Thursday, May 22, 2008

Oil execs defend huge profits before Senate

Oil execs defend huge profits before Senate

'Laws of supply and demand are at work,' Shell chairman explains

Since regular people are scrimping to pay for gasoline to go to work, Sen. Patrick Leahy wanted to make it personal for the men of Big Oil.

How much money did you make last year? the Vermont Democrat asked the top executives of the country's five biggest oil companies. They had been summoned to a Senate hearing to explain the extraordinarily high cost of oil and gasoline and their companies' profits.

Three executives said their compensation was in the millions. Two said they didn't know.

"I wish I made enough money that I didn't know how much I make," replied Leahy with no intention of hiding the sarcasm.

It was a tone that dominated the oil executives' appearance Wednesday before the Judiciary Committee, a panel that Leahy chairs.

It was the second time this year that the executives of Exxon Mobil Corp., Chevron Corp., BP America Inc., ConocoPhillips Co. and Shell Oil Co. had been summoned to testify before Congress. When they came in early April oil cost about $98 a barrel. On Wednesday, it bounded past $134 a barrel for a time and gasoline cost a national average of $3.80 a gallon.

The executives, whose companies reported $36 billion in profits during the first three months of the year, wanted to talk about tight supplies and growing global demand. They said that while the companies made billions of dollars, they also spent billions to find and produce more oil.

But senators complained the executives were trying to come across as "hapless victims" while raking in record profits. They wanted to press the executives about public anguish over paying $60 or more to fill up a car's gas tank.

"Where is the corporate conscience?" Sen. Dick Durbin, D-Ill., asked.

"People we represent are hurting, the companies you represent are profiting," Leahy told the executives. He said there's a "disconnect" between legitimate supply issues and the oil and gasoline prices motorists are seeing.

Sitting shoulder to shoulder in the hearing room, the oilmen said they understood people were hurting, but they tried to blunt the emotion with economic analysis.

"The fundamental laws of supply and demand are at work," said John Hofmeister, chairman of Shell Oil Co., acknowledging it is something the oil industry has been saying for some time and that the explanation may sound "repetitive and uninteresting."

Profits have been huge "in absolute terms," conceded J. Stephen Simon, executive vice president of Exxon Mobil Corp., but they "must be viewed in the context of the massive scale of our industry." And high earnings "in the current up cycle" are needed for investments in the long term, including when profits will be down.

"'Current up cycle,' that's a nice term when people can't afford to go to work" because gasoline is costing so much, replied Leahy with sarcasm.

The exchanges got personal with Leahy wanting to know how much the executives earned last year.

It's $12.5 million in total compensation, said Simon, the Exxon executive.

John Lowe, executive vice president of ConocoPhillips Co., said he didn't recall his total compensations, nor did Peter Robertson, vice chairman of Chevron Corp. Hofmeister said his was "about $2.2 million" and not among the top five salaries at his company's international parent. Robert Malone, chairman of BP America Inc., put his "in excess of $2 million."

The executives said restrictions on U.S. oil and gas development is adding to the tight supplies and that they're worried about being targeted for possible new taxes.

"I urge you to resist these punitive policies," said Hofmeister.

It was not what many senators wanted to hear.

You have "just a litany of complaints that you're all just hapless victims of a system," Sen. Dianne Feinstein, D-Calif., told the executives. "Yet you rack up record profits ... quarter after quarter after quarter."

One senator after another cited the pain that high energy prices are causing farmers, small businesses and people trying to find a way to afford a vacation trip this summer.

"Is there anybody here that has any concerns about what you're doing to this country with the prices that you're charging and the profits that you're taking?" Durbin asked.

The titans of America's oil industry sat quietly for a moment.

"Senator," replied Exxon's Simon, "We have a lot of concern about that. And we're doing all we can to put downward pressure on prices."

Billions of Dollars Unaccounted For in Iraq, Pentagon IG Reports

Billions of Dollars Unaccounted For in Iraq, Pentagon IG Reports

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Want to see a signature worth $320 million? Click here. It belongs to Jack Gardner, an official with the now-defunct Coalition Provisional Authority, who in July 2003 authorized that amount to be transferred to the Iraqi Ministry of Finance for the payment of Iraqi salaries. There are no other records of the transfer, just Mr. Gardner's John Hancock. Now that's power.

The payment is but one example of the process by which U.S. dollars have disappeared without a trace into the confusion (and, yes, corruption) of Iraq reconstruction, confounding Pentagon auditors who are now trying to find out where all that money went... and what exactly, if anything, the U.S. got in return.

One such auditor is Mary L. Ugone, the Pentagon's deputy inspector general for audit. Her testimony this morning before Rep. Henry Waxman's (D-Calif.) Committee on Oversight and Government Reforma new report from Pentagon's Office of Inspector General, which reviewed over 180,000 payments made by the Pentagon to contractors in Iraq, Kuwait, and Egypt, totaling approximately $8.2 billion. Of that, the Pentagon admits that it cannot properly account for how $7.8 billion—"a stunning 95% failure rate in following basic accounting standards," Waxman said in his opening statement. coincided with the release of

The IG report details how $135 million was paid to the governments of the United Kingdom, South Korea, Poland, and others contributing troops to Iraq without any mechanism for determining how it was used. Another $1.8 billion in seized Iraqi assets were also simply given away, without any accountability. IG investigators examined 53 payment invoices. Not one made note of the money's ultimate destination.

Together with a separate Pentagon IG report released last November, which showed the Defense Department could not account for at least $5 billion issued to Iraqi security forces (causing it to lose track of nearly all of the 13,508 rifles, machine guns, and RPGs it provided to Iraqi troops), today's report sets the new total of Pentagon Iraq funds lost or stolen at almost $15 billion.

To date, Pentagon auditors have referred 28 cases to criminal investigators.

Any Change From Bush’s Fundamentalism Will Do

Any Change From Bush’s Fundamentalism Will Do

By Adrian Hamilton

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here is an insidious view going the rounds in Washington that says it won’t make much difference to US foreign policy what new president takes office next year, the basic building blocks of security interests, commitment of troops in Iraq, pro-Israeli policies in the Middle East and the projection of American military power around the globe will all remain.

In fact, according to one highly-spun version being pushed by the State Department at the moment, the present incumbent of the White House, George W Bush, is already preparing the way by adopting a more emollient foreign policy, mending bridges with allies, softening the rhetoric of confrontation and seeking a peace settlement between Israel and Palestine

Utter hogwash. Anybody taken in by this nonsense should read the two major speeches by President Bush on his Middle East “peace tour” over the past week. The first was his address to the Israeli Knesset on the occasion of the state’s 60th anniversary last Thursday. The second was to the World Economic Forum meeting in Sharm el Sheikh in Egypt last Sunday.

The two were clearly intended as bookmarks for a visit planned to establish Bush’s legacy as a would-be peacemaker. Indeed, the US President even used the same terms in each of the two speeches, that the democratic system is the “only fair and just ordering of society and the only way to guarantee the God-given rights of all people”, that the US is the progenitor and guarantor of freedom around the world and that freedom means free markets and open competition.

So far so pretty much expected from an American president given to hyperbole in his last year of office. But there the similarity between the two Bush speeches in the Middle East ends. The address to the Knesset attracted attention because it appeared to contain an implicit criticism of Barack Obama back home for wanting to talk with Iran and Hamas, thus breaching the normal niceties under which a president does not use speeches abroad to pursue domestic politics.

But the real importance of the speech is in what it did not say rather than what it did. An American president, with probably more influence than any American leader since Israel’s inception because of his total commitment to their cause, arrives in the country supposedly to pursue a peace plan and, in his most important public address, does not mention the peace and does not ask the Israeli government to make a single concession to further it. Not a reference or request or hint in the entire address, just a paean of praise for a country which has “forged a free and modern society based on the love of liberty, a passion for justice, and a respect for human dignity”.

The extreme right and orthodox religious parties were delighted. Liberal members of the Knesset, who had hoped for some gesture of pressure by the US president on their Prime Minister to offer concessions to the Palestinian, if only to stop the expansion of settlements, were aghast. It was, said a seasoned, and normally balanced observer, “the most shameful speech I have ever heard since I started reporting”.

