Tuesday, March 11, 2008

TIPS' Yields Show Fed Has Lost Control of Inflation

TIPS' Yields Show Fed Has Lost Control of Inflation

By Sandra Hernandez and Deborah Finestone

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Bond investors have never been so sure that the Federal Reserve will lose control of inflation. They're so convinced that they're giving up yields just to buy debt securities that protect against rising consumer prices.

The yield on the five-year Treasury Inflation-Protected Security due in 2012 has been negative since Feb. 29, and traded today at minus 0.17 percent. The notes, which were first sold in 1997, have never before traded below zero. Even so, firms from Deutsche Asset Management to Vanguard Group Inc., the second- biggest U.S. mutual fund company, say TIPS are a bargain.

For the first time in a generation, money managers must come to grips with a central bank that's more intent on spurring the economy than restraining price increases. With oil above $100 a barrel, gold approaching $1,000 an ounce and the dollar at a record low against the euro, TIPS show investors aren't convinced Fed Chairman Ben S. Bernanke will be able to tame inflation once policy makers stop cutting interest rates.

``The way TIPS are trading now, investors believe headline inflation will stay lofty and are willing to give up the real yield for that,'' said Brian Brennan, a money manager who helps oversee $11 billion in fixed-income assets at T. Rowe Price Group Inc. based in Baltimore. Prices for the securities indicate ``a real concern of a recession and high headline inflation,'' he said.

Because TIPS pay a principal amount that rises in tandem with the consumer price index, buyers accept lower yields in a bet the inflation adjustment will make up the difference.

Volcker Fed

Investors typically determine what they are willing to receive in interest by deducting the rate of inflation expected over the life of the securities from the rate on a comparable Treasury. Investors can still earn money from TIPS with sub-zero rates because the principal rises with the CPI.

Five-year TIPS yielded 2.36 percentage points less than similar-maturity Treasuries as of 9:14 a.m. in New York. The so- called breakeven rate has risen from a four-and-a-half-month low of 1.89 percent on Jan. 23, the day after policy makers cut their target lending rate by three-quarters of a point to 3.50 percent in an emergency move.

The last time investors were so worried about faster inflation amid slowing growth, Paul A. Volcker presided over a Fed that would raise rates as high as 20 percent to end the stagflation crisis of the 1970s, according to Seth Plunkett, a bond fund manager at American Century Investment Management in Mountain View, California. The firm manages $20 billion.

Fed Forecast

Inflation ``is going to be higher than the Fed's targeted area,'' said Plunkett, whose fund owns a greater percentage of TIPS than contained in the index he uses to measure performance.

In forecasts released last month, the Fed said it expects inflation to accelerate 2.1 percent to 2.4 percent this year, and 1.7 percent to 2 percent in 2009.

TIPS have returned 6.2 percent this year, compared with 3.7 percent from regular Treasuries, according to indexes compiled by Merrill Lynch & Co. Mutual funds that specialize in inflation-linked debt attracted a net $2.87 billion in January, boosting their assets to $47.6 billion, according the latest data available from Financial Research Corp. in Boston. In all of 2007, the funds added a net $3.54 billion.

``TIPS are a really good buy,'' said Bill Chepolis, a money manager who helps oversee $9 billion at Deutsche Asset Management in New York. He bought five-year TIPS in the last six months. ``They're cheap with the Fed continuing to emphasize growth over inflation and inflation continuing to come in higher.''

Too Expensive

Investors seeking a haven from credit-market losses have pushed yields on all Treasuries lower, including TIPS. Five-year nominal note yields have dropped 1.03 percentage points this year to 2.41 percent.

``It's crazy,'' said Richard Schlanger, a portfolio manager at Boston-based Pioneer Asset Management, which oversees $44 billion in fixed income. ``You're paying the government to buy five-year TIPS. People are hiding in Treasuries for liquidity's sake because of a lack of liquidity in other markets. Eventually this will pass.''

Record-low TIPS yields also reflect bets on surging commodities. Crude oil futures rose to $106.54 last week and are up 70 percent in the past year.

Growth in countries such as China and India mean that rising prices for goods including wheat, gold, and oil ``may be a permanent thing,'' said Paul Samuelson, the second recipient of the Nobel Prize in economics who helped popularize the term ``stagflation.'' ``This time it's primarily not made-in-America inflation.''

Resumed Sales

The Treasury stopped selling five-year TIPS between 1998 and 2003, and resumed auctions in October 2004. In addition to the current five-year security, seven other inflation-indexed notes with up to four years to maturity currently yield less than zero.

Should five-year TIPS continue to have negative yields when the Treasury holds its next sale April 22, federal rules state investors would receive a coupon of zero percent, said Stephen Meyerhardt, a Bureau of Public Debt spokesman in Washington.

``TIPS have performed really well for the right reasons and they will continue to perform well for the right reason,'' said Kenneth Volpert, a fund manager overseeing $14.7 billion in inflation-linked debt at Vanguard in Valley Forge, Pennsylvania.

Billionaire Investor Sees Bank Failures Ahead

Billionaire Investor Sees Bank Failures Ahead

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Billionaire investor Wilbur Ross says the current market downturn differs from previous slumps in that no American banks have yet failed this time, but he suggests that's about to change.

"I think that's going to be the next wave, and coupled with problems in the commercial real estate market; I think they'll be the next bubbles that burst," the chairman and CEO of W. L. Ross and Company told CNBC's "Squawk Box" in an exclusive interview.

He was asked about the risks to big banks.

"I think that the big banks won't fail in the sense that they will go to zero and depositors would lose money," Ross replied. "I think the Fed and other regulators will make things happen.| I think it's the medium-sized banks, and particularly some of those that got overextended with the subprime and other kind of mortgage debt.| I think those are the ones that had the serious mismatch, making 20- and 30-year loans based on 90-day deposits."

Ross's comments echo those made by Federal Reserve Chairman Ben Bernanke, who told a Senate committee on Feb. 28 that some smaller regional banks that heavily invested in real estate could go under.

Ross and other high-profile investors have made recent moves in the credit markets, explaining that they have done so to snap up bargains. Last week it was reported that Ross had invested $1 billion into municipal bonds.

In the meantime, Ross said he didn't think the U.S. economy would recover any time soon.

"I think at best we're in for stagflation," Ross said, referring to the combination of higher inflation and weak economic growth. "I think the consumer has been tapped out for quite a while and is frightened by the poverty effect of seeing the house go down."

Straightening out the problems in the bond industry, particularly the situation of the insurers who backstop bond offerings, would go a long way toward fixing the current paralysis in the credit markets, Ross intimated. That process is underway, he suggested, with the current reassessment by ratings agencies of the bond insurers.

