Sunday, June 8, 2008

Investors' Growing Appetite for Oil Evades Market Limits

Investors' Growing Appetite for Oil Evades Market Limits

Go To Original

Hedge funds and big Wall Street banks are taking advantage of loopholes in federal trading limits to buy massive amounts of oil contracts, according to a growing number of lawmakers and prominent investors, who blame the practice for helping to push oil prices to record highs.

The federal agency that oversees oil trading, the Commodity Futures Trading Commission, has exempted these firms from rules that limit speculative buying, a prerogative traditionally reserved for airlines and trucking companies that need to lock in future fuel costs.

The CFTC has also waived regulations over the past decade on U.S. investors who trade commodities on some overseas markets, freeing those investors to accumulate large quantities of the future oil supply by making purchases on lightly regulated foreign exchanges.

Over the past five years, investors have become such a force on commodity markets that their appetite for oil contracts has been equal to China's increase in demand over the same period, said Michael Masters, a hedge fund manager who testified before Congress on the subject last month. The commodity markets, he added, were never intended for such large financial players.

"I've never said that financial speculation is behind all of the recent price increase here, but even if it's some of the reason, it's something society needs to look very hard at," he said.

Commodities have become especially enticing to investors as the credit crisis has roiled other investment opportunities such as stocks and debt-related securities. The recent flood of investment money has transformed the markets for oil, as well as uranium, wheat, cotton and other goods, into a volatile realm that some insiders call the Wild West of Wall Street.

Even as record oil prices translate into staggering increases at the pump, some regulators, including Treasury Secretary Henry M. Paulson Jr., say investors are not to blame. These officials cite supply and demand as a far bigger factor.

Since last year, this was also the position of the CFTC. But agency officials have recently signaled greater concern, saying they want to collect more data to determine whether speculation might be a significant factor. That information can be difficult to obtain because commodity trading often occurs through private, unregulated transactions and on overseas exchanges.

Walter Lukken, the acting chairman of the CFTC, acknowledged in an interview that his agency has had a hard time keeping up with the sector it oversees. Commodity trading has exploded in complexity and popularity, he said, growing six-fold in trading volume since 2000. That was the year a handful of giant energy companies, including Enron, successfully lobbied Congress to ease the regulation of energy markets.

Meanwhile, the CFTC's staffing has dropped to its lowest levels in the agency's 33-year history.

"We could hire an extra 100 people and put them to work tomorrow given the inflow of trading volume," Lukken said. "We are doing the best we can in difficult circumstances. . . . This is something that we are obviously concerned with -- the potential for manipulation."

CFTC officials said in interviews that they planned to re-examine the exemptions granted by agency staff to Wall Street firms. These date to 1991, when complex derivatives used to bet on futures contracts emerged and their significance was little understood. These officials said they would also reconsider the waivers given to overseas trades.

On commodity markets, buyers largely purchase futures contracts, which determine the price goods will fetch on a particular date in the future. Unlike commercial businesses that are trying to lock in prices for coming orders, speculators have little interest in taking actual delivery of oil or other commodities. Instead, these investors trade the contracts like stocks. These investments can be very attractive because there are only light restrictions on whether they can be bought and sold using borrowed money. While risky, this can produce enormous returns.

Some Democratic and Republican lawmakers allege that gaps in oversight are allowing deep-pocketed speculators to manipulate prices.

"Consumers no longer have the confidence that the prices they are paying at the pump are fair or even linked to underlying supply-and-demand forces," said Sen. Maria Cantwell (D-Wash.).

The recent craze in commodity investing is partly due to the emergence of commodity index funds, which act like mutual funds except they hold futures contracts rather than stocks. Such funds have made commodity purchases far easier for a wide range of investors, including hedge funds, investment banks, pension funds and university endowments.

George Soros, one of the nation's leading investors, testified in a Senate hearing this week that index funds were contributing to the rapid rise in commodity prices and were possibly creating a bubble. If it were to burst, sending prices tumbling, the fallout could wreak havoc on banks, retiree funds and colleges across the nation.

"I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance, which led to the stock market crash of 1987," Soros said.

Information on commodity trades can be hard to come by. Some contracts are exchanged privately between two parties who do not have to disclose the transaction. There are also two exchanges that trade oil and other goods in the United States. One, the New York Mercantile Exchange, or Nymex, is closely regulated. The other, Intercontinental Exchange, has set up a market in London, where trading can occur beyond the purview of U.S. regulators.

Nymex is now setting up its own market in Dubai, which the CFTC has given permission to trade oil destined for delivery in the United States. The CFTC has stated that it would not place restrictions on U.S. investors who exchange oil contracts in Dubai but rely on foreign regulators.

Nymex chief executive Jim Newsome said he recognized that Congress's patience with the CFTC was wearing thin. But he warned lawmakers against acting too rashly.

"I think some members of Congress would prefer the CFTC to move more quickly than they have," he said. "But the CFTC are the experts on these markets. And there can be very dangerous unintended consequences when you are dealing with a huge marketplace."

Officials at the Intercontinental Exchange said they worried that some investors would stop doing business with the United States if an "onerous regulatory burden" were placed on domestic markets.

Last week, the CFTC announced a new information-sharing agreement with British regulators who oversee the trading of oil destined for the United States. The agency also took the highly unusual step of revealing an ongoing investigation into possible oil price manipulation.

"I want to make sure these markets are properly regulated and will do everything we can to do that," said Lukken, who faces confirmation hearings in the Senate this week. Several Democrats have warned that they may try to oust him.

Under pressure from voters, lawmakers are pressuring the CFTC to take even more forceful action to regulate the commodity markets.

CFTC Commissioner Bart Chilton acknowledged that the agency should have been quicker to adapt.

"The commission has realized that the ordinary regulatory environment that we've been operating in has transformed dramatically and we need to look at things in an entirely new way," Chilton said. "We haven't been doing all that we needed to do. We've been getting by, and I think it requires more than just getting by."

Michael Greenberger, a professor at the University of Maryland and former CFTC commissioner, said there were loopholes the agency could close without much effort.

"There's smoke here, and the CFTC hasn't wanted to look if there's a fire," he said. "Now they say they want to look, but they need the data. . . . But these are dark markets. They don't even know who's doing the trading."

The Financial Tsunami has not reached its Climax

The Financial Tsunami has not reached its Climax

Credit Default Swaps: Next Phase of an Unravelling Crisis

The Sub Prime Meltdown is but the Tip of the Iceberg

While attention has been focussed on the relatively tiny US "sub-prime" home mortgage default crisis as the center of the current financial and credit crisis impacting the Anglo-Saxon banking world, a far larger problem is now coming into focus. Sub-prime or high-risk Collateralized Mortgage Obligations, CMOs as they are called, are only the tip of a colossal iceberg of dodgy credits which are beginning to go sour. The next crisis is already beginning in the $62 TRILLION market for Credit Default Swaps. You never heard of them? It’s time to take a look, then.

The next phase of the unravelling crisis in the US-centered "revolution in finance" is emerging in the market for arcane instruments known as Credit Default Swaps or CDS. Wall Street bankers always have to have a short name for these things.

As I pointed out in detail in my earlier exclusive series, the Financial Tsunami, Parts I-V, the Credit Default Swap was invented a few years ago by a young Cambridge University mathematics graduate, Blythe Masters, hired by J.P. Morgan Chase Bank in New York. The then-fresh university graduate convinced her bosses at Morgan Chase to develop a revolutionary new risk product, the CDS as it soon became known.

A Credit Default Swap is a credit derivative or agreement between two counterparties, in which one makes periodic payments to the other and gets promise of a payoff if a third party defaults. The first party gets credit protection, a kind of insurance, and is called the "buyer." The second party gives credit protection and is called the "seller". The third party, the one that might go bankrupt or default, is known as the "reference entity." CDS’s became staggeringly popular as credit risks exploded during the last seven years in the United States. Banks argued that with CDS they could spread risk around the globe.

Credit default swaps resemble an insurance policy, as they can be used by debt owners to hedge, or insure against a default on a debt. However, because there is no requirement to actually hold any asset or suffer a loss, credit default swaps can also be used for speculative purposes.