Compare that to to Bush’s speech to the Arabs in Egypt three days later. It is a long list of demands on them. They must, he lectured, institute “economic reform” if they are to take their “place in the centre of progress”. “Economic reform must be accompanied by political reform”. “Property rights” must be “protected and risk-taking encouraged”. Primary schools must teach “basic skills, such as reading and math, rather than indoctrinating children with ideologies of hatred”.

And so the liturgy of requirements on these backward people goes on. The Arabs must stand “shoulder to shoulder” with the US in the “great ideological struggle” against “terrorist organisations and their state sponsors”. They must oppose “Hezbollah terrorists, funded by Iran”, while “all nations in the region must stand together in confronting Hamas, which is attempting to undermine efforts at peace with acts of terror and violence”.

The style is the very man, as the French naturalist the Comte de Buffon said. Bush does genuinely believe that democracy is a blessing given by Almighty God to mankind and that the US is its agent and Israel its exemplar. But, as far as the rest of the world is concerned, he has made America appear quite blatantly one-sided, an ignorant and incompetent military mammoth wrecking everything in its ill-considered path.

Back in Washington, John McCain was quick to follow up Bush’s speech by demanding that Obama declare his intentions on talking to Iran and Hamas. And that may prove the tenor of the Republican attacks on the Democrat in the coming months. But outside the narrow confines of Washington, no American should be in any doubt. The world is desperate for a change of tone and course from the US of George Bush. Nothing short of a revolution will do.

Dave Lindorff: Bush Is a War Criminal

Bush Is a War Criminal

By Dave Lindorff

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Surely nothing that President Bush has done in his two wretched terms of office — not the invasion and destruction of Iraq, not the overturning of the five-centuries-old tradition of habeas corpus, not his authorization and encouragement of torture, not his campaign of domestic spying — nothing, can compare in its ugliness as his approval, as commander in chief, of the imprisoning of over 2500 children.

According to the US government’s own figures, that is how many kids 17 years and younger have been held since 2001 as “enemy combatants” — often for over a year, and sometimes for over five years. At least eight of those children, some reportedly as young as 10, were held at Guantanamo. They even had a special camp for them there: Camp Iguana. One of those kids committed suicide at the age of 21, after spending five years in confinement at Guantanamo. (Ironically and tragically, that particular victim of the president’s criminal policy, had been determined by the Pentagon to have been innocent only two weeks before he took his own life, but nobody bothered to tell him he was slated for release and a return home to Afghanistan.)

I say Bush’s behavior is criminal because since 1949, under the Geneva Conventions signed and adopted by the US, and incorporated into US law under the Constitution’s supremacy clause, children under the age of 15 are classed as “protected persons,” and even if captured while fighting against US forces are to be considered victims, not POWs. In 2002, the Bush administration signed an updated version of that treaty, raising the “protected person” age to all those “under 18.”

Treaties don’t mean much to this president, to the vice president, or to the rest of the administration, but they should mean something to the rest of us.

But capturing and imprisoning children isn’t even the worst of this president’s war crimes when it comes to the abuse of the young. Under Bush’s leadership as commander in chief, the US military in Iraq and Afghanistan has been considering any male child in Iraq of age 14 or older to be a potential combatant. They have been treated accordingly — shot by US troops, imprisoned as “enemy combatants,” and subjected to torture.

In the 2004 assault by US Marines on the city of Fallujah, things were even worse. Dexter Filkins, a reporter for the New York Times, reported that before that invasion, some 20,000 Marines encircled the doomed city, which the White House had decided to level because it harbored a bunch of insurgents and had angered the American public by capturing, killing and mutilating the bodies of four mercenaries working for US forces. The residents of the 300,000-population city were warned of the coming all-out attack. Women and children and old people were allowed to flee the city and pass through the cordon of troops. But Filkins reported that males determined to be “of combat age,” which in this case was established as 12 and up, were barred from leaving, and sent back into the city to await their fate. Young boys were ripped from their screaming mothers and sent trudging back to the city to face death.

In the ensuing slaughter, as the US dumped bombs, napalm, phosphorus, anti-personnel fragmentation weapons and an unimaginable quantity of machine gun and small arms fire on the city, it is clear that many of those young boys died.

This was a triple war crime. First of all, it was a case of collective punishment — a practice popular with the Nazis in World War II, and barred by the Geneva Conventions. The international laws of war also guarantees the right of surrender, so those men and boys who tried to leave, even if suspected of being enemy fighters, should have been allowed to surrender and be held as captives until their loyalties could be established. The boys, meanwhile, were “protected persons” who were by law to be treated as victims of war, and protected from harm.

Instead they were treated as the enemy, to be destroyed.

For these crimes, the president should today be impeached by the Congress and then tried as a war criminal.

After watching this Congress cower from its responsibility to defend the Constitution, I have little hope of that happening. But I do harbor the hope that once Bush has left office, some prosecutor in another country — perhaps Spain, or Canada or Germany — will use the doctrine of universal jurisdiction to indict him for war crimes, and, should he leave the country for some lucrative speaking engagement, arrest him, the way former dictator Augusto Pinochet was arrested by a Spanish prosecutor on a visit to the UK.

For his abuse, imprisonment and killing of children, this president should stand trial for war crimes.

Dave Lindorff’s most recent book is “The Case for Impeachment” (St. Martin’s Press, 2006). His work is available at

Bush's 'War Crimes' & Misdemeanors

Bush's 'War Crimes' & Misdemeanors

By Robert Parry

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Facing a tough reelection fight in 2004, George W. Bush expressed outrage over leaked photos showing U.S. military police at Iraq’s Abu Ghraib prison abusing detainees, who were paraded naked before female guards, threatened by attack dogs, chained in “stress positions” and forced to wear ladies underpants on their heads.

President Bush assured the American people that he “shared a deep disgust that those prisoners were treated the way they were treated.” Other administration officials pinned the blame on a “few bad apples” and dismissed the prison guards’ claim that they were told to “soften up” the detainees for interrogation.

Now, a report by the Justice Department’s Inspector General reveals that months before those abuses at Abu Ghraib, nearly identical tactics were used against “war on terror” detainees at Guantanamo Bay, Cuba, and at CIA prisons – and that FBI complaints about the tactics went up the chain of command back to Washington.

FBI agents at Guantanamo even opened a file that they labeled “war crimes” to document the systematic violations of the Geneva Conventions and laws against torture that they witnessed – before being told by superiors to close the file.

According to the Inspector General’s report, the FBI protests reached the White House but went unheeded. Instead, the prisoner abuses spread to Iraq where the Abu Ghraib prison was “Gitmo-ized” with the same harsh and bizarre tactics applied to Iraqi detainees.

So, the new Inspector General’s report adds to the growing body of evidence that – in the months before Election 2004 – Bush only feigned shock about what was being done to detainees in American custody.

The evidence is now overwhelming that Bush knew of – and approved of – those violations of the rules of war and basic human decency, that the “war crimes” catalogued by the FBI agents could be traced to him.

In April 2008, ABC News reported, citing unnamed sources, that during the early days of the “war on terror,” senior Bush aides met in what was called the Principals Committee to calibrate the level of harsh techniques that would be used against detainees.

At the time, the Principals Committee included Vice President Dick Cheney, National Security Adviser Condoleezza Rice, Defense Secretary Donald Rumsfeld, Secretary of State Colin Powell, CIA Director George Tenet and Attorney General John Ashcroft.

“The high-level discussions about these ‘enhanced interrogation techniques’ were so detailed, these sources said, some of the interrogation sessions were almost choreographed – down to the number of times CIA agents could use a specific tactic,” ABC News reported, adding:

“These top advisers signed off on how the CIA would interrogate top al-Qaeda suspects – whether they would be slapped, pushed, deprived of sleep or subjected to simulated drowning, called waterboarding, sources told ABC News.”