"Making real triple-As will solve a lot of the problem," he said. "The problem is we've had a lot fake triple-As before."|

That effort is far from over, indicated New York State Insurance Commissioner Eric Dinallo, who has been at the center of efforts to stabilize the sector. Troubled bond insurers MBIA (NYSE:MBI - News) and Ambac (NYSE:ABK - News) successfully raised fresh capital last week, he noted. Now attention now turns to FGIC, he said, also during an appearance on "Squawk Box."

VIDEO: Press Secretary Ordered Not To Discuss Dolla

VIDEO: Press Secretary Ordered Not To Discuss Dollar

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White House Press Secretary Dana Perino mentioned in a press conference that she is not allowed to talk about the value of the U.S. Dollar. She says that the Treasury Secretary is the only one allowed to discuss the U.S. Dollar. She even said that she would be fired if she talked about the U.S. Dollar.

First off, its ridiculous that the Treasury Secretary is the only one that can talk about the value of the U.S. Dollar since the Federal Reserve is the institution that fixes the price of the U.S. Dollar. This is just a game of smoke and mirrors the Bush administration is playing because they know that the U.S. Dollar is in the process of losing a good majority of its value. Watch the video of the Dana Perino below talking about why she can't discuss the U.S. Dollar.

Fed Prints Another $200 Billion Out Of Thin Air

Fed to Lend $200 Billion, Take on Mortgage Securities

By Scott Lanman

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The Federal Reserve, struggling to contain a crisis of confidence in credit markets, will for the first time lend Treasuries in exchange for debt that includes mortgage-backed securities.

The Fed said in a statement in Washington it plans to make up to $200 billion available through weekly auctions. Officials told reporters on condition of anonymity that the program may be increased as needed. The Fed coordinated the effort with central banks in Europe and Canada, which plan to inject up to $45 billion into their banking systems.

U.S. stocks rallied the most in six weeks on optimism the initiative will help avert a wider credit crunch.Treasuries fell, while the premiums investors demand for debt backed by home loans guaranteed by Fannie Mae remained near a 22-year high.

``This is the most significant step the Fed has taken so far,'' said David Resler, chief economist at Nomura Securities International Inc. in New York. ``This relieves some of the pressure'' in the credit markets, he said.

Today's steps indicate the Fed is increasingly concerned about the investor exodus from mortgage debt, which threatens to deepen the housing contraction and the economic slowdown. Officials said the program is aimed at countering a decline in liquidity in financial markets around the world, and comes after signs of increasing stress in U.S. mortgage securities.

New Tool

The Fed said it will lend Treasuries for 28-day periods in return for debt including AAA-rated mortgage securities sold by Fannie Mae, Freddie Mac and by banks. The loans will be made under a new program, the Term Securities Lending Facility, to so-called primary dealers, the 20 banks and securities firms that trade directly with the central bank.

Officials ``will consult with primary dealers on technical design features'' on the new resource before the first weekly auction is held on March 27, the statement said.

The Fed holds about $713 billion of Treasuries on its balance sheet.

Officials anticipate that the primary dealers, which include Goldman Sachs Group. Inc., Bear Stearns and Merrill Lynch & Co., will lend the Treasuries on to other firms in return for cash. That will help the dealers finance their balance sheets, they told reporters.

Fed's Arsenal

The TSLF becomes the second new tool introduced by the Fed in three months. In December, the Fed set up the so-called Term Auction Facility to loan funds to banks in exchange for a wide variety of collateral, including mortgage debt.

Last week, the Fed increased the size of its planned TAF auctions, to $100 billion this month from a previously announced $60 billion. The central bank also said March 7 that it would make $100 billion available through repurchase agreements, where the Fed loans cash in return for assets including mortgage debt.

``They're trying to put out fires to the best extent they can,'' said David Greenlaw, chief fixed-income economist at Morgan Stanley in New York, who is a former New York Fed researcher.

Today's announcement falls short of calls by some analysts and investors for the Fed to make outright purchases of mortgage securities.

Fed officials said they want to increase liquidity and the regular functioning of markets, rather than determine appropriate prices for securities. Buying the home loan debt directly would affect prices, they added.

Tightening Credit

The measures are the latest in Chairman Ben S. Bernanke's effort to alleviate increasing strains in financial markets that are curtailing credit to homeowners and companies, even after the Fed lowered its main interest rate by 2.25 percentage points.

The Federal Open Market Committee authorized increasing currency swap lines with the European Central Bank and Swiss National Bank to $30 billion and $6 billion, respectively, increasing the ECB's line by $10 billion and the Swiss line by $2 billion. The Fed extended the swaps through Sept. 30.

The ECB announced it will lend banks in Europe up to $15 billion for 28 days and the SNB announced a similar auction of up to $6 billion. The Bank of England will offer $20 billion of three-month loans on March 18 and hold another auction on April 15. The Bank of Canada announced plans to purchase $4 billion of securities for 28 days.

Treasuries slid after the announcement, with yields on 10- year notes rising to 3.56 percent as of 12:48 p.m. in New York, from 3.46 percent late yesterday.

Traders removed bets on the Fed to lower its benchmark rate by a full percentage point, to 2 percent, by the end of the next meeting on March 18, futures showed. The contracts indicate a 76 percent chance of a 0.75 percentage-point reduction.

Gulf War syndrome firmly linked to chemical exposure

Gulf War syndrome firmly linked to chemical exposure

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Nearly two decades after veterans of the 1991 Gulf War came home complaining of odd illnesses, enough evidence has been gathered to determine that many of them were sickened by chemical exposure, a study published Monday concluded.

And some of the damage was likely caused by pills prescribed to protect against the use of nerve gas and pesticides used to control sand flies, according to the study published in the Proceedings of the National Academy of Sciences.

While the military has subsequently stopped using the pills, the pesticides continue to be used in agriculture and for pest control in homes and offices in the United States and around the globe.

"Enough studies have been conducted, and results shared, to be able to say with considerable confidence that there is a link between chemical exposure and chronic, multi-symptom health problems," said study author Beatrice Golomb of the University of California San Diego's school of medicine.

"Furthermore, the same chemicals affecting Gulf War veterans may be involved in similar cases of unexplained, multi-symptom health problems in the general population."

Golomb examined the results of scores of studies looking at the health impact of the class of chemicals to which the veterans were exposed either through pesticides, the anti-nerve gas pills or the demolition of a weapons depot containing the nerve gas sarin.

Her study linked exposure to the chemicals to Gulf War syndrome, a chronic health problem which affected between 26 and 32 percent of deployed troops.

Symptoms routinely reported by these veterans include memory problems, trouble sleeping, muscle or joint pain, fatigue, rashes and breathing problems.

While the findings "do not imply that all illness in Gulf War veterans" is the result of this exposure it "may account for some or perhaps much of the excess illness seen in Gulf War veterans" she concluded.

Golomb also discovered why some veterans were sickened while others with equal or greater chemical exposure were not affected.