Warren Buffett once described derivatives bought speculatively as "financial weapons of mass destruction." In his Berkshire Hathaway annual report to shareholders he said "Unless derivatives contracts are collateralized or guaranteed, their ultimate value depends on the creditworthiness of the counterparties. In the meantime, though, before a contract is settled, the counterparties record profits and losses -often huge in amount- in their current earnings statements without so much as a penny changing hands. The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen)." A typical CDO is for five years term.

Like many exotic financial products which are extremely complex and profitable in times of easy credit, when markets reverse, as has been the case since August 2007, in addition to spreading risk, credit derivatives, in this case, also amplify risk considerably.

Now the other shoe is about to drop in the $62 trillion CDS market due to rising junk bond defaults by US corporations as the recession deepens. That market has long been a disaster in the making. An estimated $1,2 trillion could be at risk of the nominal $62 trillion in CDOs outstanding, making it far larger than the sub-prime market.

No Regulation

A chain reaction of failures in the CDS market could trigger the next global financial crisis. The market is entirely unregulated, and there are no public records showing whether sellers have the assets to pay out if a bond defaults. This so-called counterparty risk is a ticking time bomb. The US Federal Reserve under the ultra-permissive chairman, Alan Greenspan and the US Government’s financial regulators allowed the CDS market to develop entirely without any supervision. Greenspan repeatedly testified to skeptical Congressmen that banks are better risk regulators than government bureaucrats.

The Fed bailout of Bear Stearns on March 17 was motivated, in part, by a desire to keep the unknown risks of that bank’s Credit Default Swaps from setting off a global chain reaction that might have brought the financial system down. The Fed's fear was that because they didn't adequately monitor counterparty risk in credit-default swaps, they had no idea what might happen. Thank Alan Greenspan for that.

Those counterparties include J.P. Morgan Chase, the largest seller and buyer of CDSs.

The Fed only has supervision to regulated bank CDS exposures, but not that of investment banks or hedge funds, both of which are significant CDS issuers. Hedge funds, for instance, are estimated to have written 31% in CDS protection.

The credit-default-swap market has been mainly untested until now. The default rate in January 2002, when the swap market was valued at $1.5 trillion, was 10.7 percent, according to Moody's Investors Service. But Fitch Ratings reported in July 2007 that 40 percent of CDS protection sold worldwide was on companies or securities that are rated below investment grade, up from 8 percent in 2002.

A surge in corporate defaults will now leave swap buyers trying to collect hundreds of billions of dollars from their counterparties. This will to complicate the financial crisis, triggering numerous disputes and lawsuits, as buyers battle sellers over the technical definition of default - - this requires proving which bond or loan holders weren't paid -- and the amount of payments due. Some fear that could in turn freeze up the financial system.

Experts inside the CDS market believe now that the crisis will likely start with hedge funds that will be unable to pay banks for contracts tied to at least $150 billion in defaults. Banks will try to pre-empt this default disaster by demanding hedge funds put up more collateral for potential losses. That will not work as many of the funds won't have the cash to meet the banks' demands for more collateral.

Sellers of protection aren't required by law to set aside reserves in the CDS market. While banks ask protection sellers to put up some money when making the trade, there are no industry standards. It would be the equivalent of a licensed insurance company selling insurance protection against hurricane damage with no reserves against potential claims.

Basle BIS worried

The Basle Bank for International Settlements, the supervisory organization of the world’s major central banks is alarmed at the dangers. The Joint Forum of the Basel Committee on Banking Supervision, an international group of banking, insurance and securities regulators, wrote in April that the trillions of dollars in swaps traded by hedge funds pose a threat to financial markets around the world.

``It is difficult to develop a clear picture of which institutions are the ultimate holders of some of the credit risk transferred,'' the report said. ``It can be difficult even to quantify the amount of risk that has been transferred.''

Counterparty risk can become complicated in a hurry. In a typical CDS deal, a hedge fund will sell protection to a bank, which will then resell the same protection to another bank, and such dealing will continue, sometimes in a circle. That has created a huge concentration of risk. As one leading derivatives trader expressed the process, "The risk keeps spinning around and around in this daisy chain like a vortex. There are only six to 10 dealers who sit in the middle of all this. I don't think the regulators have the information that they need to work that out.''

Traders, and even the banks that serve as dealers, don't always know exactly what is covered by a credit-default-swap contract. There are numerous types of CDSs, some far more complex than others. More than half of all CDSs cover indexes of companies and debt securities, such as asset-backed securities, the Basel committee says. The rest include coverage of a single company's debt or collateralized debt obligations...

Banks usually send hedge funds, insurance companies and other institutional investors e-mails throughout the day with bid and offer prices, as there is no regulated exchange to pricess the market or to insure against loss. To find the price of a swap on Ford Motor Co. debt, for example, even sophisticated investors might have to search through all of their daily e-mails.

Banks want Secrecy

Banks have a vested interest in keeping the swaps market opaque, because as dealers, the banks have a high volume of transactions, giving them an edge over other buyers and sellers. Since customers don't necessarily know where the market is, you can charge them much wider profit margins.

Banks try to balance the protection they've sold with credit-default swaps they purchase from others, either on the same companies or indexes. They can also create synthetic CDOs, which are packages of credit-default swaps the banks sell to investors to get themselves protection.

The idea for the banks is to make a profit on each trade and avoid taking on the swap's risk. As one CDO dealer puts it, "Dealers are just like bookies. Bookies don't want to bet on games. Bookies just want to balance their books. That's why they're called bookies."

Now as the economy contracts and bankruptcies spread across the United States and beyond, there's a high probability that many who bought swap protection will wind up in court trying to get their payouts. If things are collapsing left and right, people will use any trick they can.

Last year, the Chicago Mercantile Exchange set up a federally regulated, exchange-based market to trade CDSs. So far, it hasn't worked. It's been boycotted by banks, which prefer to continue their trading privately.


Global Research Associate F. William Engdahl is author of A Century of War: Anglo-American Oil Politics and the New World Order (PlutoPress), and Seeds of Destruction: The Hidden Agenda of Genetic Manipulation. (Global Research, available at www.globalresearch.ca). He may be reached at info@engdahl.oilgeopolitics.net.

The Last Roundup: Is the government compiling a secret list of citizens to detain under martial law?

The Last Roundup: Is the government compiling a secret list of citizens to detain under martial law?

By Christopher Ketcham

Go To Original



ARE YOU ON THE LIST?
The federal government has been developing a highly classified plan that will override the Constitution in the event of a major terrorist attack



I
n the spring of 2007, a retired senior official in the U.S. Justice Department sat before Congress and told a story so odd and ominous, it could have sprung from the pages of a pulp political thriller. It was about a principled bureaucrat struggling to protect his country from a highly classified program with sinister implications. Rife with high drama, it included a car chase through the streets of Washington, D.C., and a tense meeting at the White House, where the president's henchmen made the bureaucrat so nervous that he demanded a neutral witness be present.

The bureaucrat was James Comey, John Ashcroft's second-in-command at the Department of Justice during Bush's first term. Comey had been a loyal political foot soldier of the Republican Party for many years. Yet in his testimony before the Senate Judiciary Committee, he described how he had grown increasingly uneasy reviewing the Bush administration's various domestic surveillance and spying programs. Much of his testimony centered on an operation so clandestine he wasn't allowed to name it or even describe what it did. He did say, however, that he and Ashcroft had discussed the program in March 2004, trying to decide whether it was legal under federal statutes. Shortly before the certification deadline, Ashcroft fell ill with pancreatitis, making Comey acting attorney general, and Comey opted not to certify the program. When he communicated his decision to the White House, Bush's men told him, in so many words, to take his concerns and stuff them in an undisclosed location.

The Continuity of Governance program encompasses national emergency plans that would trigger the takeover of the country by extra-constitutional forces. In short, it's a road map for martial lawComey refused to knuckle under, and the dispute came to a head on the cold night of March 10, 2004, hours before the program's authorization was to expire. At the time, Ashcroft was in intensive care at George Washington Hospital following emergency surgery. Apparently, at the behest of President Bush himself, the White House tried, in Comey's words, "to take advantage of a very sick man," sending Chief of Staff Andrew Card and then–White House counsel Alberto Gonzales on a mission to Ashcroft's sickroom to persuade the heavily doped attorney general to override his deputy. Apprised of their mission, Comey, accompanied by a full security detail, jumped in his car, raced through the streets of the capital, lights blazing, and "literally ran" up the hospital stairs to beat them there.