Asked about his subordinates setting these interrogation rules, Bush told ABC News correspondent Martha Raddatz that “yes, I'm aware our national security team met on this issue. And I approved." [ABC News, April 11, 2008]

Moral Leader?

Yet, in 2004, by dismissing the grotesque scenes at Abu Ghraib as an aberration, Bush portrayed himself as a moral leader who was furious that some low-level American soldiers would misbehave in such a fashion.

After the photos became public, Army Sgt. Sam Provance was the only uniformed military intelligence officer at Abu Ghraib to support the guards’ claim that the prisoner abuse was part of the “alternative interrogation techniques” that had made their way from Guantanamo to Abu Ghraib.

Provance, however, was punished for his candor and pushed out of the U.S. military. The Bush administration then went ahead and pinned the blame on the MPs. [See’s “The Ghosts of Abu Ghraib.”]

Eventually, 11 enlisted soldiers were convicted in courts martial. Cpl. Charles Graner Jr. received the harshest sentence – 10 years in prison – while Lynndie England, a 22-year-old single mother who was photographed holding an Iraqi on a leash and pointing at a detainee’s penis, was sentenced to three years in prison.

Protected from the scandal’s fallout, Bush was rewarded with a second term in the White House. Later, he began to treat the Abu Ghraib case like some freak accident that the media had blown out of proportion.

At a press conference on May 25, 2006, Bush complained, “We’ve been paying for that for a long period of time.”

However, it’s now clear the President didn’t pay much of a personal price at all. The more complete record now available indicates that Bush was a knowledgeable participant in the sadistic treatment of detainees, not an innocent bystander.

Indeed, on Feb. 7, 2002, Bush signed the key memo that cleared the way for the abuses, asserting that the Geneva Conventions’ prohibitions against the degrading treatment of prisoners did not apply to “unlawful combatants,” including al-Qaeda and the Taliban, the militant Islamists who had ruled Afghanistan at the time of the 9/11 attacks.

Many casual readers missed the import of Bush’s phrasing, which stressed that captives would be treated “humanely and, to the extent appropriate and consistent with military necessity, in a manner consistent with the principles of Geneva.”

The operative phrase in the memo turned out to be “to the extent appropriate and consistent with military necessity.” In the Bush administration’s view, that was a loophole you could drive a truck full of abusive tactics through. [For more on Bush’s theories of presidential power, see our book, Neck Deep.]

Fresh Evidence

The Inspector General’s report, released May 20, 2008, also provides fresh evidence that senior Bush aides signed off on the harsh treatment of detainees.

In spring 2002, when FBI agents objected to the treatment of badly wounded al-Qaeda captive Abu Zubaydah – what one agent called “borderline torture” – they were assured by CIA personnel “that the procedures being used on Zubaydah had been approved ‘at the highest levels,’” the Inspector General’s report said.

But one of the FBI agents, called “Thomas” in the report, still passed on his concerns to his superior, FBI Counterterrorism Assistant Director Pasquale D'Amuro, who soon pulled the FBI agents out of the interrogation.

D’Amuro, in turn, took the issue of Zubaydah’s interrogation to FBI Director Robert Mueller; Michael Chertoff, then Assistant Attorney General in charge of the Justice Department’s Criminal Division; and other senior department officials, the report said.

During a meeting with his superiors in summer 2002, D’Amuro said he learned that the CIA had obtained a legal opinion from the Justice Department opening the door for the harsh interrogations.

That was an apparent reference to memos written by John Yoo of the Justice Department’s Office of Legal Counsel, claiming that the President’s commander-in-chief authority gave Bush the right to ignore laws if he deemed that necessary to protect the nation.

“After his meeting at Chertoff's office, [D’Amuro] met with Director Mueller and recommended that the FBI not get involved in interviews in which aggressive interrogation techniques were being used,” the Inspector General’s report said.

“He stated that his exact words to Mueller were ‘we don't do that,’ and that someday the FBI would be called to testify and he wanted to be able to say that the FBI did not participate in this type of activity.

“D'Amuro said that the Director agreed with his recommendation that the FBI should not participate in interviews in which these techniques were used.”

D’Amuro said he objected to the harsh techniques because they were less effective in gleaning reliable information; complicated later prosecutions; violated moral standards; and “helped al-Qaeda in spreading negative views of the United States.”

Up the Ladder

These FBI concerns made there way up the ladder to Bush’s National Security Council.

Mueller’s chief of staff Daniel Levin said he attended a meeting at the NSC at which CIA techniques were discussed and an attorney from the Office of Legal Counsel [OLC] defended their legality.

“Levin stated that in connection with this meeting, or immediately after it, FBI Director Mueller decided that FBI agents would not participate in interrogations involving techniques the FBI did not normally use in the United States, even though OLC had determined such techniques were legal,” the Inspector General’s report said.

FBI agents also crossed swords with Pentagon interrogators over similar abusive techniques instituted at Guantanamo, especially the harsh questioning of suspected 20th hijacker Mohammed al-Qahtani between Nov. 23, 2002, and Jan. 15, 2003.

During this period, military interrogators tied al-Qahtani to a dog leash and made him perform dog tricks; repeatedly poured water over his head; put him in painful stress positions; questioned him for periods of 20 hours straight; stripped him naked in front of a woman; held him down while a female interrogator straddled him; called his mother and sister whores; accused him of homosexual tendencies; made him dance with a male interrogator; ordered him to pray to an idol shrine; and subjected him to extreme temperatures.

At one point in December 2002, al-Qahtani was taken to a hospital suffering from low blood pressure and low body core temperature, what one FBI agent termed hypothermia.

The FBI’s objections to al-Qahtani’s interrogation also were brought to the attention of senior officials in Washington, according to the Inspector General’s report.

David Nahmias, a counsel in the Justice Department’s Criminal Division, told the IG that he was “fairly confident” that department officials raised the al-Qahtani issue at a meeting of the Principals Committee.

Nahmias also said he believed Attorney General Ashcroft spoke with someone at the NSC, mostly likely NSC adviser Rice, about the FBI concerns regarding al-Qahtani.

“When asked if anything ever happened as a result of these meetings, Nahmias said that DOJ officials were continually frustrated by their inability to get any changes or make progress with regard to the al-Qahtani matter,” the report said.

Ashcroft, who resigned in November 2004 shortly after Bush won a second term, declined to be interviewed by the Inspector General.

Lack of Action

But the reason for a lack of action on the FBI complaints is now more obvious.

The FBI’s evidence of “war crimes” went up the chain of command, all the way to the White House, the NSC and the Principals Committee – precisely where the abusive policies had been developed in the first place.

Before senior FBI officials grasped this high-level support for the mistreatment of detainees, some FBI agents were instructed to compile the evidence for a “war crimes” file at Guantanamo.

“At some point in 2003, however,” the Inspector General’s report said, the FBI agents at Guantanamo “received instructions not to maintain a separate ‘war crimes’ file, … that investigating detainee allegations of abuse was not the FBI's mission.”

When the ugly reality of how the United States was treating detainees finally surfaced in spring 2004 with the Abu Ghraib photos, Bush and his top aides pretended that they were innocent parties as shocked as everyone else.

By laying the blame off on a “few bad apples,” Bush managed to get through the November 2004 election relatively unscathed.

And now that the truth is finally coming to the surface, it appears to be too late for him to be held accountable for “war crimes” and other abuses of his presidential powers.

Some members of the Democratic-controlled Congress have expressed outrage over the latest disclosures and want hearings.

But – if recent history suggests anything – it is that the Bush administration will brush aside congressional inquiries, and the Democrats, who long ago took impeachment off the table, will surrender once again.