"There is evidence that genetics have something to do with how a body handles exposure to these chemicals," Golomb said.

"Some people are genetically less able to withstand these toxins and evidence shows that these individuals have higher chance of suffering the effects of exposure."

Some 250,000 service members were given the bromide pills as a preventative measure. Those with the mutations that reduced their ability to detoxify the pills were at significantly higher risk of illness, Golomb found.

Previous studies have shown that this mutation is also linked to increased rates of some neurological diseases, such as amyotrophic lateral sclerosis (ALS) or Lou Gehrig's disease.

Bush family private equity fund in deep trouble as Financial Tsunami rolls on

Bush family private equity fund in deep trouble as Financial Tsunami rolls on

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Carlyle Capital Corp. Ltd., a subsidiary of one of the most influential USA private equity funds and closely tied to the Bush family, is in default on several of its securities. Carlyle is an offshore subsidiary of the Washington-based Carlyle Group, one of the most politically powerful private equity firms of the past two decades. The severity of its liquidity problems indicates that the unfolding financial crisis is taking major parts of the US financial and political elite down with it. Among the leading partners of the Carlyle Group in recent years have been George H.W. Bush, father of the President; James Baker III, the Bush family’s attorney and ‘fixer;’ former UK Prime Minister John Major.

Carlyle Capital reports it is attempting to convince lenders holding $16 billion in securities not to liquidate the company's remaining collateral. The company is a listed mortgage-bond fund managed by the Carlyle Group. The Carlyle Group already has loaned Carlyle Capital $150 million to cover debt obligations since July 2007. In the past several days it failed to meet margin calls with four banks. The fear in the market according to informed reports is that its entire portfolio, recently valued at $21 billion, could be sold off in a distress sale, putting major downward pressure on all mortgage bonds globally. A collapse at Carlyle would hit the value of all fixed-income securities, which have already dropped sharply as banks pull back on their lending, and force a new global round of asset sales.

Margin calls

In the past days Carlyle Capital had admitted it had received "substantial additional margin calls and additional default notices from its lenders." It said lenders are selling off securities held as collateral. Margin calls are demanded when a creditor questions the ability of the borrower to repay.

Shares in the fund, which trades on Euronext Amsterdam, have been suspended after closing down nearly 60 percent. Carlyle Capital was a prime example of the financial engineering encouraged during the Alan Greenspan era by Washington. It had leveraged $670 million in equity by an alarmingly high 32 times to finance a $21.7 billion portfolio of highly rated mortgage-backed securities issued by US housing agencies Freddie Mac and Fannie Mae. To finance the deals it entered into repurchase agreements with banks where it posted the mortgage securities as collateral in exchange for cash. If the value of the security held as collateral falls, the lender has the right to ask for more collateral — a "margin call" — to secure the loan.

If the borrower does not meet the margin call by putting up more collateral, the lender may sell the security.

More worrisome is the fact that the Carlyle crisis does not owe to so-called sub-prime or bad grade mortgage debt. The company held US government agency AAA-rated residential mortgage-backed securities (RMBS). Now Carlyle’s lenders have issued margin calls in excess of $400 million. At the onset of the sub-prime crisis in September 2007 Carlyle was forced to go to Abu Dhabi’s sovereign wealth fund to get capital. Mubadala, the arm of Abu Dhabi which has invested in sectors as diverse as Libyan oil exploration and Ferrari, the Italian motor company, paid $1.35bn for a 10% Carlyle stake.

And Blackstone Group too?

Carlyle is by no means the only elite US private capital group in serious trouble. Blackstone Group, manager of the world's largest buyout fund, said fourth-quarter profit plunged 89 percent after a ``meltdown'' in the credit markets and warned that getting loans for takeovers will be difficult in 2008. Profit declined to $88 million from $808.1 million a year earlier.

Blackstone decided to list the private equity company on the stock market in June 2007 in a move some date as the last gasp of the huge securitization and private equity buyout mania of the past decade. Since June its stock has fallen 53 percent. More serious, it hasn't completed a takeover of more than $2 billion in five months and is struggling to close the $6.6 billion buyout of Dallas-based Alliance Data Systems Corp., a credit-card processor, announced in May 2007.

Blackstone and Carlyle led the recent “locust capitalism” (Heuschrecke) hostile takeover binge which triggered a major political backlash in Germany and elsewhere. That debt-financed takeover binge came to a halt with the eruption of the sub-prime securitization crisis last fall. Blackstone has $102 billion in assets under management at present. The value of Leveraged or debt-financed Buyout (LBO) deals announced in the second half of 2007 plunged two-thirds from the first six months, according to data by Bloomberg.

Crisis spreads to US municipal debt market

The ongoing financial market crisis whose background I have detailed in the series, The Financial Tsunami, Part I-V, was nominally triggered by a crisis of confidence in the value of the most risky securities, sub-prime home mortgages in the US, mortgages often made by banks without checking the borrowers credit history or income. Because the securitization revolution was premised on the flawed illusion that by spreading risk throughout the global financial system, risk would disappear, once the weakest part began to collapse, confidence in the multi-trillion entire edifice of securitized debt began to collapse. The process unravels over time which is why most have the illusion of a localized crisis. In reality, centered in the US economic and financial sector, what is now underway is a crisis not even comparable to the 1930’s Great Depression.

Now the normally high-quality debt of US local and state governments, so-called municipal debt, is getting hit. California, New York City and the owner of the World Trade Center site will replace their floating rate debt, sharply raising costs for local governments as the economic depression is slashing their tax revenues.

In February, interest rate yields on US tax-exempt municipal debt rose to the highest ever relative to Treasuries. The market is reacting to deteriorating finances at bond insurance companies and credit rating companies. States, cities and agencies are pulling out of the $330 billion floating rate or auction-rate market, where costs have doubled since January and plan to sell about $22.5 billion of fixed-rate, tax-exempt bonds to raise capital at a significant penalty price.

Bond fund managers in New York and London tell us they have never seen such troubles in the municipal bond market before.

The market for floating rate or auction-rate municipal bonds in the US, once thought safe, entered crisis as losses tied to sub-prime mortgage bonds and related securities threatened so-called monoline bond insurers' AAA ratings, causing investors to avoid the bonds they had insured. The same monoline insurers, specialized New York financial security insurance companies, had insured sub-prime mortgage securities and municipal debt. The monoline companies guarantee about half the $2.6 trillion of outstanding state and local government debt, some $1.2 trillion. Higher interest rate costs for states and local governments will aggravate local US fiscal crises as the depression spreads, creating a self-reinforcing downward spiral. The process is in its early stages yet.