Minutes later, Gonzales and Card arrived with an envelope filled with the requisite forms. Ashcroft, even in his stupor, did not fall for their heavy-handed ploy. "I'm not the attorney general," Ashcroft told Bush's men. "There"—he pointed weakly to Comey—"is the attorney general." Gonzales and Card were furious, departing without even acknowledging Comey's presence in the room. The following day, the classified domestic spying program that Comey found so disturbing went forward at the demand of the White House—"without a signature from the Department of Justice attesting as to its legality," he testified.

What was the mysterious program that had so alarmed Comey? Political blogs buzzed for weeks with speculation. Though Comey testified that the program was subsequently readjusted to satisfy his concerns, one can't help wondering whether the unspecified alteration would satisfy constitutional experts, or even average citizens. Faced with push-back from his bosses at the White House, did he simply relent and accept a token concession? Two months after Comey's testimony to Congress, the New York Times reported a tantalizing detail: The program that prompted him "to threaten resignation involved computer searches through massive electronic databases." The larger mystery remained intact, however. "It is not known precisely why searching the databases, or data mining, raised such a furious legal debate," the article conceded.


ONE NATION, UNDER SURVEILLANCE James Comey testifies before the Senate Judiciary Committee (Photo: Getty Images)

Another clue came from a rather unexpected source: President Bush himself. Addressing the nation from the Oval Office in 2005 after the first disclosures of the NSA's warrantless electronic surveillance became public, Bush insisted that the spying program in question was reviewed "every 45 days" as part of planning to assess threats to "the continuity of our government."

Few Americans—professional journalists included—know anything about so-called Continuity of Government (COG) programs, so it's no surprise that the president's passing reference received almost no attention. COG resides in a nebulous legal realm, encompassing national emergency plans that would trigger the takeover of the country by extra-constitutional forces—and effectively suspend the republic. In short, it's a road map for martial law.

While Comey, who left the Department of Justice in 2005, has steadfastly refused to comment further on the matter, a number of former government employees and intelligence sources with independent knowledge of domestic surveillance operations claim the program that caused the flap between Comey and the White House was related to a database of Americans who might be considered potential threats in the event of a national emergency. Sources familiar with the program say that the government's data gathering has been overzealous and probably conducted in violation of federal law and the protection from unreasonable search and seizure guaranteed by the Fourth Amendment.

According to a senior government official who served with high-level security clearances in five administrations, "There exists a database of Americans, who, often for the slightest and most trivial reason, are considered unfriendly, and who, in a time of panic, might be incarcerated. The database can identify and locate perceived 'enemies of the state' almost instantaneously." He and other sources tell Radar
that the database is sometimes referred to by the code name Main Core. One knowledgeable source claims that 8 million Americans are now listed in Main Core as potentially suspect. In the event of a national emergency, these people could be subject to everything from heightened surveillance and tracking to direct questioning and possibly even detention.




DESPERATE TIMES Should another 9/11 occur, Continuity of Governance plans developed during the Cold War go into effect (Photo: Getty Images)

Of course, federal law is somewhat vague as to what might constitute a "national emergency." Executive orders issued over the past three decades define it as a "natural disaster, military attack, [or] technological or other emergency," while Department of Defense documents include eventualities like "riots, acts of violence, insurrections, unlawful obstructions or assemblages, [and] disorder prejudicial to public law and order." According to one news report, even "national opposition to U.S. military invasion abroad" could be a trigger.

Let's imagine a harrowing scenario: coordinated bombings in several American cities culminating in a major blast—say, a suitcase nuke—in New York City. Thousands of civilians are dead. Commerce is paralyzed. A state of emergency is declared by the president. Continuity of Governance plans that were developed during the Cold War and aggressively revised since 9/11 go into effect. Surviving government officials are shuttled to protected underground complexes carved into the hills of Maryland, Virginia, and Pennsylvania. Power shifts to a "parallel government" that consists of scores of secretly preselected officials. (As far back as the 1980s, Donald Rumsfeld, then CEO of a pharmaceutical company, and Dick Cheney, then a congressman from Wyoming, were slated to step into key positions during a declared emergency.) The executive branch is the sole and absolute seat of authority, with Congress and the judiciary relegated to advisory roles at best. The country becomes, within a matter of hours, a police state.

In case of a wide-scale attack, the executive branch becomes the sole and absolute seat of authority. The country becomes, within a matter of hours, a police stateInterestingly, plans drawn up during the Reagan administration suggest this parallel government would be ruling under authority given by law to the Federal Emergency Management Agency, home of the same hapless bunch that recently proved themselves unable to distribute water to desperate hurricane victims. The agency's incompetence in tackling natural disasters is less surprising when one considers that, since its inception in the 1970s, much of its focus has been on planning for the survival of the federal government in the wake of a decapitating nuclear strike.

Under law, during a national emergency, FEMA and its parent organization, the Department of Homeland Security, would be empowered to seize private and public property, all forms of transport, and all food supplies. The agency could dispatch military commanders to run state and local governments, and it could order the arrest of citizens without a warrant, holding them without trial for as long as the acting government deems necessary. From the comfortable perspective of peaceful times, such behavior by the government may seem far-fetched. But it was not so very long ago that FDR ordered 120,000 Japanese Americans—everyone from infants to the elderly—be held in detention camps for the duration of World War II. This is widely regarded as a shameful moment in U.S. history, a lesson learned. But a long trail of federal documents indicates that the possibility of large-scale detention has never quite been abandoned by federal authorities. Around the time of the 1968 race riots, for instance, a paper drawn up at the U.S. Army War College detailed plans for rounding up millions of "militants" and "American negroes," who were to be held at "assembly centers or relocation camps." In the late 1980s, the Austin American-Statesman and other publications reported the existence of 10 detention camp sites on military facilities nationwide, where hundreds of thousands of people could be held in the event of domestic political upheaval. More such facilities were commissioned in 2006, when Kellogg Brown & Root—then a subsidiary of Halliburton—was handed a $385 million contract to establish "temporary detention and processing capabilities" for the Department of Homeland Security. The contract is short on details, stating only that the facilities would be used for "an emergency influx of immigrants, or to support the rapid development of new programs." Just what those "new programs" might be is not specified.

In the days after our hypothetical terror attack, events might play out like this: With the population gripped by fear and anger, authorities undertake unprecedented actions in the name of public safety. Officials at the Department of Homeland Security begin actively scrutinizing people who—for a tremendously broad set of reasons—have been flagged in Main Core as potential domestic threats. Some of these individuals might receive a letter or a phone call, others a request to register with local authorities. Still others might hear a knock on the door and find police or armed soldiers outside. In some instances, the authorities might just ask a few questions. Other suspects might be arrested and escorted to federal holding facilities, where they could be detained without counsel until the state of emergency is no longer in effect.

It is, of course, appropriate for any government to plan for the worst. But when COG plans are shrouded in extreme secrecy, effectively unregulated by Congress or the courts, and married to an overreaching surveillance state—as seems to be the case with Main Core—even sober observers must weigh whether the protections put in place by the federal government are becoming more dangerous to America than any outside threat.

Another well-informed source—a former military operative regularly briefed by members of the intelligence community—says this particular program has roots going back at least to the 1980s and was set up with help from the Defense Intelligence Agency. He has been told that the program utilizes software that makes predictive judgments of targets' behavior and tracks their circle of associations with "social network analysis" and artificial intelligence modeling tools.

"The more data you have on a particular target, the better [the software] can predict what the target will do, where the target will go, who it will turn to for help," he says. "Main Core is the table of contents for all the illegal information that the U.S. government has [compiled] on specific targets." An intelligence expert who has been briefed by high-level contacts in the Department of Homeland Security confirms that a database of this sort exists, but adds that "it is less a mega-database than a way to search numerous other agency databases at the same time."



CROWD CONTROL New Yorkers walk home on the afternoon of the September 11 attacks (Photo: Getty Images)

A host of publicly disclosed programs, sources say, now supply data to Main Core. Most notable are the NSA domestic surveillance programs, initiated in the wake of 9/11, typically referred to in press reports as "warrantless wiretapping."