Torture Turf Wars

Torture Turf Wars

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On Tuesday, the Department of Justice (DOJ) Inspector General released a report, three-and-a-half years in the making, that offers "the clearest and most definitive account to date of the key tactics used by the government against suspected terrorists." These methods include "use of strobe lights in conjunction with loud rock music, twisting of thumbs backward, and exposure of detainees to extreme temperatures, threatening dogs, pornography and sexual taunting." On the same day, a former Guantanamo Bay detainee, German resident Murat Kurnaz, told Congress he was tortured while held by the U.S. military. Kurnaz said he underwent "water treatment," similar to the more notorious practice of waterboarding. "There was a bucket of water. And they stick my head in it and at the same time, punch me into my stomach," he said. Though the CIA has admitted waterboarding three detainees, it is unclear how many more suffered "water treatment." Yet Washington insiders seem ready to ignore this latest piece of evidence about the Bush torture policy. "Barely half a dozen lawmakers came to listen to the former detainee, and most were unable to remember his name, with one even calling him 'Mr. Karzai.," AFP reported. Following a pattern of ignoring new accounts of torture, the White House press corps did not ask Press Secretary Dana Perino about the DOJ report or Kurnaz's testimony until the last question of Tuesday's briefing. She replied that she had not seen it yet; no one followed up to ask her about it the next day.

TRENCH WARFARE: The DOJ report details the "trench warfare" between the FBI and the military over harsh interrogations, which FBI agents objected to, going "so far as to collect allegations of abuse in what they labeled a 'war crimes file.'" "The report says that the F.B.I. agents took their concerns to higher-ups, but that their concerns often fell on deaf ears: officials at senior levels at the F.B.I., the Justice Department, the Defense Department and the National Security Council were all made aware of the F.B.I. agents’ complaints, but little appears to have been done as a result." "Beyond any doubt, what they are doing (and I don't know the extent of it) would be unlawful were these enemy prisoners of war," wrote Spike Bowman, then head of national security law unit at FBI, in an e-mail to top FBI officials in July 2003. The DOJ report concludes that "the FBI should be credited for its conduct and professionalism" in interrogations, but it also finds that "the DOD [Department of Defense] made the decisions regarding which interrogation techniques could be used" -- regardless of FBI complaints. Indeed, though the FBI decided not to participate in any abusive interrogations in 2003, "the bureau appears to have done nothing to end the abuse. It certainly never told Congress or the American people."

The report's account of the interrogation of Abu Zubaydah, an al Qaeda suspect, provides a window into the fight between the CIA and the FBI and demonstrates the White House's approval of torture. In 2002, the FBI used "relationship-building techniques with Zubaydah and succeeded in getting Zubaydah to admit his identity." Later, he "identified a photograph of Khalid Sheik Muhammad," the mastermind of the 9/11 attacks, to his FBI interrogator. Soon, however, the CIA stepped in, arguing it "needed to diminish his capacity to resist." The CIA's specific methods are redacted from the DOJ report, but the FBI agent "raised objections to the techniques to the CIA and told the CIA it was 'borderline torture'" (a former CIA official testified last December that the CIA had waterboarded Zubaydah). When a more senior-level FBI official raised these objections with Michael Chertoff, then Assistant Attorney General for the Criminal Division, and other DOJ officials, he learned that the CIA had obtained "a legal opinion from DOJ that certain techniques could legally be used, including [redacted]." Chertoff "made it clear that the CIA had requested the legal opinion from Attorney General Ashcroft." Thus the account of Zubaydah's interrogation both proves the effectiveness of the safe and legal rapport-building method of interrogation and, more importantly, indicates that the CIA's "borderline torture" techniques were explicitly condoned by a DOJ legal opinion.

WHITE HOUSE OFFICIALS DISMISS FBI COMPLAINTS: Indeed, the Bush administration seems to have ignored FBI complaints completely. "The report said several senior Justice Department Criminal Division officials raised concerns with the National Security Council in 2003 about the military's treatment of detainees but saw no changes as a result." As was recently revealed, this same council -- which included Vice President Cheney, Condoleezza Rice, Donald Rumsfeld, Colin Powell, George Tenet, and John Ashcroft -- specifically choreographed abusive interrogations that included slapping, pushing, sleep deprivation, and waterboarding. The DOJ report "reveals that top government officials in the Defense Department, CIA and even as high as the White House turned a blind eye to torture and abuse and failed to act aggressively to end it," said Anthony Romero, Executive Director of the ACLU. Despite administration efforts to dismiss the report as "nothing new," the Washington Post's Dan Froomkin emphasized the importance of these revelations: "[K]nowing that the nation's top law-enforcement officials put senior White House aides on notice that the interrogation tactics they had approved were potentially illegal adds a key element to the portrait of complicity in what could someday be prosecuted as violations of U.S. torture statutes or even war crimes."

Where Are Those Iranian Weapons in Iraq?

Where Are Those Iranian Weapons in Iraq?

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The U.S. military command in Iraq continues to talk about an alleged pipeline of Iranian weapons to Iraqi Shiites opposing the U.S. occupation, implying that they have become dependent on Iran for indirect-fire weapons and rocket-propelled grenades (RPGs).

But U.S. officials have failed thus far to provide evidence that would support that claim, and a long-delayed U.S. military report on Iranian arms is unlikely to offer any data on what proportion of the weapons in the hands of Shiite fighters are from Iran and what proportion comes from purchases on the open market.

When Maj. Gen. Kevin Bergner was asked that question at a briefing May 8, he did not answer it directly. Instead Bergner reverted to a standard U.S. military line that these groups "could not do what they're doing without the support of foreign support [sic]." Then he defined "foreign support" to include training and funding as well as weapons, implicitly conceding that he did not have much of a case based on weapons alone.

Bergner's refusal to address that question reflects a fundamental problem with the U.S. claims about Iranian weapons in Iraq: if there are indeed any Iranian rockets and mortars, and RPGs in the Mahdi Army's arsenal of stand-off weapons, they represent an insignificant part of it.

Reports by the U.S. command in Iraq over the past 15 months cited only a handful of Iranian weapons out of hundreds counted in caches found in Shiite areas. Nearly 700 mortars and rockets were reported by specific caliber size, along with a handful of RPGs, in nearly two dozen caches. Of that total, only four rockets were reported as being of Iranian origin, and another 15 were listed as possibly being Iranian.

Although those reports do not represent all the Mahdi Army caches found, they provide further evidence of the relative importance of Iranian rockets, mortars and RPGs in the Mahdi Army arsenal. That is because U.S. military officials are so eager to publicise any discovery of an Iranian-made weapon system that they would exploit any opportunity available to do so.

The U.S. command has gone so far as to claim that it had found "four Iranian hand grenades" -- but they were in a cache of weapons found in an al Qaeda area.

Based on weapons caches discovered over the past 15 months, the Mahdi Army has relied overwhelmingly on four types of heavy weapons: 60mm and 120mm mortars, 107mm rocket, and 57mm anti-tank missile.

Those are essentially the same mortars and rockets that have turned up in al Qaeda and Sunni insurgent weapons caches, suggesting that both groups have obtained their heavier weapons from the international arms market. In fact, 60mm and 120mm mortars were used by Sunni guerrillas in the very early months of the war against U.S. occupation troops.

A U.S. explosives expert, Maj. Marty Weber, confirmed in April 2007 that most 107mm rockets found in Iraq were Chinese-made. He claimed that Iran had repainted Chinese 60mm and 107mm rockets them and sold them on the "open market".

However, Chinese, Yugoslav and Pakistani 107mm rockets have also been the weapon of choice of Taliban guerrillas in Afghanistan, according to U.S. military officers there.

The U.S. military has refrained from making any charges against Iran over the 107mm rockets found in Iraq, perhaps because it would support the conclusion that the Mahdi Army was buying weapons on the international market rather than obtaining them from the Iranian Revolutionary Guard Corps.

U.S. officials tried to capitalise on the increased mortar and rocket attacks on the Green Zone and U.S. military headquarters last year to argue that they were the result of a rising tide of Iranian supply of such stand-off weapons -- particularly 240mm rockets -- to what the U.S. command calls "special groups" of Shiite militiamen.

One U.S. official, who insisted on being identified only as a "senior official", told this writer in mid-September 2007 that rockets and mortars provided by Iran since the beginning of that year -- and especially 240 mm rockets -- were doing much greater damage because of their greater accuracy and power compared with the older Katyusha rockets -- mostly from Iraqi stocks -- that had been employed in attacking U.S. bases and the Green Zone in previous years.