Bush family private equity fund in deep trouble as Financial Tsunami rolls on

Bush family private equity fund in deep trouble as Financial Tsunami rolls on

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Carlyle Capital Corp. Ltd., a subsidiary of one of the most influential USA private equity funds and closely tied to the Bush family, is in default on several of its securities. Carlyle is an offshore subsidiary of the Washington-based Carlyle Group, one of the most politically powerful private equity firms of the past two decades. The severity of its liquidity problems indicates that the unfolding financial crisis is taking major parts of the US financial and political elite down with it. Among the leading partners of the Carlyle Group in recent years have been George H.W. Bush, father of the President; James Baker III, the Bush family’s attorney and ‘fixer;’ former UK Prime Minister John Major.

Carlyle Capital reports it is attempting to convince lenders holding $16 billion in securities not to liquidate the company's remaining collateral. The company is a listed mortgage-bond fund managed by the Carlyle Group. The Carlyle Group already has loaned Carlyle Capital $150 million to cover debt obligations since July 2007. In the past several days it failed to meet margin calls with four banks. The fear in the market according to informed reports is that its entire portfolio, recently valued at $21 billion, could be sold off in a distress sale, putting major downward pressure on all mortgage bonds globally. A collapse at Carlyle would hit the value of all fixed-income securities, which have already dropped sharply as banks pull back on their lending, and force a new global round of asset sales.

Margin calls

In the past days Carlyle Capital had admitted it had received "substantial additional margin calls and additional default notices from its lenders." It said lenders are selling off securities held as collateral. Margin calls are demanded when a creditor questions the ability of the borrower to repay.

Shares in the fund, which trades on Euronext Amsterdam, have been suspended after closing down nearly 60 percent. Carlyle Capital was a prime example of the financial engineering encouraged during the Alan Greenspan era by Washington. It had leveraged $670 million in equity by an alarmingly high 32 times to finance a $21.7 billion portfolio of highly rated mortgage-backed securities issued by US housing agencies Freddie Mac and Fannie Mae. To finance the deals it entered into repurchase agreements with banks where it posted the mortgage securities as collateral in exchange for cash. If the value of the security held as collateral falls, the lender has the right to ask for more collateral — a "margin call" — to secure the loan.

If the borrower does not meet the margin call by putting up more collateral, the lender may sell the security.

More worrisome is the fact that the Carlyle crisis does not owe to so-called sub-prime or bad grade mortgage debt. The company held US government agency AAA-rated residential mortgage-backed securities (RMBS). Now Carlyle’s lenders have issued margin calls in excess of $400 million. At the onset of the sub-prime crisis in September 2007 Carlyle was forced to go to Abu Dhabi’s sovereign wealth fund to get capital. Mubadala, the arm of Abu Dhabi which has invested in sectors as diverse as Libyan oil exploration and Ferrari, the Italian motor company, paid $1.35bn for a 10% Carlyle stake.

And Blackstone Group too?

Carlyle is by no means the only elite US private capital group in serious trouble. Blackstone Group, manager of the world's largest buyout fund, said fourth-quarter profit plunged 89 percent after a ``meltdown'' in the credit markets and warned that getting loans for takeovers will be difficult in 2008. Profit declined to $88 million from $808.1 million a year earlier.

Blackstone decided to list the private equity company on the stock market in June 2007 in a move some date as the last gasp of the huge securitization and private equity buyout mania of the past decade. Since June its stock has fallen 53 percent. More serious, it hasn't completed a takeover of more than $2 billion in five months and is struggling to close the $6.6 billion buyout of Dallas-based Alliance Data Systems Corp., a credit-card processor, announced in May 2007.

Blackstone and Carlyle led the recent “locust capitalism” (Heuschrecke) hostile takeover binge which triggered a major political backlash in Germany and elsewhere. That debt-financed takeover binge came to a halt with the eruption of the sub-prime securitization crisis last fall. Blackstone has $102 billion in assets under management at present. The value of Leveraged or debt-financed Buyout (LBO) deals announced in the second half of 2007 plunged two-thirds from the first six months, according to data by Bloomberg.

Crisis spreads to US municipal debt market

The ongoing financial market crisis whose background I have detailed in the series, The Financial Tsunami, Part I-V, was nominally triggered by a crisis of confidence in the value of the most risky securities, sub-prime home mortgages in the US, mortgages often made by banks without checking the borrowers credit history or income. Because the securitization revolution was premised on the flawed illusion that by spreading risk throughout the global financial system, risk would disappear, once the weakest part began to collapse, confidence in the multi-trillion entire edifice of securitized debt began to collapse. The process unravels over time which is why most have the illusion of a localized crisis. In reality, centered in the US economic and financial sector, what is now underway is a crisis not even comparable to the 1930’s Great Depression.

Now the normally high-quality debt of US local and state governments, so-called municipal debt, is getting hit. California, New York City and the owner of the World Trade Center site will replace their floating rate debt, sharply raising costs for local governments as the economic depression is slashing their tax revenues.

In February, interest rate yields on US tax-exempt municipal debt rose to the highest ever relative to Treasuries. The market is reacting to deteriorating finances at bond insurance companies and credit rating companies. States, cities and agencies are pulling out of the $330 billion floating rate or auction-rate market, where costs have doubled since January and plan to sell about $22.5 billion of fixed-rate, tax-exempt bonds to raise capital at a significant penalty price.

Bond fund managers in New York and London tell us they have never seen such troubles in the municipal bond market before.

The market for floating rate or auction-rate municipal bonds in the US, once thought safe, entered crisis as losses tied to sub-prime mortgage bonds and related securities threatened so-called monoline bond insurers' AAA ratings, causing investors to avoid the bonds they had insured. The same monoline insurers, specialized New York financial security insurance companies, had insured sub-prime mortgage securities and municipal debt. The monoline companies guarantee about half the $2.6 trillion of outstanding state and local government debt, some $1.2 trillion. Higher interest rate costs for states and local governments will aggravate local US fiscal crises as the depression spreads, creating a self-reinforcing downward spiral. The process is in its early stages yet.

Radio Fear America

Radio Fear America

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Mayor Fiorello LaGuardia read the funnies over the radio to cheer up New Yorkers during a newspaper strike. President Franklin Roosevelt gave "fireside chats" to bolster Americans during the depression. President Bush used his radio address on Saturday to try to scare Americans into believing they have to sacrifice their rights and their values to combat terrorism.

Mr. Bush announced that he had vetoed the 2008 intelligence budget because it contains a clause barring the C.I.A. from torturing prisoners. Mr. Bush told the nation that it "would take away one of the most valuable tools in the war on terror - the C.I.A. program to detain and question key terrorist leaders and operatives." That is simply not true. Nothing in the bill shuts down the C.I.A. interrogation program. It just requires the C.I.A.'s interrogators to follow the rules already contained in the Army field manual on prisoners.

The manual does not stop interrogators from questioning prisoners aggressively. It simply forbids the use of techniques that are regarded by most civilized people as abuse and torture, including sexual abuse, electric shocks, mock executions and the infamous form of simulated drowning known as waterboarding.

