters to know – even as she insists that she’s been fully “vetted” and Obama deserves more intense scrutiny from the press.

When Obama pressed on the tax-return issue, the Clinton team – surprise, surprise – accused him of acting like a Republican.

Clinton spokesman Howard Wolfson implied that Obama was “imitating Ken Starr,” the right-wing special prosecutor who pursued the Clintons in the 1990s. Clinton adviser Ann Lewis said Obama was “using Republican talking points” and had “recycled many of the same Republican attacks.” [Washington Post, March 7, 2008]

Yet, using Republican attack lines was exactly what Clinton did to Obama in the Feb. 26 debate when she claimed Obama had “basically threatened to bomb Pakistan.” That was a charge that President Bush and Sen. John McCain had made against Obama earlier.

It also wasn’t true. As Obama explained, his real position was that he would authorize an attack on al-Qaeda bases inside Pakistan if the Pakistani government refused to act. He wasn’t threatening to “bomb Pakistan” in any reasonable interpretation of his words.


In the days before the key Ohio and Texas primaries, the Clinton campaign also made hay out of a leaked Canadian government memo saying that an Obama adviser, University of Chicago economics professor Austan Goolsbee, had equivocated to a Canadian diplomat about Obama’s tough talk on renegotiating the NAFTA trade deal. [NYT, March 4, 2008]

Clinton accused him of giving “the old wink-wink,” again portraying Obama as untrustworthy. It took the Obama campaign several days to pin down and explain the details of the meeting, which both Obama and Goolsbee said had been misrepresented in the memo. But the political damage was done, especially in NAFTA-averse Ohio.

Much less attention was given to disclosures in Canada – after the primaries – that the Clinton campaign had given similar NAFTA assurances to the Canadian government to assuage its concerns about Clinton’s equally tough talk on NAFTA.

Ian Brodie, chief of staff to Prime Minister Stephen Harper, told reporters that the Clinton campaign had called the Canadian Embassy in Washington to tell officials to take her anti-NAFTA rhetoric “with a grain of salt,” the AFP wire service reported on March 6.

Inside Canada, the leaking of the Obama memo – especially while documents about any Clinton assurance apparently were withheld – prompted complaints that Harper, a close ally of President Bush and the Republican Party, may have been interfering with the U.S. political process to help his conservative friends in Washington.

But the bigger question may relate to whether Democratic voters want a nominee whose campaign seems to have bought into the negative, reality-bending, albeit winning strategies of the Republicans.

Some Democrats may view Clinton’s adoption of these Republican tactics as wrong and even disqualifying. Others, however, may look kindly on the Clinton approach, under the old theory: If you can’t beat them, join them.

Hedge Funds Reel From Margin Calls Even on Treasuries

Hedge Funds Reel From Margin Calls Even on Treasuries

By Tom Cahill and Katherine Burton

Go To Original

The hedge-fund industry is reeling from its worst crisis in a decade as banks are now demanding more money pledged to support outstanding loans even when the investment is backed by the full faith and credit of the United States.

Since Feb. 15, at least six hedge funds, totaling more than $5.4 billion, have been forced to liquidate or sell holdings because their lenders -- staggered by almost $190 billion of asset writedowns and credit losses caused by the collapse of the subprime-mortgage market -- raised borrowing rates by as much as 10-fold with new claims for extra collateral.

While lenders are most unsettled by credit consisting of real estate and consumer debt, bankers are now attempting to raise the rates they charge on Treasuries, considered the world's safest securities, because of the price fluctuations in the bond market.

``If you have leverage, you're stuffed,'' said Alex Allen, chief investment officer of London-based Eddington Capital Management Ltd., which has $195 million invested in hedge funds for clients. He likens the crisis to a bank panic turned upside down with bankers, not depositors, concerned they won't get their money back.

The lending crackdown is the worst to hit the $1.9 trillion hedge-fund industry since Russia's debt default in 1998 roiled global credit markets and required the U.S. Federal Reserve to pressure the securities industry to arrange a $3.6 billion bailout of Greenwich, Connecticut-based Long-Term Capital Management LP. Today, hedge funds are being forced to sell assets to meet banks' margin calls, resulting in the dissolution of the funds.

``There has to be more in the next weeks,'' Allen said. ``There are people who have been hanging on by their fingernails who can't hold on much, much longer.''

`Mercy of Counterparties'

Ivan Ross, founder of Westport, Connecticut-based hedge fund Tequesta Capital Advisors, received a call from his bankers on Feb. 22 demanding he put up more money or risk losing his loans. Ross was unable to meet the margin call as the market for mortgage- backed debt seized up, preventing him from selling securities to raise the cash. Four days later, lenders liquidated his $150 million fund.