In March, a front-page article in the Wall Street Journal shed further light onto the extraordinarily invasive scope of the NSA efforts: According to the Journal, the government can now electronically monitor "huge volumes of records of domestic e-mails and Internet searches, as well as bank transfers, credit card transactions, travel, and telephone records." Authorities employ "sophisticated software programs" to sift through the data, searching for "suspicious patterns." In effect, the program is a mass catalog of the private lives of Americans. And it's notable that the article hints at the possibility of programs like Main Core. "The [NSA] effort also ties into data from an ad-hoc collection of so-called black programs whose existence is undisclosed," the Journal reported, quoting unnamed officials. "Many of the programs in various agencies began years before the 9/11 attacks but have since been given greater reach."

"We're at the edge of a cliff," says Bruce Fein, a top justice official in the Reagan administration. "To a national emergency planner, everybody looks like a danger to stability"The following information seems to be fair game for collection without a warrant: the e-mail addresses you send to and receive from, and the subject lines of those messages; the phone numbers you dial, the numbers that dial in to your line, and the durations of the calls; the Internet sites you visit and the keywords in your Web searches; the destinations of the airline tickets you buy; the amounts and locations of your ATM withdrawals; and the goods and services you purchase on credit cards. All of this information is archived on government supercomputers and, according to sources, also fed into the Main Core database.

Main Core also allegedly draws on four smaller databases that, in turn, cull from federal, state, and local "intelligence" reports; print and broadcast media; financial records; "commercial databases"; and unidentified "private sector entities." Additional information comes from a database known as the Terrorist Identities Datamart Environment, which generates watch lists from the Office of the Director of National Intelligence for use by airlines, law enforcement, and border posts. According to the Washington Post, the Terrorist Identities list has quadrupled in size between 2003 and 2007 to include about 435,000 names. The FBI's Terrorist Screening Center border crossing list, which listed 755,000 persons as of fall 2007, grows by 200,000 names a year. A former NSA officer tells Radar that the Treasury Department's Financial Crimes Enforcement Network, using an electronic-funds transfer surveillance program, also contributes data to Main Core, as does a Pentagon program that was created in 2002 to monitor antiwar protesters and environmental activists such as Greenpeace.


HERE'S LOOKING AT YOU From your late-night e-mails and travel plans to phone records and financial transactions, the government finds you fascinating—and may consider you a potential enemy of the state (Photo: Illustration by Brett Ryder)


If previous FEMA and FBI lists are any indication, the Main Core database includes dissidents and activists of various stripes, political and tax protesters, lawyers and professors, publishers and journalists, gun owners, illegal aliens, foreign nationals, and a great many other harmless, average people.

A veteran CIA intelligence analyst who maintains active high-level clearances and serves as an advisor to the Department of Defense in the field of emerging technology tells Radar that during the 2004 hospital room drama, James Comey expressed concern over how this secret database was being used "to accumulate otherwise private data on non-targeted U.S. citizens for use at a future time." Though not specifically familiar with the name Main Core, he adds, "What was being requested of Comey for legal approval was exactly what a Main Core story would be." A source regularly briefed by people inside the intelligence community adds: "Comey had discovered that President Bush had authorized NSA to use a highly classified and compartmentalized Continuity of Government database on Americans in computerized searches of its domestic intercepts. [Comey] had concluded that the use of that 'Main Core' database compromised the legality of the overall NSA domestic surveillance project."

If Main Core does exist, says Philip Giraldi, a former CIA counterterrorism officer and an outspoken critic of the agency, the Department of Homeland Security (DHS) is its likely home. "If a master list is being compiled, it would have to be in a place where there are no legal issues"—the CIA and FBI would be restricted by oversight and accountability laws—"so I suspect it is at DHS, which as far as I know operates with no such restraints." Giraldi notes that DHS already maintains a central list of suspected terrorists and has been freely adding people who pose no reasonable threat to domestic security. "It's clear that DHS has the mandate for controlling and owning master lists. The process is not transparent, and the criteria for getting on the list are not clear." Giraldi continues, "I am certain that the content of such a master list [as Main Core] would not be carefully vetted, and there would be many names on it for many reasons—quite likely including the two of us."


UNDER REAGAN In the 1980s, control of the FBI's "security index" was reportedly transferred to none other than FEMA (Photo: Getty Images)


Would Main Core in fact be legal? According to constitutional scholar Bruce Fein, who served as associate deputy attorney general under Ronald Reagan, the question of legality is murky: "In the event of a national emergency, the executive branch simply assumes these powers"—the powers to collect domestic intelligence and draw up detention lists, for example—"if Congress doesn't explicitly prohibit it. It's really up to Congress to put these things to rest, and Congress has not done so." Fein adds that it is virtually impossible to contest the legality of these kinds of data collection and spy programs in court "when there are no criminal prosecutions and [there is] no notice to persons on the president's 'enemies list.' That means if Congress remains invertebrate, the law will be whatever the president says it is—even in secret. He will be the judge on his own powers and invariably rule in his own favor."

Compared to PROMIS, Richard Nixon's enemies list or Senator Joe McCarthy's blacklist look downright crudeThe veteran CIA intelligence analyst notes that Comey's suggestion that the offending elements of the program were dropped could be misleading: "Bush [may have gone ahead and] signed it as a National Intelligence Finding anyway."

But even if we never face a national emergency, the mere existence of the database is a matter of concern. "The capacity for future use of this information against the American people is so great as to be virtually unfathomable," the senior government official says.
In any case, mass watch lists of domestic citizens may do nothing to make us safer from terrorism. Jeff Jonas, chief scientist at IBM, a world-renowned expert in data mining, contends that such efforts won't prevent terrorist conspiracies. "Because there is so little historical terrorist event data," Jonas tells Radar, "there is not enough volume to create precise predictions."

The overzealous compilation of a domestic watch list is not unique in postwar American history. In 1950, the FBI, under the notoriously paranoid J. Edgar Hoover, began to "accumulate the names, identities, and activities" of suspect American citizens in a rapidly expanding "security index," according to declassified documents. In a letter to the Truman White House, Hoover stated that in the event of certain emergency situations, suspect individuals would be held in detention camps overseen by "the National Military Establishment." By 1960, a congressional investigation later revealed, the FBI list of suspicious persons included "professors, teachers, and educators; labor-union organizers and leaders; writers, lecturers, newsmen, and others in the mass-media field; lawyers, doctors, and scientists; other potentially influential persons on a local or national level; [and] individuals who could potentially furnish financial or material aid" to unnamed "subversive elements." This same FBI "security index" was allegedly maintained and updated into the 1980s, when it was reportedly transferred to the control of none other than FEMA (though the FBI denied this at the time).

FEMA, however—then known as the Federal Preparedness Agency—already had its own domestic surveillance system in place, according to a 1975 investigation by Senator John V. Tunney of California. Tunney, the son of heavyweight boxing champion Gene Tunney and the inspiration for Robert Redford's character in the film The Candidate, found that the agency maintained electronic dossiers on at least 100,000 Americans that contained information gleaned from wide-ranging computerized surveillance. The database was located in the agency's secret underground city at Mount Weather, near the town of Bluemont, Virginia. The senator's findings were confirmed in a 1976 investigation by the Progressive magazine, which found that the Mount Weather computers "can obtain millions of pieces [of] information on the personal lives of American citizens by tapping the data stored at any of the 96 Federal Relocation Centers"—a reference to other classified facilities. According to the Progressive, Mount Weather's databases were run "without any set of stated rules or regulations. Its surveillance program remains secret even from the leaders of the House and the Senate."



JUST IN CASE The Miami Herald contended that Reagan loyalist Oliver North had spearheaded the development of a "secret contingency plan" (Photo: Getty Images)

Ten years later, a new round of government martial law plans came to light. A report in the Miami Herald contended that Reagan loyalist and Iran-Contra conspirator Colonel Oliver North had spearheaded the development of a "secret contingency plan,"—code-named REX 84—which called "for suspension of the Constitution, turning control of the United States over to FEMA, [and the] appointment of military commanders to run state and local governments." The North plan also reportedly called for the detention of upwards of 400,000 illegal aliens and an undisclosed number of American citizens in at least 10 military facilities maintained as potential holding camps.