But evidence from the U.S. command itself contradicts that dramatic narrative of a bold, new Iranian intervention in the war. A Multi-National Force - Iraq press release dated Jun. 1, 2007 reported that a cache of weapons had been found in an area from which Mahdi Army troops had fired rockets at the Green Zone. It did not claim any Iranian rockets or mortars in the cache but only 20 107mm rocket warheads, three fully assembled 107mm rockets and one 60mm mortar.

No 240mm rocket has been reported found in a Mahdi Army weapons cache over the past year, but a single warhead for a 240mm rocket was reported to have been found in Basra Apr. 19. No official claim has been made that it was manufactured in Iran, however.

After a rocket fired at Camp Victory on Sep. 11, 2007 killed one and wounded 11 others, U.S. officials told the news media that the command spokesman, Gen. Bergner, would display fragments of a 240mm rocket -- complete with Iranian markings -- at his next press briefing in order to "show the link between the Iranian weapons and the damage they are doing".

But Bergner admitted to the media that there were no discernible Iranian markings on the fragment, and that a number of countries manufacture 240mm rockets. He was able to assert only that ordnance experts "assess it is of [sic] consistent with the rockets of Iranian origin we have seen used in other attacks."

That was a very weak claim, because Bergner had not provided any evidence to the media that previous attacks had involved Iranian 240mm rockets either.

When the military headquarters at Camp Victory was hit by rocket fire last Oct. 12, officials admitted that it was 107mm rockets, not 240mm rockets that had been used.

Gen. David Petraeus insisted last October that there is "absolutely no question" that Iran is providing RPG-29 rocket-propelled grenade launchers to Iraqi Shiite groups. But RPG-29s are manufactured by Russia, not Iran. Syria was known to have purchased large quantities of the RPG-29 in 1999-2000. Both the Israeli newspaper Haaretz and the Beirut-based defence monthly Defense 21 have confirmed that the RPG-29s used by Hezbollah in 2006 were Russian-made weapons obtained via Syria.

In weapons caches reported from Shiite locations, not a single RPG-29 has been identified. Of the 160 RPG launchers reported in Mahdi Army caches, along with 800 RPG missiles, none were identified as Iranian, although some were identified as being Soviet-made. Only 11 were reported to be RPG-7s -- a type of launcher that is made by Russia and China as well as Iran and used by 40 countries around the world.

*Gareth Porter is an historian and national security policy analyst. The paperback edition of his latest book, "Perils of Dominance: Imbalance of Power and the Road to War in Vietnam", was published in 2006.

Slavery Today: A Clear and Present Danger

Slavery Today: A Clear and Present Danger

Matt Renner

Go To Original

Slavery never ended in the United States; it continues here and across the globe, facilitated by globalization, corruption and greed. There are more people enslaved today - controlled by violence and forced to work without pay - than at any time in human history.

Experts put the number of slaves at 27 million worldwide. These men and women work across many sectors of the global economy, raking in profits for the criminals who hold them against their will. The US State Department estimates that 17,500 slaves are brought into the United States every year. An estimated 50,000 slaves are forced to work as prostitutes, farm workers and domestic servants in the US.

Republican presidential nominee John McCain recently mentioned domestic slavery during a stump speech. He pledged to establish a task force to coordinate various federal law enforcement agencies to target human trafficking - the process of smuggling slaves between countries. However, the Think Progress blog pointed out that such an agency already exists. Shortly after the speech, Democratic National Committee spokesperson Damien LaVera pointed out in an email that McCain had complained about and voted against a $200,000 earmark intended to fund a conference on human trafficking in 2001. "Once again McCain's earmark obsession conflicts with his campaign rhetoric," Lavera wrote.

McCain's campaign failed to return repeated calls for comment on the issue.

This was the first mention of modern slavery on the campaign trail. Little attention has been paid to the issue by the media, with stories about isolated incidents of slavery in other countries occasionally making headlines. However, international activists and scholars have been leading a movement to eradicate global slavery.

Free The Slaves, an organization founded by acclaimed human rights activist and scholar Kevin Bales, works on the front lines of slavery to find, rescue and rehabilitate slaves.

Bales, a professor of sociology at Roehampton University in London, is recognized as the leading expert on modern slavery.

Bales estimates that ending global slavery would cost between $10 billion and $15 billion, roughly ten percent of the amount the US government is sending out in tax rebates. "It would be interesting if we held a national referendum and asked people if they'd be willing to take ten percent of their stimulus check and use it to eradicate slavery across the globe," he said to Truthout, adding "I'd be willing to take $540 instead of $600."

In his latest book, "Ending Slavery: How We Free Today's Slaves," Bales describes the horrifying reality of modern slavery and proposes solutions. The book is a comprehensive examination of the current state of modern slavery, its causes and effects, its ties to global industry and business, and the activists who risk their lives to bring people out of slavery.

From young boys forced to endlessly weave intricate wool rugs in India to teens who are beaten and starved on cocoa plantations in the Ivory Coast, to a woman from Cameroon who was lured into forced domestic slavery by a suburban couple living outside Washington, DC, the stories in the book are heartbreaking.

In a section of the book titled "A Wake-Up Call in San Diego," Bales recounts the story of a sex-slavery operation in the small town of Oceanside, California, just north of San Diego, where Riena, a 15-year-old Mexican girl was forced to have sex with scores of migrant farmworkers on a daily basis. On the outskirts of the strawberry fields where the migrants worked, "pimps pushed paths through the tall reeds, and hollowed out small 'caves' along the paths. There on the ground, with scraps of clothing, bits of blankets, used condoms, spit, empty bottles and trash, teenagers were on their backs, forced to have sex with the two hundred men a day who prowled these paths."

Riena had been smuggled into the US and held captive by her pimp, who threatened to kill her infant daughter in Mexico if she ran away. After seven months, Riena tried to escape despite the threat. She was caught and brutally beaten. On her second attempt, she managed to reach the local police station.

This story had a happy ending. Mexican officials rescued Riena's baby. Two of the three brothers at the top of the organized crime syndicate running the trafficking operation were imprisoned, albeit on lesser charges.

The media exposure surrounding Riena's story and others like it forced San Diego officials to come to terms with the fact that slavery existed within their city. A community-based solution to address these types of situations was hammered out and procedures were established to create real cooperation between police, social services, and state and federal agencies.

With this and many other stories, Bales demonstrates that the political will to end slavery and enforce existing laws can only be created with public awareness. "Until slavery reaches the public agenda, slaves will continue to suffer," he writes.

"The key thing we need is leadership. There are roughly the same number of people trafficked into the United States every year as there are murders committed. Every single police department in the country has a homicide division, but there are only five that have units which specialize in trafficking," Bales told Truthout.

Citigroup's `Last Roman' CDO Spotlights Banks' Enron Accounting

Citigroup's ‘Last Roman' CDO Spotlights Banks' Enron Accounting

By Mark Pittman

Go To Original

Citigroup Inc. created a $2.5 billion mortgage-backed security called Bonifacius Ltd. in August as capital markets seized up and panic swept Wall Street.

The issue took the name of a general, called by historian Edward Gibbon the ‘‘last of the Romans,'' who fought and died for a fading empire. The bonds were created from subprime home loans as demand evaporated. Within six months, Bonifacius collapsed as homeowners fell behind on their payments in record numbers.

Citigroup, Merrill Lynch & Co., UBS AG and other banks created more than $1.5 trillion of collateralized debt obligations like Bonifacius, keeping an undisclosed amount in off-balance-sheet funds called variable interest entities. Bonifacius and $190 billion of similar securities have gone bust since October, spotlighting loopholes the Financial Accounting Standards Board failed to close when Enron Corp. went bankrupt in 2001 after disclosing investments that weren't on its books.

‘‘They never got the real problem fixed after Enron,'' said Lynn Turner, the chief accountant for the Securities and Exchange Commission when the Enron scandal was exposed. ‘‘When people find out how little FASB did, they're going to be shocked. FASB needs to be taken out behind the woodshed and given a good whoopin'.''