In a letter we published on Sunday, Mark Mansfield, the C.I.A. spokesman, said the agency has no objections to those restrictions and that the "C.I.A. neither conducts nor condones torture."

We're glad he cleared that up. Mr. Mansfield's boss, the C.I.A. director, Gen. Michael Hayden, told Congress recently that he had banned waterboarding in 2006 (after the courts started questioning Mr. Bush's detention policies), but he was still "not certain" whether it is legal.

General Hayden's boss, the director of national intelligence, thinks it is, and Vice President Dick Cheney apparently agrees.

That made us wonder what Mr. Mansfield had in mind when he wrote that the field manual is too confining, that there are interrogation techniques the C.I.A. wants to use but won't talk about. He said they are necessary and approved by the Justice Department and the intelligence committees in Congress.

But the chairman of the Senate intelligence committee, John Rockefeller IV of West Virginia, disagreed strongly. He said the veto itself would hurt intelligence-gathering "in the name of preserving a separate C.I.A. interrogation program that Congress has determined is not necessary and, in fact, counterproductive."

Mr. Bush said the C.I.A. program helped "prevent a number of attacks," but Mr. Rockefeller said he had "heard nothing" to suggest that was true. He also said any information the C.I.A. collected could have been obtained through legal methods.

This is not the first time that Mr. Bush has misled Americans on intelligence-gathering and antiterrorism operations, and it may not be the last. It will be up to the next president to restore the rule of law.

House Steers Its Own Path on Wiretaps

House Steers Its Own Path on Wiretaps

By Eric Lichtblau

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Washington - In continued defiance of the White House, House Democratic leaders are readying a proposal that would reject giving legal protection to the phone companies that helped in the National Security Agency's program of wiretapping without warrants after the Sept. 11 attacks, Congressional officials said Monday.

Instead of blanket immunity, the tentative proposal would give the federal courts special authorization to hear classified evidence and decide whether the phone companies should be held liable. House Democrats have been working out the details of their proposal in the last few days, officials said, and expect to take it to the House floor for a vote on Thursday.

The Democrats' proposal would fall far short of what the White House has been seeking.

President Bush has been insisting for months that Congress give retroactive immunity to the phone companies, calling it a vital matter of national security. The Senate gave him what he wanted in a vote last month that also broadened the government's eavesdropping powers.

But House Democratic leaders have balked at the idea.

When the White House would not agree allow more time for negotiations, House leaders last month let expire a temporary six-month surveillance measure. The White House says the Democrats' inaction has imperiled national security. Democrats have accused Mr. Bush of fear-mongering.

The flash point in the debate has been the question of whether to protect AT&T and other major phone companies from some 40 lawsuits pending in federal courts, which charge that the companies' participation in the eavesdropping program violated federal privacy laws and their responsibilities to their customers.

Mr. Bush says the companies acted out of patriotism in responding to what they believed was a lawful presidential order. He has said that the lawsuits are being pursued by money-driven class-action lawyers and that they should not be allowed to threaten the financial solvency of the phone companies.

The Bush administration has shown no sign of backing down, with Kenneth L. Wainstein, the assistant attorney general for national security at the Justice Department, laying out its position most recently in an interview broadcast on Sunday on C-Span's "Newsmakers" program. Mr. Wainstein said the phone companies had "received assurances from the government, the highest levels, that this was a lawful program and that it was authorized by the president and was necessary for our national security."

But House Democratic leaders appear ready to give the White House a fight on national security, an issue over which they once largely conceded the field to Mr. Bush.

The tentative proposal worked out by House Democratic leaders, officials said, has three main elements.

It would impose tougher restrictions on National Security Agency eavesdropping than the Senate version does by requiring court approval before the agency's wiretapping procedures, instead of approval after the fact. It would also reject retroactive immunity for the phone carriers.

The proposal would also create a bipartisan Congressional commission with subpoena power to issue a report on the surveillance programs, including the one approved by Mr. Bush to monitor some Americans' international communications without warrants.

The commission would seek to find out how the program was actually run. Some Democrats complain that even now, more than two years after the program was first publicly disclosed, many questions about its operations remain unanswered.

The idea of giving federal courts specific jurisdiction to determine the immunity issue is somewhat similar to a proposal made in the Senate by Senator Dianne Feinstein, Democrat of California. That was soundly defeated by a vote of 57 to 41.

House Democratic officials say they like elements of the idea because it would allow the courts to decide the issue and answer the concerns of the phone carriers, who say they have been muzzled in defending themselves by the government's efforts to invoke the "state secrets" privilege on the lawsuits.

"This approach allows the cases to go forward, but it also allows the companies to be unshackled to put on their cases," said one House Democratic staff member who has been involved in the negotiations but received anonymity because he was not authorized to speak publicly.

Under the proposal, the courts would be given authority to hear classified evidence in the civil suits - perhaps on an "ex parte" basis, with only one side in attendance - to determine whether the companies are immune from liability. Officials said the proposal would most likely give that authority to a federal district court, but it is possible that the Foreign Intelligence Surveillance Court in Washington could be given that authority instead.

With some conservative Democrats in the House favoring immunity for the phone companies, Democratic leaders conceded that the proposal would face opposition even within their own party. And they said that even if it were approved by the House, it was certain to face strong opposition from the White House and probable defeat in the Senate.

"This is not the end of the road," the House Democratic staff member acknowledged. "We're trying to build support for the provision."

Exhaustive Review Finds No Link Between Saddam and al-Qaeda

Exhaustive Review Finds No Link Between Saddam and al-Qaeda

By Warren P. Strobel

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Washington - An exhaustive review of more than 600,000 Iraqi documents that were captured after the 2003 U.S. invasion has found no evidence that Saddam Hussein's regime had any operational links with Osama bin Laden's al Qaida terrorist network.

The Pentagon-sponsored study, scheduled for release later this week, did confirm that Saddam's regime provided some support to other terrorist groups, particularly in the Middle East, U.S. officials told McClatchy. However, his security services were directed primarily against Iraqi exiles, Shiite Muslims, Kurds and others he considered enemies of his regime.

The new study of the Iraqi regime's archives found no documents indicating a "direct operational link" between Hussein's Iraq and al Qaida before the invasion, according to a U.S. official familiar with the report.

He and others spoke to McClatchy on condition of anonymity because the study isn't due to be shared with Congress and released before Wednesday.

President Bush and his aides used Saddam's alleged relationship with al Qaida, along with Iraq's supposed weapons of mass destruction, as arguments for invading Iraq after the September 11, 2001, terrorist attacks.

Then-Defense Secretary Donald H. Rumsfeld claimed in September 2002 that the United States had "bulletproof" evidence of cooperation between the radical Islamist terror group and Saddam's secular dictatorship.