North's program was so sensitive in nature that when Texas congressman Jack Brooks attempted to question North about it during the 1987 Iran-Contra hearings, he was rebuffed even by his fellow legislators. "I read in Miami papers and several others that there had been a plan by that same agency [FEMA] that would suspend the American Constitution," Brooks said. "I was deeply concerned about that and wondered if that was the area in which he [North] had worked." Senator Daniel Inouye, chairman of the Senate Select Committee on Iran, immediately cut off his colleague, saying, "That question touches upon a highly sensitive and classified area, so may I request that you not touch upon that, sir." Though Brooks pushed for an answer, the line of questioning was not allowed to proceed.

Wired magazine turned up additional damaging information, revealing in 1993 that North, operating from a secure White House site, allegedly employed a software database program called PROMIS (ostensibly as part of the REX 84 plan). PROMIS, which has a strange and controversial history, was designed to track individuals—prisoners, for example—by pulling together information from disparate databases into a single record. According to Wired, "Using the computers in his command center, North tracked dissidents and potential troublemakers within the United States. Compared to PROMIS, Richard Nixon's enemies list or Senator Joe McCarthy's blacklist look downright crude." Sources have suggested to Radar that government databases tracking Americans today, including Main Core, could still have PROMIS-based legacy code from the days when North was running his programs.

In the wake of 9/11, domestic surveillance programs of all sorts expanded dramatically. As one well-placed source in the intelligence community puts it, "The gloves seemed to come off." What is not yet clear is what sort of still-undisclosed programs may have been authorized by the Bush White House. Marty Lederman, a high-level official at the Department of Justice under Clinton, writing on a law blog last year, wondered, "How extreme were the programs they implemented [after 9/11]? How egregious was the lawbreaking?" Congress has tried, and mostly failed, to find out.


HISTORY'S LESSONS Japanese Americans moved to internment camps in World War II

In July 2007 and again last August, Representative Peter DeFazio, a Democrat from Oregon and a senior member of the House Homeland Security Committee, sought access to the "classified annexes" of the Bush administration's Continuity of Government program. DeFazio's interest was prompted by Homeland Security Presidential Directive 20 (also known as NSPD-51), issued in May 2007, which reserves for the executive branch the sole authority to decide what constitutes a national emergency and to determine when the emergency is over. DeFazio found this unnerving.

But he and other leaders of the Homeland Security Committee, including Chairman Bennie Thompson, a Mississippi Democrat, were denied a review of the Continuity of Government classified annexes. To this day, their calls for disclosure have been ignored by the White House. In a press release issued last August, DeFazio went public with his concerns that the NSPD-51 Continuity of Government plans are "extra-constitutional or unconstitutional." Around the same time, he told the Oregonian: "Maybe the people who think there's a conspiracy out there are right."

None of the leading presidential candidates have been asked the question, "As president, will you continue aggressive domestic surveillance programs in the vein of the Bush administration?"Congress itself has recently widened the path for both extra-constitutional detentions by the White House and the domestic use of military force during a national emergency. The Military Commissions Act of 2006 effectively suspended habeas corpus and freed up the executive branch to designate any American citizen an "enemy combatant" forfeiting all privileges accorded under the Bill of Rights. The John Warner National Defense Authorization Act, also passed in 2006, included a last-minute rider titled "Use of the Armed Forces in Major Public Emergencies," which allowed the deployment of U.S. military units not just to put down domestic insurrections—as permitted under posse comitatus and the Insurrection Act of 1807—but also to deal with a wide range of calamities, including "natural disaster, epidemic, or other serious public health emergency, terrorist attack, or incident."

More troubling, in 2002, Congress authorized funding for the U.S. Northern Command, or NORTHCOM, which, according to Washington Post military intelligence expert William Arkin, "allows for emergency military operations in the United States without civilian supervision or control."

"We are at the edge of a cliff and we're about to fall off," says constitutional lawyer and former Reagan administration official Bruce Fein. "To a national emergency planner, everybody looks like a danger to stability. There's no doubt that Congress would have the authority to denounce all this—for example, to refuse to appropriate money for the preparation of a list of U.S. citizens to be detained in the event of martial law. But Congress is the invertebrate branch. They say, 'We have to be cautious.' The same old crap you associate with cowards. None of this will change under a Democratic administration, unless you have exceptional statesmanship and the courage to stand up and say, 'You know, democracies accept certain risks that tyrannies do not.'"


CREDIBLE WITNESS James Comey (Photo: Getty Images)

As of this writing, DeFazio, Thompson, and the other 433 members of the House are debating the so-called Protect America Act, after a similar bill passed in the Senate. Despite its name, the act offers no protection for U.S. citizens; instead, it would immunize from litigation U.S. telecom giants for colluding with the government in the surveillance of Americans to feed the hungry maw of databases like Main Core. The Protect America Act would legalize programs that appear to be unconstitutional.

Meanwhile, the mystery of James Comey's testimony has disappeared in the morass of election year coverage. None of the leading presidential candidates have been asked the questions that are so profoundly pertinent to the future of the country: As president, will you continue aggressive domestic surveillance programs in the vein of the Bush administration? Will you release the COG blueprints that Representatives DeFazio and Thompson were not allowed to read? What does it suggest about the state of the nation that the U.S. is now ranked by worldwide civil liberties groups as an "endemic surveillance society," alongside repressive regimes such as China and Russia? How can a democracy thrive with a massive apparatus of spying technology deployed against every act of political expression, private or public? (Radar put these questions to spokespeople for the McCain, Obama, and Clinton campaigns, but at press time had yet to receive any responses.)

These days, it's rare to hear a voice like that of Senator Frank Church, who in the 1970s led the explosive investigations into U.S. domestic intelligence crimes that prompted the very reforms now being eroded. "The technological capacity that the intelligence community has given the government could enable it to impose total tyranny," Church pointed out in 1975. "And there would be no way to fight back, because the most careful effort to combine together in resistance to the government, no matter how privately it was done, is within the reach of the government to know."


Christopher Ketcham writes for Harper's, GQ, and Mother Jones, among other publications
UPDATE

Since this article went to press, several documents have emerged to suggest the story has longer legs than we thought. Most troubling among these is an October 2001 Justice Department memo that detailed the extra-constitutional powers the U.S. military might invoke during domestic operations following a terrorist attack. In the memo, John Yoo, then deputy assistant attorney general, "concluded that the Fourth Amendment had no application to domestic military operations." (Yoo, as most readers know, is author of the infamous Torture Memo that, in bizarro fashion, rejiggers the definition of "legal" torture to allow pretty much anything short of murder.) In the October 2001 memo, Yoo refers to a classified DOJ document titled "Authority for Use of Military Force to Combat Terrorist Activities Within the United States." According to the Associated Press, "Exactly what domestic military action was covered by the October memo is unclear. But federal documents indicate that the memo relates to the National Security Agency's Terrorist Surveillance Program." Attorney General John Mukasey last month refused to clarify before Congress whether the Yoo memo was still in force.

Meanwhile, congressional sources tell Radar that Congressman Peter DeFazio has apparently abandoned his effort to get to the bottom of the White House COG classified annexes. Penny Dodge, DeFazio's chief of staff, says otherwise. "We will be sending a letter requesting a classified briefing soon," she told Radar this week.

Sleeping in Cars in the USA

Sleeping in Cars in the USA

Look around. The evidence of a withering economy is everywhere. In “good times” consumers shun the canned meat aisle altogether, but no more. Today, Spam sales are soaring; grocery stores can’t keep it on the shelves. Everyone is looking for cheaper ways to feed their families. The Labor Dept. assures us that core-inflation is only 4 per cent, but everybody knows it’s load of malarkey. Food prices are going through the roof. White bread is up 13 percent, bacon is up 7 percent and peanut butter is up 9 percent. Inflation is rampant and there’s no end in sight. The dollar is closing in on the peso and working people are struggling just to get by. The bottom line is that more and more people in “the richest country on earth” are now surviving on processed pig-meat. That says it all.