Variable interest entities, or VIEs, are a post-Enron version of special-purpose vehicles, the term for the investments Citigroup created that led to the demise of the energy-trading company. The lack of disclosure about VIEs is adding to concern among investors after financial institutions reported $382.6 billion of writedowns and losses from subprime-contaminated debt since the start of 2007.

VIE Rules

A bank can set up a VIE as long as its partners stand to gain or lose the most from projected changes in the value of the underlying securities. Banks aren't required to disclose the assets they sell to their own VIEs, what price was paid, or whether they have lost value, making it harder for investors to determine when the subprime crisis will end.

Citigroup spokeswoman Danielle Romero-Apsilos declined to say whether Bonifacius was put in a VIE. The New York-based bank also didn't say if any losses from the security were included in the $7.4 billion it wrote down from the ventures since September.

Citigroup shares fell 61 percent from last year's high, eliminating about $154 billion of market value as investors struggled to figure out the amount of the company's losses from subprime-linked securities. The company's losses and writedowns total $42.9 billion, more than any other bank, according to data compiled by Bloomberg.

Bank Losses

The combination of the 7.7 percent decline in existing U.S. home prices, the highest level of mortgage delinquencies since 1984 and lack of disclosure about what banks may be liable for is stoking concern that banks will be required to take assets from VIEs back on their financial statements, resulting in new losses.

Treasury Secretary Henry Paulson pointed to the dangers posed by off-balance-sheet entities in a speech May 13 at the National Press Club in Washington, D.C. ‘‘Existing capital rules may have also failed to mitigate, or even amplified, the stress associated with these vehicles,'' said Paulson, the former chief executive officer of Goldman Sachs Group Inc., Wall Street's most profitable securities firm.

Paul Volcker, who was chairman of the Federal Reserve from 1979 to 1987, said in testimony to the Joint Economic Committee of Congress the next day that regulators should have stopped banks. ‘‘Why were they permitted to set up those off-balance- sheet entities that may or may not have had some formal relationship with the banks?'' he said.

The SEC and state attorneys general in New York, Connecticut and Ohio have said they are investigating how banks and dealers created and sold investments linked to subprime mortgages.

FASB Changes

FASB, the group that sets U.S. accounting rules, is drafting changes that would prevent banks from using off-balance-sheet treatment for VIEs if they retain the power to buy or sell assets for the venture, said Russell Golden, the group's director of technical application and implementation.

‘‘Do the investment banks have the power to decide what assets go into the entity? Or who they sell it to?'' Golden said in an interview from his office in Norwalk, Connecticut. ‘‘That additional step is going to put more of the assets and liabilities on their balance sheets.''

FASB's staff wants to present its board with the recommendations on June 4 and seek comments from banks, brokers and other market participants, Golden said. The board may approve the new rules by the end of the year, he said.

Moving assets off balance sheets allows banks to make investments in loans and securities without requiring them to increase reserves or capital levels to protect depositors against losses.

‘They're the Same'

‘‘When the dealers set these things up, they're usually a vehicle of convenience,'' said Christopher Whalen, managing director of Hawthorne, California-based Institutional Risk Analytics, which assesses credit for banks. ‘‘They're supposed to be separate from the bank, but the economic reality is that they're the same.''

VIEs are under increasing scrutiny because they contain CDOs, or bonds largely backed by subprime debt that are repackaged into new securities with credit ratings as high as AAA, according to S&P. More than 180 CDOs with $192 billion of assets have failed since October, data compiled by S&P and Bloomberg show. Only $5.1 billion of CDOs collapsed between 2003 and mid-2006, S&P said.

The biggest underwriters of defaulted CDOs are New York- based Merrill, with $39 billion, followed by Citigroup at $35.1 billion and UBS in Zurich with $20.1 billion, according to S&P and Bloomberg data. They sold almost half the CDOs that were either in default or in so-called acceleration mode as of May 12, the data show.

Merrill spokesman Mark Herr and UBS spokesman Doug Morris declined to comment.

Acceleration occurs after a default when CDO managers are required to pay out the most senior debt first, leaving investors in lower-rated pieces with losses.

Bernoulli, Diogenese

Trustees in 30 CDOs created by Citigroup filed events of default or acceleration notices, one of which is Bonifacius, according to S&P and Bloomberg data. Almost all of the collateral backing Bonifacius was rated A or above by S&P.

Enron used SPVs with names like ‘‘JEDI'' and ‘‘Chewie,'' based on ‘‘Star Wars'' characters, to book loans as trading revenue, according to a report by Enron Bankruptcy Court examiner Neal Batson.

Like the SPVs, the securities going into VIEs have colorful names. One CDO created by Merrill was named Bernoulli, after the physicist who founded fluid mechanics. A Deutsche Bank AG CDO was called Diogenes for the Greek beggar-philosopher who carried a lamp to look for an honest man.


FASB restricted the use of off-balance-sheet accounting in the wake of Enron, once the seventh-biggest U.S. company by sales. More than 5,000 jobs and $1 billion in employee retirement funds were wiped out when Enron plunged into bankruptcy after widespread accounting fraud was revealed.

Investors sued to recover more than $40 billion in losses. Before, companies needed only to sell 3 percent of the equity in a unit to take it off the books. After, FASB wrote rules that permitted such transactions only if banks had minimal discretion over the activities of the ventures and brought them back on their books if they were obligated to absorb a majority of expected losses.

One way banks comply with the rules is by placing the AAA, or ‘‘super-senior,'' pieces of CDOs into VIEs and selling the riskiest portions to investors. The AAA portions are typically the largest part of a CDO.

The strategy is backfiring because mortgage defaults are rising so fast -- home foreclosure rates in the U.S. increased 65 percent in April from a year earlier, according to RealtyTrac Inc. --that banks can no longer argue they have the least at stake, forcing them to bring failing assets of VIEs back on their books.

UBS Writedowns

Half the $38 billion in writedowns taken by UBS, the biggest European bank, came from its holdings of super-senior pieces of CDOs, the firm said in an April 18 report to shareholders. The bank began holding the pieces in 2005 because it viewed them ‘‘as an attractive source of profit,'' UBS said in the report.

The securities behind Bonifacius consist of 288 prime and subprime mortgage bonds, other CDOs and Alt/A debt, which is based on mortgages that straddle prime and subprime.

Bonifacius, which means ‘‘good fate'' in Latin, is divided into nine pieces. The largest, which was originally rated AAA, has since been cut to Baa3 at Moody's and to BBB- by S&P, the lowest levels of investment grade.

Banks are betting that markets will improve enough to allow the securities to be sold at a higher price, according to Stanley Sporkin, a former federal judge who helped write the federal 1977 Foreign Corrupt Practices Act when he was the head of the enforcement division at the SEC.

‘‘Not every off-balance-sheet activity is wrong,'' Sporkin said. ‘‘But there could be pockets of activity to hide things that later explode.''

JPMorgan Swap Deals Spur Probe as Default Stalks Alabama County

JPMorgan Swap Deals Spur Probe as Default Stalks Alabama County

By William Selway and Martin Z. Braun

Go To Original

As nighttime temperatures plunged in Birmingham, Alabama, last October, Dora Bonner had a choice: either pay the gas bill so she could heat the home she shares with four grandchildren, or send the Birmingham Water Works a $250 check for her water and sewer bill.

Bonner, who is 73 and lives on Social Security, decided to keep the house from freezing.

‘‘I couldn't afford the water, so they shut it off,'' she says.

Bonner's sewer bills have risen more than fourfold in the past decade. So have those of others in Jefferson County, which has 659,000 residents and includes Birmingham, the state's largest city.

What's threatening to increase them even more isn't the high cost of treating waste; it's the way county officials chose to finance the $3.2 billion in debt they took on to build a new sewer system. The county relied on advice from a bank, JPMorgan Chase & Co., to arrange its funding, rather than use competitive bidding.

Like homeowners who took out mortgages they couldn't afford and didn't understand, Jefferson County officials rejected fixed- rate debt and borrowed instead at rates that varied with the market.