Then-Secretary of State Colin Powell cited multiple linkages between Saddam and al Qaida in a watershed February 2003 speech to the United Nations Security Council to build international support for the invasion. Almost every one of the examples Powell cited turned out to be based on bogus or misinterpreted intelligence.

As recently as last July, Bush tried to tie al Qaida to the ongoing violence in Iraq. "The same people that attacked us on September the 11th is a crowd that is now bombing people, killing innocent men, women and children, many of whom are Muslims," he said.

The new study, entitled "Saddam and Terrorism: Emerging Insights from Captured Iraqi Documents", was essentially completed last year and has been undergoing what one U.S. intelligence official described as a "painful" declassification review.

It was produced by a federally-funded think tank, the Institute for Defense Analyses, under contract to the Norfolk, Va.-based U.S. Joint Forces Command.

Spokesmen for the Joint Forces Command declined to comment until the report is released. One of the report's authors, Kevin Woods, also declined to comment.

The issue of al Qaida in Iraq already has played a role in the 2008 presidential campaign.

Sen. John McCain, the presumptive GOP nominee, mocked Sen. Barack Obama, D-Ill, recently for saying that he'd keep some U.S. troops in Iraq if al Qaida established a base there.

"I have some news. Al Qaida is in Iraq," McCain told supporters. Obama retorted that, "There was no such thing as al Qaida in Iraq until George Bush and John McCain decided to invade." (In fact, al Qaida in Iraq didn't emerge until 2004, a year after the invasion.)

The new study appears destined to be used by both critics and supporters of Bush's decision to invade Iraq to advance their own familiar arguments.

While the documents reveal no Saddam-al Qaida links, they do show that Saddam and his underlings were willing to use terrorism against enemies of the regime and had ties to regional and global terrorist groups, the officials said.

However, the U.S. intelligence official, who's read the full report, played down the prospect of any major new revelations, saying, "I don't think there's any surprises there."

Saddam, whose regime was relentlessly secular, was wary of Islamic extremist groups such as al Qaida, although like many other Arab leaders, he gave some financial support to Palestinian groups that sponsored terrorism against Israel.

According to the State Department's annual report on global terrorism for 2002 - the last before the Iraq invasion - Saddam supported the militant Islamic group Hamas in Gaza, Palestinian Islamic Jihad and the Popular Front for the Liberation of Palestine-General Command, a radical, Syrian-based terrorist group.

Saddam also hosted Palestinian terrorist Abu Nidal, although the Abu Nidal Organization was more active when he lived in Libya and he was murdered in Baghdad in August 2002, possibly on Saddam's orders.

An earlier study based on the captured Iraqi documents, released by the Joint Forces Command in March 2006, found that a militia Saddam formed after the 1991 Persian Gulf war, the Fedayeen Saddam, planned assassinations and bombings against his enemies. Those included Iraqi exiles and opponents in Iraq's Kurdish and Shiite communities.

Other documents indicate that the Fedayeen Saddam opened paramilitary training camps that, starting in 1998, hosted "Arab volunteers" from outside of Iraq. What happened to the non-Iraqi volunteers is unknown, however, according to the earlier study.

The new Pentagon study isn't the first to refute earlier administration contentions about Saddam and al Qaida.

A September 2006 report by the Senate Intelligence Committee concluded that Saddam was "distrustful of al Qaida and viewed Islamic extremists as a threat to his regime, refusing all requests from al Qaida to provide material or operational support."

The Senate report, citing an FBI debriefing of a senior Iraqi spy, Faruq Hijazi, said that Saddam turned down a request for assistance by bin Laden which he made at a 1995 meeting in Sudan with an Iraqi operative.

Defying Mukasey, Congress Sues Bolten, Miers

Defying Mukasey, Congress Sues Bolten, Miers

By Christopher Kuttruff

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On Monday, House Democrats filed a lawsuit against former White House counsel Harriet Miers and White House chief of staff Joshua Bolten, after Attorney General Michael Mukasey refused last week to enforce Congressional subpoenas.

"I do not take this step lightly," said John Conyers, chairman of the House Judiciary Committee. "It is extremely rare that Congress must litigate in order to enforce subpoenas and no compromise can be reached. Unfortunately, this administration simply will not negotiate towards a compromise resolution so we must proceed."

After months of delay, the House finally moved forward in mid-February on a vote to hold Bolten and Miers in contempt of Congress. This vote - the first of its kind in 25 years - was brought to the floor due to Miers's and Bolten's refusal to comply with subpoenas issued by the House Judiciary Committee, which was investigating the abrupt firing of nine US attorneys. [1]

The December 2006 firings created significant controversy due to the potential motivations behind them. For example, in October 2006, Republican Sen. Pete Domenici called David Iglesias, the US attorney from New Mexico, and inquired about the status of an investigation of at least one Democratic state senator. The phone call, which many legal experts deem a violation of Congressional ethics rules, came two months before the firing of Mr. Iglesias. [2] Iglesias noted he felt a sense of pressure and unease, given the unusual nature of the call.

According to McClatchy, David Iglesias states in his upcoming book that US Attorney Johnny Sutton told Iglesias the firing was political, and he should "just go quietly." [3]

This event, along with similar incidents, led many in Congress to seriously question the motivation behind the replacements.

Miers and Bolten were positionally central to deliberations involving these dismissals; thus, many in Congress feel their testimony is crucial to conducting a thorough investigation. After their refusal to appear before the committee, the House eventually found it necessary to hold the two White House aides in contempt of Congress.

The investigations into the firing of the attorneys involved testimony from former Deputy Attorney General James Comey, then Attorney General Alberto Gonzales, Monica Goodling, former senior counsel to Attorney General Alberto Gonzales, and Paul McNulty, deputy attorney general. While several of these witnesses frequently invoked executive privilege to avoid certain lines of questioning, only Miers and Bolten (acting upon White House instruction) refused outright to comply with the subpoenas.

"On June 28, 2007, White House Counsel Fred Fielding wrote that the White House would refuse to produce any documents pursuant to the subpoena issued to Mr. Bolten based on executive privilege," states the Judiciary Committee's November contempt report. "Chairman Conyers and Chairman Leahy requested that the White House provide a privilege log to set forth the factual and legal basis for any claims of privilege as to each document being withheld, as well as a signed statement by the President asserting any privilege by July 9, 2007. In a letter dated July 9, 2007, Mr. Fielding declined." [4]

Many legal experts point to the contradiction of the White House's claim of executive privilege: If the President has denied any involvement in the dismissal of the attorneys (which he has vociferously done), then how can he deny Congress access to those involved in the firings, since any aspects of such an investigation would not involve communication between the president and his advisers? [5]

Peter Shane, an Ohio State law professor who specializes in separation of powers, told Truthout that "it's critical to maintain a catalog of information at issue" - something the administration has refused to provide. Because of this lack of disclosure, Shane states in an article in The Jurist, "it is not clear that the documents at issue are even properly within the category of materials about which the executive branch can legally claim executive privilege as against another branch of government."