In Santa Barbara parking lots are being converted into hostels so that families that lost their homes in the subprime fiasco can sleep in their cars and not be hassled by the cops. The same is true in LA where tent cities have sprung up around the railroad yards to accommodate the growing number of people who’ve lost their jobs or can’t afford to rent a room on service-industry wages. It’s tragic. Everywhere people are feeling the pinch; that’s why 9 out of 10 Americans now believe the country is now headed in the wrong direction and that’s why consumer confidence is at its lowest ebb since the Great Depression. This is the great triumph of Reagan’s free trade “trickle down” Voodoo economics; whole families living out of their cars waiting for the pawn shop to open.

The economy is on life-support. The rest of the world would be doing us all a favor if they decided to chuck the dollar and boycott US financial products altogether. That would put an end to Wall Street’s chicanery once and for all. Foreign investors should be demanding restitution and impounding American assets to compensate for the trillions of dollars they lost in the subprime/securitization swindle. Litigate, litigate, litigate; that’s the only way to make the guilty parties pay for their crimes. Either that or set up a gallows on Wall Street and get down to business.

The pundits on the business channel are telling us that the “worst is over”; that the Force 5 hurricane in the financial markets has weakened to a squall. Don’t believe it. The corporate bond market is still frozen, housing is in free fall, and the banking system is buckling from the overload of bad investments. The FDIC is even trying to lure former employees out of retirement to deal with the tsunami of bank failures set to touch down later in 2008. Corporate defaults are on the rise and and commercial real estate is crashing.

“Commercial property prices in the US in February saw their sharpest decline since records began nearly 15 years ago as sources of finance for deals has dried up, according to data from Standard & Poor’s out yesterday. Sales of commercial properties were down 71 per cent in the first quarter compared with a year earlier.” (Financial Times) Commercial real estate is following the same downward trajectory as residential housing. They’re both headed for the bottom of the fish-tank. Any slump in CRE will send unemployment skyrocketing while adding to the solvency problems facing the banks.

We’re not out of the woods by a long shot, and won’t be for years to come. According to Bloomberg News, soaring raw material costs have caused a sharp rise in costs to producers that they won’t be able to pass on to cash-strapped consumers. That means that corporate profits will fall and stock values will plunge.

Last week, Oppenheimer analyst Meredith Whitney announced that:

“The real harrowing days of the credit crisis are still ahead of us and will prove more widespread in effect than anything yet seen. Just as strained liquidity pushed so many small and mid-sized specialty finance companies to the brink, we believe it will do the same to the US consumer. We believe losses will only accelerate further and far worse than the most draconian estimates.”

Whitney has been one of the few consistently accurate analysts of the current market meltdown.

The fate of the larger investment banks is just as uncertain as the smaller “depository” banks. Carlyle Group Chairman David Rubenstein summed it up like this last week, “US and European banks and financial institutions have enormous losses from from bad loans they haven’t yet recognized and may have a harder time wooing sovereign fund rescuers. Based on information I see, it will take at least a year before all losses are realized, and some financial institutions may fail. Many financial institutions aren’t going to be able to survive as independent institutions.”

That means there will be greater consolidation and more formidable banking monopolies, all of which is bad for the consumer.

The banks and financial institutions have never been in worse shape. They’ve already written down $344 billion since the credit crisis began last August and they’ll write down another $200 billion next year. By the time the crisis is over, they will have racked up an estimated $1 trillion in losses. That represents a $3 trillion contraction in loans to consumers and businesses. Also, these estimates don’t take into account the losses of revenue from the slowdown in consumer spending, shrinking GDP, and massive business failures; all of which will wreak further havoc on the financial sector.

The amount of stress on the banking system is unprecedented. The Fed is loaning out money hand-over-fist just to keep the scaffolding in place. Take a look at what is going on at the Fed’s so-called “auction facilities” where the Fed is providing loans and US Treasuries for “unsellable” mortgage-backed junk and other toxic bonds. The numbers are staggering.

According to the Associated Press:

The Federal Reserve’s emergency loans to banks climbed to the highest level on record even as Wall Street investment companies scaled back their borrowing… Banks stepped up their borrowing, according to the Fed report. They averaged $15.95 billion in daily borrowing for the week ending May 28, compared with $13.5 billion for the previous week, and the total was a record. The previous high of $14.4 billion came in the week ending May 14… In the broadest use of the central bank’s lending power since the 1930s, the Fed in March scrambled to avert a market meltdown by giving investment houses a place to go for emergency overnight loans… The Fed also announced Thursday it will make a fresh batch of short-term cash loans available to banks as part of an effort to ease stressed credit markets… The Fed said it will conduct three auctions in June; each will offer $75 billion in short-term cash loans. It would mark the latest round in a program that the Fed launched in December to help banks overcome credit problems so they will keep lending to customers.1

Another $225 billion?!?

The Fed is trashing its balance sheet–to the tune of $225 billion–when the money could be used to provide free college tuition and universal health care. What a waste. Instead, the money is being used to throw a lifeline to dodgy speculators would were trying to snooker foreign investors with garbage securities. At the same time, the Fed’s emergency facilities have done nothing to restore trust between the individual banks who are more reluctant to lend to each other than ever. The ongoing scandal surrounding Libor (the interest rate that banks charge each other and which determines the rates on $3 trillion of financial products including mortgages) strongly suggests that the banks are lying about the true rate they are paying so the public doesn’t find out how battered they really are.

Bloomberg News: “Banks routinely misstated borrowing costs to the British Bankers’ Association to avoid the perception they faced difficulty raising funds as credit markets seized up.”

Consumer spending is sluggish too, since lending standards have tightened and home equity continues to vanish. Subprime problems have migrated from Wall Street to Main Street as credit trends appear to be getting worse. Consumers are maxed-out on their credit cards, student loans, mortgages and car loans. The lack of personal savings is not the result of a profligate lifestyle (as the right wing media likes to opine) but 30 years of stagnant wages and class warfare waged via big business and the federal tax code. None of the baby boomers are counting on Social Security to pay the bills when they retire but, still, that doesn’t justify the money being ripped-off from their paychecks every week and slipped into the general fund where it is used to pave roads and purchase cluster-bombs. Social security is nothing but a flat tax for paupers. (The rich get a free-ride after the first $87,000 income) These are some of the factors that are bearing down on an American economy like a Daisy Cutter. 2009 is looking is looking more and more like a chapter out of Revelation.

An article is this week’s The Economist summarizes the malaise in housing in particularly apocalyptic terms:

America’s house prices are falling even faster than during the Great Depression. As house prices in America continue their rapid descent, market-watchers are having to cast back ever further for gloomy comparisons. The latest S&P/Case-Shiller national house-price index, published this week, showed a slump of 14.1% in the year to the first quarter, the worst since the index began 20 years ago. Now Robert Shiller, an economist at Yale University and co-inventor of the index, has compiled a version that stretches back over a century. This shows that the latest fall in nominal prices is already much bigger than the 10.5% drop in 1932, the worst point of the Depression. And things are even worse than they look. In the deflationary 1930s house prices declined less in real terms. Today inflation is running at a brisk pace, so property prices have fallen by a staggering 18% in real terms over the past year.2

The country is undergoing a collapsing real estate market that surpasses the Great Depression and former Fed-chief Alan Greenspan’s book is still on the New York Times Best Seller list. How’s that for irony?

Regrettably, there’s no sign of a bottom yet in housing. Some markets have already dropped by 30% costing the states (like California and Florida) billions in tax revenue and triggering a steep increase in foreclosures. In California, sales are not only down by roughly 50 per cent, but 40 per cent of new sales are sales of foreclosed homes. The pool of potential buyers has dried up. Now the vultures are circling and picking up homes for $.50 on the dollar. The losses are enormous. If the downward trend continues, (as many now expect) and housing prices drop 30 per cent nationwide; the market will shed $6.5 trillion in aggregate value and lower household spending by $300 billion. That means GDP will shrink at least another full percentage point.

The crisis in the financial markets won’t be resolved until housing prices stabilize, that’s why the Fed and Congress are scrambling to put together a plan (Hope Now) that will slow the rate of foreclosures. Trillions of dollars in complex bonds and mortgage-backed securities will continue to be downgraded until investors see that it is safe to “dip their toes in the water” again and reinvest in a (currently) moribund market. So far, Congress has made little headway in keeping homeowners from defaulting on their mortgages. Credit Suisse predicts that foreclosures will be somewhere north of 6.5 million homeowners over the next few years. It is the equivalent of Hurricane Katrina sweeping from one side of the country to the other.