The county paid banks $120 million in fees -- six times the prevailing rate -- for $5.8 billion in interest-rate swaps. That was supposed to protect the county from rising rates for their bonds. Lending rates went the wrong way, putting the county $277 million deeper into debt.

Interest Rate Soared

In February, the county's interest rate soared to as much as 10 percent, up from 3 percent just weeks earlier. The swaps have now compounded the risk that Jefferson County will file for bankruptcy as it faces its worst financial crisis since it was founded in 1819.

The same subprime chaos that has felled chief executive officers on Wall Street and forced banks to write off $322 billion has plowed into Jefferson County and other municipalities. That means local officials now have to pay to banks money that otherwise might have been used to build schools, hospitals or public housing.

Meanwhile, the U.S. Securities and Exchange Commission and the Justice Department are now investigating bankers and officials involved in Jefferson County's swap agreements.

Bankers who worked for New York-based Bear Stearns Cos. and JPMorgan when Jefferson County bought its swaps have been told they might face criminal charges under an antitrust investigation of the municipal derivatives industry, according to records filed with the Financial Industry Regulatory Authority Inc.

SEC Sues Mayor

On April 30, the SEC sued Larry Langford, the former county commission president and now Birmingham's mayor, for fraud in allegedly accepting $156,000 from a local banker while refinancing the sewer debt. Langford denies any wrongdoing. JPMorgan spokesman Brian Marchiony declined to comment for this article.

The Federal Bureau of Investigation has raided financial advisers in California, Minnesota and Pennsylvania to get files. In January 2007, Charlotte, North Carolina-based Bank of America Corp. agreed to cooperate with federal prosecutors in exchange for leniency. Bank of America spokeswoman Shirley Norton declined to comment.

Jefferson County -- which weathered the U.S. Civil War in the 1860s and racial strife in the 1960s -- is now scrambling to avert what would be the biggest municipal bankruptcy in the nation's history, measured by outstanding bonds.

‘‘It's going to come back to us, to the people,'' says Bonner, a retired waitress. ‘‘Whether you're poor or you're rich, you're going to end up paying.''

Secret Swap Fees

JPMorgan, Bank of America, Bear Stearns, and Lehman Brothers Holdings Inc. charged Jefferson County about $50 million above prevailing prices for 11 of the interest-rate swaps the county bought between 2001 and 2004. None of the fees were disclosed to the commissioners, records show.

Porter, White & Co., the Birmingham-based financial advisory firm later hired by the county to analyze its swaps, said the banks raked in as much as $100 million in excessive fees on all 17 of its swaps.

The swaps are contracts in which the county and the banks agreed to exchange periodic payments based on the size of the outstanding debt and changes in prevailing lending rates. Swaps are derivatives, which are unregulated financial contracts tied to the underlying value of a security, commodity or index.

Jefferson County's deals started to unravel in January after its bond insurers, Financial Guaranty Insurance Co. and XL Capital Assurance Inc., suffered hundreds of millions of dollars in losses on securities tied to home loans.

Bonds Take Hit

Standard & Poor's downgraded Financial Guaranty's credit rating to AA from AAA on Jan. 31. The next week, Moody's Investors Service cut XL Capital six levels to A3. Moody's then downgraded Financial Guaranty to A3.

When a bond insurer takes a ratings hit, so do the bonds it has guaranteed; the insurer effectively lends its high rating to the bond issuer.

That's what happened to about $3 billion of Jefferson County's debt, causing its interest rate to balloon to as high as 10 percent in February and March from 3 percent in January. That helped increase its total monthly debt payments to $23 million from $10 million.

‘‘It happened overnight,'' County Commission President Bettye Fine Collins says. ‘‘It became a situation that worsened every day.''

The turmoil in Jefferson County might be just the beginning of a new, painful chapter in the subprime debacle.

‘‘The Jefferson County crisis could have national implications,'' says U.S. Representative Spencer Bachus, who represents the county and is the top Republican on the House Financial Services Committee. ‘‘Large defaults in the municipal bond market could have a ripple effect on the larger U.S. financial system, again causing systemwide financial stress.''

Bear Stearns Saved

The banks that sold the toxic financing to Jefferson County have themselves fallen victim to the subprime crisis -- none more so than Bear Stearns. The firm, which sold $1.6 billion in swaps to the county, saw its shares plunge 95 percent from Jan. 1 to March 17 before it was bailed out by the Federal Reserve in March.

The Fed negotiated a deal in which JPMorgan bought Bear for $10 a share. JPMorgan had sold $3.2 billion in swaps to Jefferson County.

‘‘It's ironic that the Fed can do corporate welfare for the banks, but they can't bail out a county that was victimized by these banks,'' says Craig Greer, a Catholic chaplain at a Birmingham hospice.

The SEC and Justice Department are probing whether the banks that financed Jefferson County conspired nationwide to fix prices for derivatives, violating the Sherman Antitrust Act, according to target letters sent to bank employees.

Criminal Charges

At least four JPMorgan bankers who worked for the bank at the time Jefferson County deals were done, including Douglas MacFaddin, the former head of municipal derivative sales, have been told by the U.S. Attorney's office that they could face criminal charges, records show. MacFaddin, who was fired in March, couldn't be reached for comment.

‘‘In Jefferson County's case, the people who were allegedly doing the price fixing were right at the center of the scandal,'' says Christopher ‘‘Kit'' Taylor, who ran the Municipal Securities Rulemaking Board, the public finance regulator in the U.S., from 1978 to 2007.

Jefferson County could use the federal probe of the banks that financed the sewer debt as leverage to stop the firms from demanding more money, Taylor says. So far, the county has won agreements with JPMorgan and the other banks to keep from being forced to buy back as much as $847 million of unwanted bonds or pay up the $277 million it owes on its swaps.

Don't Pull Trigger

The banks might be worried that Jefferson County, if pressed, could walk away from the derivatives trades on the grounds that they were signed in what might have been fraudulent deals written by the banks, Taylor says. That threat could be enough for the county to bide its time as it works for a solution.

‘‘The big boys don't want to pull the trigger,'' Taylor says. ‘‘Then they might end up upsetting the whole derivatives apple cart because of what a judge may do in a court case.''

Some Jefferson County residents have taken to joking about the mess local officials and banks have dumped on them. Greer, the chaplain, is selling what he calls look-alike bonds, for $2.50. He says they should be used as toilet paper. He's also distributed bumper stickers saying ‘‘Wipe Out Sewer Debt.''

Not everyone is laughing. Outside a Piggly Wiggly grocery store in western Birmingham, Charles Boyd, a construction supervisor, says it seems like the only thing he does is pay bills.

‘‘It's just not like it used to be,'' Boyd, 67, says. ‘‘It's rough. And I'm working, so when people talk about their sewer bills, I know it's hard. The sewer bill is higher than the water bill. It's ridiculous. It's outrageous.''

Seeds of Crisis

The seeds of Jefferson County's debt crisis were planted in December 1993, when three citizens filed a lawsuit against the county commission, alleging untreated sewage was being discharged into the Black Warrior and Cahaba rivers during heavy rains, in violation of the federal Clean Water Act.

The U.S. Environmental Protection Agency in 1994 joined the taxpayers who filed the complaint. In December 1996, the county settled the case by agreeing to build a sewer system for collecting overflows and cleaning the water.

In 1997, the county began selling bonds to raise money for the project. Most of the bond sales, all done without competitive bidding, were arranged by Charles LeCroy, a banker at St. Petersburg, Florida-based Raymond James & Associates Inc.

‘Cash Cow'

By November 2002, the county had issued $2.9 billion in sewer bonds, with an average rate of 5.25 percent; the cost of building the sewer system doubled from initial projections. Meanwhile, LeCroy had been hired by JPMorgan, taking the county's debt work with him.

‘‘Jefferson County became a cash cow,'' says County Commissioner Shelia Smoot, a Democrat.

In 2002, with municipal bond interest rates near a 34-year low, LeCroy told Jefferson County officials they could save millions of dollars by refinancing their sewer debt. He recommended that the county use a combination of IND' ))">adjustable-rate bonds and interest-rate swaps.