While the potential legal battle is indeed a rarity, Shane explains precedence certainly exists for allowing the civil suit to proceed ... he cites the civil suit brought against the Nixon reelection committee. The professor emphasizes "balancing of the competing institutional interests of the legislative and executive branches" is a core necessity, and this balancing needs to be conducted, if not by Congressional committee, by the courts.

Chairman of the Senate Judiciary Committee Patrick Leahy has also vigorously examined the president's broad use of executive authority: "the complete lack of particularity of the White House claims, including the lack of a privilege log or any specific factual basis for the privilege claims, makes the scope of the claims improper." [6]

In a February 28 letter to Mukasey, House Speaker Nancy Pelosi formally requested the matter of contempt be referred to the US attorney of the District of Columbia, Jeffrey Taylor. She also challenged Mukasey's view of executive privilege:

"There is no authority by which persons may wholly ignore a subpoena and fail to appear as directed because a President unilaterally instructs them to do so. Even if a subpoenaed witness intends to assert a privilege in response to questions, the witness is not at liberty to disregard the subpoena and fail to appear at the required time and place. Surely, your Department would not tolerate that type of action if the witness were subpoenaed to a federal grand jury. Short of a formal assertion of executive privilege, which cannot be made in this case, there is no authority that permits a President to advise anyone to ignore a duly issued congressional subpoena for documents." [7]

However, on March 1, Mukasey denied the request to refer the matter to a federal grand jury, writing to Speaker Pelosi, "The department will not bring the Congressional contempt citations before a grand jury or take any other action to prosecute Mr. Bolten or Ms. Miers."

In response, Speaker Nancy Pelosi said she will bring a civil lawsuit forward against Miers and Bolten. Left with few alternative oversight measures, Congress has decided to move forward with a civil suit.

The Bush administration's rigidity stems from its extremely expansive view of executive authority. Its legal rationale, forged by neoconservatives such as John Yoo and David Addington from the Office of Legal Counsel, tips the balance of power toward the executive branch and creates a paradigm that many legal experts find contrary to precedent and common constitutional interpretation. This is evidenced by, in part, the president's extensive use of signing statements, which, many argue, amount to a line-item veto. [8]

This narrow and uncompromising stance has put Congress in a difficult position, forced to forfeit oversight to a stubborn executive or take more forceful measures.

Pelosi, though she hopes to reach some compromise with the White House, stressed on Thursday the legal battle would continue into the next administration if necessary. [9]

--------

Christopher Kuttruff is a frequent contributor to Truthout.org.

Additional reporting and editing by Matt Renner and Maya Schenwar.

[1] http://thehill.com/leading-the-news/house-finds-white-house-officials-in-contempt-of-congress-2008-02-14.html

[2] http://www.washingtonpost.com/wp-dyn/content/article/2007/03/04/AR2007030400507.html

[3] http://www.mcclatchydc.com/244/story/29698.html

[4] http://judiciary.house.gov/Media/PDFS/ContemptReport071105.pdf

[5] http://jurist.law.pitt.edu/forumy/2007/12/senator-leahy-executive-power-and-rule.php

[6] http://leahy.senate.gov/press/200711/112907a.html

[7] http://www.speaker.gov/blog/?p=1171

[8] http://www.newyorker.com/archive/2006/07/03/060703fa_fact1?currentPage=10

[9] http://rawstory.com/news/2008/Pelosi_Dems_absolutely_will_continue_pursuing_0306.html

Islamophobic Gibberish Taints U.S. Media Discourse on Middle East

Islamophobic Gibberish Taints U.S. Media Discourse on Middle East

By Rami Khouri

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My travels around the United States for the past two weeks, during an intense political moment leading up to two crucial presidential primaries Tuesday, have reinforced my sense of a dark hole in public political life of this country.

At a time when the United States is deeply involved militarily in the Arab-Islamic region of the world, serious, balanced and in-depth analysis or coverage of this region and its people remain elusive.

Other issues that are important for America's well-being, such as climate change, education reform, or immigration, are covered with much more depth, accuracy and balance.

The political campaigns, especially among conservative Republicans, have aggravated an already grim situation. Republican front-runner John McCain in particular wastes no opportunity to rally his supporters with emotional commitments to use every ounce of energy in his body to fight "radical Islamic militants." He'll chase them to the "gates of hell," he thunders. And the happy crowd roars approval -- not quite sure who the radical Islamic militants are, or why the combined powers of the world's mightiest democracies and allied Third World tyrannies have not even chased the rascals out of the mountains of Afghanistan and Pakistan, or suburban London, let alone to hell itself.

The crescendo of McCain's simplistic appeal is always that "I'll never surrender!" and the happy crowd roars again, secure in the knowledge that surrender is not an option -- though still blissfully confused about whom exactly one might surrender to if surrender were ever an option.

Other intellectual hooligans and cultural skinheads -- like Glenn Beck on CNN every night -- reflect a widespread tendency among conservative media commentators and hosts to replace sensibility with emotion, to act tough when that is easier than being smart and realistic.

Fox News panders to similar sentiments, simultaneously affirming a determination to fight bad Muslims and terrorists who threaten the United States, while proudly waving the American flag as an emotional symbol of one's commitment to something -- though what that something is remains unclear.

I suspect that the emotional patriotism and macho militarism that increasingly define the conservative side of the United States -- half the country, probably -- have increasingly come to serve as a substitute for consistent ideology and sound foreign policy. Many scholars, religious leaders, businessmen and -women, and civil society groups increasingly reflect the best of American traditions, by making the effort to grasp that a few criminal Arab-Muslims in the world are dwarfed by the billion-plus law-abiding Muslims and 300 million-plus Arabs who share most American values.

The political and media public space, however, is dominated by images, words and innuendo that overwhelmingly portray Arab-Muslims who are violent, extremist, religiously fanatic and generally alien, and therefore dangerous.

In the past two weeks in the United States, I have kept my eyes and ears open for signs of news media reports about Arab-Muslims that portray them as they really are -- normal people, usually politically placid, occasionally angry and very occasionally violent. Those images and reports are extremely rare, in a way that they are not rare in coverage of other population groups around the world or within the United States.

Sadly, more than six years after 9/11 and five years after the American-led attack on Iraq, the public debate on these issues in the United States -- with only a few exceptions -- remains mired in intellectual mediocrity, factual inaccuracy, analytical selectivity, cultural insensitivity and political values more worthy of a horse barn than a powerful and otherwise decent nation.