The next administration–whether it’s McCain or Obama–will be forced to restore the Resolution Trust Corp., which was created in 1989 to dispose of assets of insolvent savings and loan banks. The RTC would create a government-owned management company that would buy distressed MBS from banks and liquidate them via auction. The state would pay less than full-value for the bonds (The Fed currently pays 85 per cent face-value on MBS) and then take a loss on their liquidation. According to Joseph Stiglitz in his book, Towards a New Paradigm in Monetary Economics, the real reason behind the need of this company was to allow the US government to subsidize the banking sector in a way that wasn’t very transparent and therefore avoid the possible resistance.

There it is; a taxpayer-funded bailout of Biblical proportions looming on the horizon, possibly as soon as 2009. Ultimately, it is the only sure-fire way to stabilize the crumbling banking system and put a floor under housing prices. The effects on the dollar, however, will be catastrophic. Don’t expect the greenback to survive as the world’s “reserve currency”. Those days are about over.

The troubles in the financial markets will be with us for some time. The massive expansion of credit has created numerous equity bubbles that are unwinding at an unpredictable pace. Author James Howard Kunstler calls the present process “the remorseless algebra of a deflationary death spiral”. That’s about as close to a perfect description as imaginable. There’s bound to be considerable disagreement about the origins of the bubble and who is to blame. Was it the Fed’s “low interest ” policy following the dot.com bust in 2000, or the lack of government regulation in the securitzation process, or was it just the natural corollary of a political system which invariably bows and scrapes to Wall Street?

The real origin of the problem is ideological. It’s rooted in the prevailing “trickle down” orthodoxy which opposes any increases in wages or benefits for working people. Henry Ford realized what today’s captains of industry and finance refuse to accept; that if workers aren’t adequately paid for their labor—and wages do not keep pace with production—then the economy cannot grow because consumers do not have the money to buy the things they make. It’s just that simple. Greenspan and his ilk believed that they could prosecute the class war and make up the difference by relaxing lending standards, changing bankruptcy laws, and by creating a nearly endless array of exotic financial products that expanded credit. But shifting wealth from one class to another has its costs. By crushing the worker the Friedmanites have killed the golden goose. The world’s most prosperous consumer society is in terminal distress and no amount of “free market” gibberish will keep it from crashing.

  1. Jeannine Aversa, “Banks step up Fed loans, investment firms scale back,” Yahoo! News, 29 May 2008. #
  2. Through the floor,” The Economist, 29 May 2008. #

Chavez Revamps His Intelligence Services: The Corporate Media React

Chavez Revamps His Intelligence Services: The Corporate Media React

By Stephen Lendman

Go To Original

Reports keep surfacing about new threats against Hugo Chavez. Given past ones, they can't be taken lightly. Chavez is alerted and reacts accordingly. Case in point: revamping Venezuela's decades old intelligence services. It's long overdue and urgently needed given the Bush administration's tenure winding down and its determination in its remaining months to end the Bolivarian project and crush its participatory democracy.

CIA, NED, IRI, USAID and other US elements infest the country and are more active than ever. Subversion is their strategy, and it shows up everywhere. Violence is being encouraged. Opposition groups are recruited and funded. So are members of Venezuela's military. Student groups as well and anti-Chavista candidates for November's mayoral and gubernatorial elections.

The dominant media are on board in Venezuela and America. They assail Chavez relentlessly and are on the warpath again after his May 28 announced intelligence services changes. The Interior and Justice Ministries will oversee a new General Intelligence Office and Counterintelligence Office in place of the current Directorate of Intelligence and Prevention Services (DISIP). Similar military intelligence and counterintelligence components will replace the Military Intelligence Division (DIM) and will be under the Defense Ministry. Why was it done and why now? To counter stepped up US espionage and destabilization efforts when it's most needed.

New tools will be used and current personnel retrained and vetted for their Bolivarian commitment. DISIP and DIM are outdated. They've been around since 1969 to serve the "capitalist vision" of that era. Ever since, they've been "notoriously repressive" and closely aligned with the CIA. Therein lies the problem. Chavez intends to fix it. The dominant media reacted. They're hostile to change and showed it their reports.

The New York Times' Simon Romero has trouble with his facts. He headlined "Chavez Decree Tightens Hold on Intelligence." He referred to the new Law on Intelligence and Counterintelligence that passed by presidential decree under the legislatively-granted enabling law. He failed to explain that the 1969 law passed the same way, and that Venezuela's Constitution then and now permit it.

Instead, he noted a "fierce backlash here from (mostly unnamed) human rights groups and 'legal scholars' who say the measures will force citizens to inform on one another to avoid prison terms....The new law requires (them) to....assist the agencies, secret police or community activist groups loyal to Mr. Chavez. Refusal can result in prison terms of two to four years (and up to) six years for government employees."

Once again, Romero falls short on credibility. Hyperbole substitutes for truth as in all his reports. No country more respects human rights than Venezuela, and Chavez is committed to them. To the rule of law as well and social justice. The country's Constitution mandates it, and government officials are bound by it. Appointed officials with other aims have no place in it. They need to be exposed and replaced but need fear no recrimination unless they violate the law.

The new one won't create "a society of informers" as one of Romero's sources stated. Nor will it imprison Venezuelan citizens or let Chavez "assert greater control over public institutions in the face of political challenges following a 'stinging' defeat in December('s) constitutional (referendum) that would have expanded his powers."

It will insure greater "national security" and protect against "imperialist attacks" as Chavez explained. It's to preserve Bolivarianism against persistent attempts to destroy it. It's to serve all Venezuelans, advance a new 21st century vision, and put people ahead of privilege. It's to counter Bush administration efforts to restore neoliberalism, return the old order, and destroy social justice in the region's most model democracy.

Without explaining Venezuelan law or its legislative process, Romero states that the "law (was drafted and passed) behind closed doors, without exposing it to....public debate (and that) contributed to the public uproar and suspicion." His "public," of course, are elitists. They target Chavez for removal, denounce all his beneficial changes, and falsely accuse him of governing dictatorially.

"They" claim "justice officials, including judges, are required to actively collaborate with the intelligence services rather than serve as a check on them." According to Americas director for Human Rights Watch (HRW), Jose Miguel Vivanco: "This is a government that simply doesn't believe in the separation of powers....(It requires) the country's judges (to) serve as spies for the government." Vivanco knows better and damages HRW's credibility with comments like these. Romero uses them with relish to aid the imperial project.

Venezuela's internal threat is unmentioned. Rogue elements infest the government and military. They oppose democracy and social justice. Washington supports them. They must be found and removed. Venezuelans demand it. Better intelligence will help. Romero won't report it. Instead, he inverts truth and sides with forces trying to destabilize and undermine a government of, by and for the people.

He quotes "a prominent legal scholar" (in fact, right wing lawyer Rocio San Miguel) saying "This is the most scandalous effort to intimidate the population in the 10 years this government has been in power. Under the new law (information I have) could be considered a threat to national security and I could be sent immediately to jail." Indeed she could if she violates the law or tries to subvert the government. Otherwise, she's entitled to all benefits and protections Venezuelan law affords everyone. No comment from Romero.

AP echoed The New Times in its headlined May 31 report: "Venezuelan intelligence law draws protests, seen as potential tool against dissent." Again, it's false and misleading and part of the imperial plot against Chavez. AP unfairly equates the new law to the USA Patriot Act, when, in fact, it's totally dissimilar. The US law violates constitutional civil liberties. Venezuela's respects them, but it's easy for protesters to claim otherwise.

Justice Minister Ramon Rodriguez Chacin explained the difference. US law spies on Americans and denies them legal protection. Venezuela's law enlists responsible citizen participation in preserving their government. They have a stake in "state security and resolving crimes. If (they) witness (wrongdoing and) hide it, then (they) are an accomplice to that crime." It doesn't require people to spy. It wants them to cooperate and be engaged in preserving Bolivarianism and to report threats against it. It's to make them responsible citizens united for their common self-interest.