The officials took JPMorgan's advice, and in 2002 and '03 Jefferson County issued $3 billion of adjustable-rate bonds, including $2.2 billion of auction-rate securities, bonds whose interest rates reset at periodic auction sales by banks.

Swaps Seminars

Those bonds provided the banks with about $55 million in fees, county records show. JPMorgan sold Jefferson County $2.7 billion of interest-rate swaps, Bank of America sold the county $373 million in swaps and New York-based Lehman Brothers sold the county $190 million more.

The swaps, if they worked as designed, would allow Jefferson County to pay about 4.2 percent on its debt for 40 years.

Jefferson County was so enthusiastic about its sophisticated debt management techniques that in 2003 and 2004 it held ‘‘Investor Relations'' seminars each year in a Birmingham hotel.

The events were sponsored by 32 banks, advisers, law firms, bond insurers and rating companies, including CDR Financial Products, the county's Beverly Hills, California-based swap adviser, Bear Stearns and JPMorgan. County officials solicited sponsorships, including $27,000 from JPMorgan, $15,000 from Bear Stearns and $10,000 from CDR.

‘‘We have so many little municipalities around here that can't afford to go for any kind of training,'' says Linda Goldblatt, the county's investor relations director. ‘‘We thought it would be a good idea to help get them some idea of what's going on out there.''

‘Prudent Financial Management'

Bankers from Bear Stearns and JPMorgan, along with advisers from CDR, led the sessions.

‘‘The worldwide use of privately negotiated derivatives has generated considerable momentum,'' a JPMorgan presentation said. ‘‘The need for prudent financial management continues to drive the wider use of privately negotiated derivatives.''

The phrase privately negotiated is a euphemism bankers use to describe debt deals that are struck without competitive bidding -- as all of Jefferson County's were.

Then JPMorgan banker Matthew Roggenburg quoted Federal Reserve Chairman Alan Greenspan, who lauded derivatives because they create a more flexible and efficient financial system.

‘‘New financial products have enabled risk to be dispersed more effectively to those willing, and presumably able, to bear it,'' Greenspan said in an April 2002 speech. ‘‘Shocks to the overall economic system are accordingly less likely to create cascading credit failure.''

Upfront Cash

In 2004, three months before one of the seminars, Bear Stearns, along with Montgomery, Alabama-based underwriter Blount Parrish & Co. and Mobile, Alabama-based Gardnyr Michael Capital Inc., pitched the county another swap deal, its largest yet.

The county sought to generate millions in upfront cash to hold down sewer bills by agreeing to pay 67 percent of the one-month rate on the London interbank offered rate. In return, the banks would pay the county 56 percent of one-month Libor plus 0.49 percentage point.

In June 2004, the county entered into $1.5 billion of swaps with Bear Stearns on those terms and another $380 million swap with Bank of America on those terms. Jefferson County received $25 million in upfront cash.

The deals also gave Jefferson County the distinction of holding the most interest-rate swaps -- $5.8 billion in all -- of any county in the U.S.

County Commissioner Jim Carns, 67, says the banks used the lack of transparency in derivatives to overcharge Jefferson County.

‘Unregulated Market'

‘‘It's easier for mischief to take place in an unregulated market,'' he says. ‘‘You don't have a teacher watching the playground.''

A year after the swaps deals with Jefferson County, JPMorgan's LeCroy ran into legal trouble. He was indicted in June 2004 on federal fraud charges in a municipal finance corruption scandal in Philadelphia. JPMorgan fired him. In January 2005, LeCroy pleaded guilty and was later fined $15,000 and imprisoned for three months. He declined to comment.

The SEC's action against Langford, the former county commission president, hit closer to home. In April, the agency accused Langford in federal court of fraud for failing to disclose he had accepted more than $156,000 from William Blount of Blount Parrish.

Langford steered a portion of the work on every swap and bond deal in 2003 and 2004 to Blount, which was paid more than $6.7 million in fees, according to the complaint. The SEC said in an April 30 press release that it was still investigating. Langford says the SEC's allegations are untrue.

‘Political Witch Hunt'

‘‘It was a political witch hunt from day one,'' he says. ‘‘Blount and I have been friends for 30 years. He wouldn't have had to buy no involvement in no bond deal from me.''

Andrew Campbell, a lawyer for Blount, denies any wrongdoing and says the SEC doesn't have jurisdiction over swaps.

The SEC has asked the Jefferson County commissioners to turn over information regarding payments, fees and gifts relating to the county's bond deals and swaps since January 2002, according to Commissioner Collins.

The agency specifically asked for all communications with Bank of America, Bear Stearns, JPMorgan and Lehman Brothers.

Bachus, the Alabama congressman, says the entire controversy would have been avoided if Jefferson County had simply used the kind of financing all municipalities once used: fixed-rate bonds, which through the early 1970s were almost always sold through competitive bidding.

‘Knew the Risk'

‘‘On a 30-year issue at a fixed rate, then everybody knew the risk,'' Bachus says. ‘‘Now, with these swaps and these different transactions, the taxpayers, the ratepayers, even the county -- I don't think they understood what they were getting into.''

Some of Jefferson County's commissioners agree. Collins, a Republican and one of the two current members of the five-person board who were there when the deals were struck, says it's now clear that the financing was wrong for the county.

Commissioner Smoot says the commission misplaced its confidence in the bankers and advisers.

‘‘I blame the people who said they were the experts,'' Smoot says. ‘‘The big Wall Street bankers. Where are they now? We trusted them. We asked our folks to trust them. And you know what- -- they violated our trust.''

The interest rate on $2.2 billion of the county's bonds was determined by bond auctions to investors, periodically run by banks. Because of the global debt crisis, investors and banks began pulling money away from the auction-rate-securities market at the start of 2008.

Almost Doubled Rates

When those auctions failed because no one bought the securities, Bank of America and JPMorgan, seeking to shore up their own capital, didn't step in and buy the Alabama debt, as banks that had run such auctions had in the past. That forced Jefferson County to almost double the interest payments on its auction-rate bonds.

Meanwhile, the payments the county received under its swap agreements, which were supposed to cover the interest payments on its floating-rate bonds, went down. The payments were supposed to track the county's bonds, covering any increase to its bills. Instead, they added to them.

‘‘We were already on the razor's edge of what we could afford,'' Commissioner Carns says. ‘‘We're going into the Superbowl with one arm in a cast and another tied behind our backs.''

Cut to Junk

February brought even worse news, Carns says. On Feb. 26, Moody's cut the sewer bonds to Baa3, one step above junk. The downgrade triggered clauses in the county's swap agreements. Bank of America, Bear Stearns, JPMorgan and Lehman Brothers now had the right to cancel the deals -- at a cost of $277 million to the county.

The group of banks left holding almost all of its $847 million of unwanted bonds could also cancel the deals to act as buyers of last resort and force the county to buy the bonds back. On Feb. 29, Standard & Poor's cut the sewer bonds to junk.

‘‘Once we got cut to junk status, we couldn't go any lower without just leaving the scene and turning over a corpse to somebody,'' Carns says.

In March, the county sent its financial advisers from Porter White to meet with JPMorgan, other banks and bond insurers in New York.

They tried to convince the bank to take about $30 million of the revenue from the one-cent sales taxes it collects for a $1 billion school construction bond and add those funds to the $115 million of annual income the county's sewer system can use to pay for the debts.

‘We Cannot'

That would still have left the county with at least $100 million less than what it says its annual interest bill would be. The banks and insurers didn't accept the offer. They told the county to find ways to increase sewer revenue, Porter White's President Jim White says.

‘‘We cannot raise sewer rates,'' Commissioner Collins says. ‘‘We've done that and we've done that.''

Birmingham resident Dora Bonner, the grandmother who lost her water, says she feels betrayed by the county's politicians.

‘‘They're not interested in us,'' she says. ‘‘We elect them, then they turn the other way.''

Bonner and other residents are paying for a lesson that Warren Buffett, the world's richest man, wrote about in 2003. Derivatives are like hell, he said: ‘‘Easy to enter and almost impossible to exit.''