``Because it's impossible in this environment to move among dealers, you're at the mercy of counterparties,'' said the 45-year- old Ross, who has managed hedge funds for 13 years, including a stint handling mortgage-backed debt for billionaire George Soros. ``To the extent they want to shut you down, they can.''

The demise of Tequesta revealed the deathtrap for hedge funds caught in the credit maelstrom of banks selling mortgage-backed bonds as fast as they can while demanding more collateral from clients who use the securities to back loans.

Carlyle Fund

On Feb. 24, London-based Peloton Partners LLP gave up a ``night and day'' effort to stave off demands from banks, including Goldman Sachs Group Inc. and UBS AG, for as much as 25 percent collateral for securities that once required 10 percent, according to investors in the fund. Peloton, run by former Goldman partners Ron Beller and Geoff Grant, liquidated the $1.8 billion ABS Fund, its largest.

The same day, about 5,000 miles (7,770 kilometers) away in Santa Fe, New Mexico, JPMorgan Chase & Co. told Thornburg Mortgage Inc. that it had defaulted on a $320 million loan because it couldn't meet a $28 million margin call, according to U.S. regulatory filings.

Thornburg, the home lender that lost 93 percent of its market value in the past year, was near collapse March 7 after it failed to meet $610 million of margin calls. Chief Executive Officer Larry Goldstone said in a statement the company fell victim to a ``panic that has gripped the mortgage financing industry.''

Repo Agreements

Carlyle Capital Corp., the debt-investment fund started by private-equity firm Carlyle Group of Washington, was suspended from trading in Amsterdam on March 7 after it couldn't meet margin calls, and its banks seized and sold assets.

``Banks are reducing exposure anywhere they can and the shortest way to do that is to cut leverage,'' said John Godden, chief executive officer of London-based hedge-fund consultant IGS AIS LLP.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

The managers that trade fixed-income securities generally borrow money through repurchase agreements, or repos. In a repo, the security itself is used as collateral, just as a homeowner puts up the house as collateral for a mortgage.

Collateral `Haircuts'

Banks usually limit their risk on repos by lending less than the value of the securities used as collateral. Tequesta was able to borrow $95 on $100 worth of AAA rated jumbo prime mortgages in early 2007, meaning the bank took a $5, or 5 percent so-called haircut. By last month, the amount required had risen to as much as 30 percent, Ross said. Jumbo mortgages are loans of more than $417,000, typically used to finance more expensive homes.

The losses started in mid-2007, when prices of subprime loans, those to homeowners with bad credit histories, started tumbling because of a surge in delinquencies. The contagion spread to other credit markets, including bonds backed by student loans and credit cards and now mortgages backed by federal agencies, which have an implied guarantee from the U.S. government.

Prices keep falling, with yields on mortgage-backed debt issued by agencies such as Fannie Mae rising last week to the highest level relative to U.S. Treasuries since 1986. Costs to protect corporate bonds from default are close to a record high.

Under such circumstances, lenders have no choice but to ask clients to put up more cash. For AAA rated residential mortgage backed securities, banks have raised haircuts 10-fold in the past year to 20 percent, according to estimates from Citigroup credit analyst Hans Peter Lorenzen in London.

Treasury Swings

On AAA asset-backed securities, banks are demanding a 15 percent haircut, up from 3 percent last summer. Corporate bond haircuts have gone to 10 percent from 5 percent, bankers said.

At least one bank has raised Treasury haircuts, which range from 0.25 percent to 3 percent, depending on the length of the loan and the creditworthiness of the borrower, said bankers, who declined to be identified. They said they wouldn't be surprised if the practice becomes more widespread, not because they expect the U.S. government to default, but rather because there have been bigger price swings in the Treasury market, which affects value.

Some banks may have been late to raise haircuts for their biggest hedge funds because they are lucrative clients, said Jochen Felsenheimer, head of credit strategy at Milan-based UniCredit SpA, Italy's biggest bank.

``Until now, hedge funds have been the big winners of the crisis and this could be as well due to banks not having yet drawn down their margin,'' Felsenheimer said.

Survival of Fittest

Carlyle said in a March 6 statement that margin prices requested for securities weren't ``representative of the underlying recoverable value'' of its securities. Lenders started to liquidate its portfolio of $22 billion of AAA rated mortgage debt issued by Fannie Mae and Freddie Mac.

``It's not a question of prime brokers deciding which firms live and which don't,'' said Odi Lahav, head of the European Alternate Investment Group at Moody's Investors Service in London. ``They're trying to manage their own risk. There's a Darwinian aspect to survivorship in this industry.''

Some managers set themselves up for a stumble by taking on too much leverage and not anticipating that terms could change, said Christopher Cruden, CEO of Lugano, Switzerland-based Insch Capital Management, which oversees $150 million for clients.

``If you're going to dance with the devil, there comes a time when your toes are going to be stepped on,'' Cruden said. ``Prime brokers are there to do business, not be your friend.''