Politicians play on the ignorance and fear of their fellow citizens to rouse emotional responses in a desperate quest for votes; commercial media personalities do the same thing in pursuit of larger audience shares, in order to sell more advertising. Both appear irresponsible and uncaring that their simplistic emotionalist and reactionary chauvinism fosters a fresh form of racism that can only generate new tensions and greater conflicts down the road.

There is much to admire this season in the American political system. But we also clearly see much that is repugnant -- where the dark sides of American racism and xenophobia is hideously promoted in speeches -- and this repulsiveness shamelessly hidden by wrapping it in the flag.

We should not fall into the same moral morass that these few racists and hucksters have adopted as their home: This sort of deliberate exploitation of racist fears and ignorance is the sickness of a small minority of Americans living in a strange and desperate world of media and political competitiveness.

We should not brand all Americans as ugly and stupid because a small minority of them choose to be so, just as Americans should not see all Arabs and Muslims as dangerous fanatics because a small minority of them choose to be so.

Rami G. Khouri is editor-at-large of the Daily Star and director of the Issam Fares Institute for Public Policy and International Affairs at the American University of Beirut, in Beirut, Lebanon.

Sordid Details on 'Black Site' on Diego Garcia Island Come to Light

Sordid Details on 'Black Site' on Diego Garcia Island Come to Light

By Liliana Segura

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British Foreign Secretary David Miliband issued an embarrassing apology to members of Parliament last month. Despite "earlier explicit assurances" to the contrary, he admitted, two planes carrying prisoners of the U.S. "war on terror" had landed on the British-owned island of Diego Garcia in 2002 before flying to foreign territory as part of the American extraordinary rendition program.

One flight went on to Guantánamo, one to Morocco. The identities of the detainees remain classified, but one of them has since been set free. According to the CIA, neither was tortured. But -- Miliband would have the public believe -- the CIA didn't bother to tell the British government that its territory was being used as a landing pad for American torture taxis.

Human rights attorneys and a handful of British MPs have long raised the possibility that Diego Garcia, a small island in the Indian Ocean that is home to a massive American military base, has played a role in extraordinary rendition -- and that it is among the United States' "black sites" -- secret CIA-run prisons, the existence of which President Bush himself confirmed in 2006. Even loose-lipped American officials have acknowledged it. As London-based human rights attorney Clive Stafford Smith, director of the legal organization Reprieve (which, over a year ago, unearthed flight logs recording the arrival and departure of a CIA rendition plane at Diego Garcia), wrote in the Guardian last January:

British denials are difficult to square with the words of U.S. Army Gen. Barry McCaffrey ... recently retired from running Southcom, the military command that oversees Guantánamo. He was asked in May 2004 where the thousands of ghost prisoners were being held. "You know, Bagram Air Field, Diego Garcia, Guantánamo, 16 camps throughout Iraq," he replied.

Yet the Blair and Brown administrations continually denied it. Until now.

"We have just been informed by the United States of America about what has actually happened," Prime Minister Gordon Brown told reporters lamely on Feb. 21. "The U.S. has expressed regret for us not knowing about this issue. We share the disappointment that everybody has about what's actually happened."

In the States, the controversy has gotten little press -- in no small part because Americans have known for years that their elected officials are in the kidnap/torture business. But in Britain, where the government has denied any role in their ally's unsavory program, officials are pleading ignorance, offering insipid excuses and, ultimately, trying to reduce proof of their complicity with the U.S. torture/detention machinery to a mere bureaucratic oversight. As Brown tells it, this was simply a case where an "error in the earlier U.S. records search meant that these cases did not come to light."

Nevertheless, the Guardian reported on Monday, "Ministers are coming under growing pressure as officials made it clear they still could not be certain of the extent to which U.S. aircraft made use of British facilities when taking alleged terrorists to prisons where they were likely to be subjected to inhumane treatment."

Regardless of what comes to light, the case of Diego Garcia is uniquely instructive in what it has revealed of American and British collusion in the past. Long before the "war on terror," the story of Diego Garcia was a tragic symbol of imperial aggression.

As the British journalist John Pilger wrote in his book Freedom Next Time, "The story of Diego Garcia is shocking, almost incredible."

A British colony lying midway between Africa and Asia in the Indian Ocean, the island is one of 64 unique coral islands that form the Chagos Archipelago, a phenomenon of natural beauty and once of peace. Newsreaders refer to it in passing: "American B-52 and stealth bombers last night took off from the uninhabited British island of Diego Garcia to bomb Iraq (or Afghanistan)." It is the word "uninhabited" that turns the key on the horror of what was done there. In the 1970s, the Ministry of Defense in London produced this epic lie: "There is nothing in our files about a population and an evacuation."

Pilger tells the awful story of an island that, at the height of the Cold War, was seized by the British, and with the help of the American government, "swept" and "sanitized." This involved taking a population of natives and, retroactively, reclassifying them as "short-term, temporary residents" that were "returned" to the island of Mauritius, about 1,000 miles away. "In fact," writes Pilger, "many islanders traced their ancestry back five generations, as their cemeteries bore witness."

Rendered disposable, the population of 2,000 was forcibly removed and eventually replaced by American troops: Diego Garcia was leased to the United States free of charge following a secret pact between British Prime Minister Harold Wilson and U.S. President Lyndon Johnson. They inhabit a military base that's now one of the world's largest. The name: "Camp Justice."

Years later, the start of the "war on terror" coincided with a number of significant -- and hideously overdue -- developments for the people of Diego Garcia. In 2000, the British high court ruled the forced removal of the islanders illegal. But, reported Pilger, "within hours of the judgment, the Foreign Office announced that it would not be possible for them to return to Diego Garcia because of a 'treaty' with Washington -- in truth, a deal concealed from Parliament and the U.S. Congress."

In 2003, at the same time that extraordinary rendition flights were carrying detainees to be tortured, a second ruling denied compensation for the former residents of Diego Garcia. Adding brutal insult to injury, the Blair government invoked the "royal prerogative" -- special executive powers that belong only to the king or queen -- to dispense with the earlier ruling -- and "a decree was issued that the islanders were banned forever from returning home."

Today, with Diego Garcia in the spotlight, official reports have tried to continue the fiction that the island never belonged to anyone. "Once uninhabited, it was turned into an air base to protect oil supplies to the West during the Cold War," wrote a reporter in the Gulf Times the day after Miliband's apology.

For their part, U.S. officials are taking responsibility for failing to tell the British about the flights in and out of Diego Garcia. "That we found this mistake ourselves, and that we brought it to the attention of the British government, in no way changes or excuses the reality that we were in the wrong," CIA Director Michael Hayden said. "An important part of intelligence work, inherently urgent, complex and uncertain, is to take responsibility for errors and to learn from them."

Perhaps. But if Diego Garcia's role in the war on terror is any indication, neither the U.S. nor the British government have learned from their mistakes. It is only the latest chapter in an epic story of imperial injustice.