That's not how BBC sees it as part of its anti-Chavez agenda. Its June 3 online report highlighted: "Venezuela 'spy' law draws protest....among groups who say it threatens civil liberties." One of them is HRW's Vivanco again voicing the same false and misleading statements about "judges serving as spies." Another source, with a clear anti-Chavez agenda, says the "law may be used as a weapon to silence and intimidate the opposition."

In fact, Chavez champions free expression in all forms unlike in America post-9/11. Repressive laws and presidential executive orders stifle it. Activists are targeted, harassed and imprisoned. Illegal spying is institutionalized. So are repression, torture and disdain for the rule of law. Where are BBC, AP, The New York Times and other dominant media voices? Why aren't they exposing police state justice? Instead they denounce democracy, ally with despotism, and acknowledge no hint of hypocrisy.

Chavez is mirror opposite his media critics and counters them correctly. He calls the USA Patriot Act "dictatorial law." In contrast, the new Venezuelan one upholds freedom, seeks to preserve it, and is within "a framework of great respect for human rights." It will combat US subversion that dominant media sources ignore. They blame victims instead and are willing co-conspirators against Venezuela's model democracy. Their latest efforts show why Chavez needs all the defense he can marshal against them, and for all the right reasons.

Stephen Lendman is a Research Associate of the Centre for Research on Globalization. He lives in Chicago and can be reached at lendmanstephen@sbcglobal.net.

Also visit his blog site at sjlendman.blogspot.com and listen to The Global Research News Hour on RepublicBroadcasting.org Mondays from 11AM to 1PM US Central time for cutting-edge discussions with distinguished guests. All programs are archived for easy listening.

Gaza Strip pummelled by Israel

Gaza Strip pummelled by Israel

Go To Original

Israel has sent aircraft, tanks and ground troops to pummel the Gaza Strip, only hours after Prime Minister Ehud Olmert warned that Israel was seriously considering a large-scale incursion and would abandon truce talks.

The Israeli’s killed one Palestinian and injured seventeen on Friday, a day after Palestinian militants killed an Israeli civilian in a mortar attack.

Four Israelis have been killed this year in rocket and mortar attacks, out of a total of 16 killed since 2004.

Egypt has been trying for months to mediate a cease-fire between Israel and the Gaza’s Islamic militant Hamas rulers, but both sides have set tough conditions for a truce.

In addition to its military operations against militants, Israel also has blockaded Gaza in an effort to force Hamas to rein in rocket launchers.

For months, only humanitarian aid and limited fuel shipments have passed into the territory, which Hamas seized in a violent takeover one year ago.

Blackwater's Private Spies

Blackwater's Private Spies

Go To Original

This past September, the secretive mercenary company Blackwater USA found its name splashed across front pages throughout the world after the company's shooters gunned down seventeen Iraqi civilians in Baghdad's Nisour Square. But by early 2008, Blackwater had largely receded from the headlines save for the occasional blip on the media radar sparked by Congressman Henry Waxman's ongoing investigations into its activities. Its forces remained deployed in Iraq and Afghanistan, and business continued to pour in. In the two weeks directly following Nisour Square, Blackwater signed more than $144 million in contracts with the State Department for "protective services" in Iraq and Afghanistan alone and, over the following weeks and months, won millions more in contracts with other federal entities like the Coast Guard, the Navy and the Federal Law Enforcement Training Center.

Blackwater's Iraq contract was extended in April, but the company is by no means betting the house on its long-term presence there. While the firm is quietly maintaining its Iraq work, it is aggressively pursuing other business opportunities.

In September it was revealed that Blackwater had been "tapped" by the Pentagon's Counter Narcoterrorism Technology Program Office to compete for a share of a five-year, $15 billion budget "to fight terrorists with drug-trade ties." According to the Army Times, the contract "could include antidrug technologies and equipment, special vehicles and aircraft, communications, security training, pilot training, geographic information systems and in-field support." A spokesperson for another company bidding for the work said that "80 percent of the work will be overseas." As Richard Douglas, a deputy assistant secretary of defense, explained, "The fact is, we use Blackwater to do a lot of our training of counternarcotics police in Afghanistan. I have to say that Blackwater has done a very good job."

Such an arrangement could find Blackwater operating in an arena with the godfathers of the war industry, such as Lockheed Martin, Northrop Grumman and Raytheon. It could also see Blackwater expanding into Latin America, joining other private security companies well established in the region. The massive US security company DynCorp is already deployed in Colombia, Bolivia and other countries as part of the "war on drugs." In Colombia alone, US military contractors are receiving nearly half the $630 million in annual US military aid for the country. Just south of the US border, the United States has launched Plan Mexico, a $1.5 billion counternarcotics program. This and similar plans could provide lucrative business opportunities for Blackwater and other companies. "Blackwater USA's enlistment in the drug war," observed journalist John Ross, would be "a direct challenge to its stiffest competitor, DynCorp--up until now, the Dallas-based corporation has locked up 94 percent of all private drug war security contracts." The New York Times reported that the contract could be Blackwater's "biggest job ever."

As populist movements grow stronger in Latin America, threatening US financial interests as well as the standing of right-wing US political allies in the region, the "war on drugs" is becoming an increasingly central part of US counterinsurgency efforts. It allows for more training of foreign security forces through the private sector--away from Congressional oversight--and a deployment of personnel from US war corporations. With US forces stretched thin, sending private security companies to Latin America offers Washington a "small footprint" alternative to the politically and militarily problematic deployment of active-duty US troops. In a January report by the United Nations working group on mercenaries, international investigators found that "an emerging trend in Latin America but also in other regions of the world indicates situations of private security companies protecting transnational extractive corporations whose employees are often involved in suppressing the legitimate social protest of communities and human rights and environmental organizations of the areas where these corporations operate."

If there is one quality that is evident from examining Blackwater's business history, it is the company's ability to take advantage of emerging war and conflict markets. Throughout the decade of Blackwater's existence, its creator, Erik Prince, has aggressively built his empire into a structure paralleling the US national security apparatus. "Prince wants to vault Blackwater into the major leagues of U.S. military contracting, taking advantage of the movement to privatize all kinds of government security," reported the Wall Street Journal shortly after Nisour Square. "The company wants to be a one-stop shop for the U.S. government on missions to which it won't commit American forces. This is a niche with few established competitors."

In addition to providing armed forces for war and conflict zones and a wide range of military and police training services, Blackwater does a robust, multimillion-dollar business through its aviation division. It also has a growing maritime division and other national and international initiatives. Among these, Blackwater is in Japan, where its forces protect the US ballistic missile defense system, which, according to Stars and Stripes, "points high-powered radio waves westward toward mainland Asia to hunt for enemy missiles headed east toward America or its allies." Meanwhile, early this year, Defense News reported, "Blackwater is training members of the Taiwanese National Security Bureau's (NSB's) special protection service, which guards the president. The NSB is responsible for the overall security of the country and was once an instrument of terrorism during the martial law period. Today, according to its Web site, the NSB is responsible for 'national intelligence work, special protective service and unified cryptography.'" Former Pakistani Prime Minister Benazir Bhutto reportedly tried to hire Blackwater to protect her as she campaigned for the presidency in 2007. Conflicting reports indicated that either the US State Department or the Pakistani government vetoed the plan. She was assassinated in December.

What could prove to be one of Blackwater's most profitable and enduring enterprises is one of the company's most secretive initiatives--a move into the world of privatized intelligence services. In April 2006, Prince quietly began building Total Intelligence Solutions, which boasts that it "brings CIA-style" services to the open market for Fortune 500 companies. Among its offerings are "surveillance and countersurveillance, deployed intelligence collection, and rapid safeguarding of employees or other key assets."

As the United States finds itself in the midst of the most radical privatization agenda in its history, few areas have seen as dramatic a transformation to privatized services as the world of intelligence. "This is the magnet now. Everything is being attracted to these private companies in terms of individuals and expertise and functions that were normally done by the intelligence community," says former CIA division chief and senior analyst Melvin Goodman. "My major concern is the lack of accountability, the lack of responsibility. The entire industry is essentially out of control. It's outrageous."

Last year R.J. Hillhouse, a blogger who investigates the clandestine world of private contractors and US intelligence, obtained documents from the office of the Directorate of National Intelligence (DNI) showing that Washington spends some $42 billion annually on private intelligence contractors, up from $17.5 billion in 2000. That means 70 percent of the US intelligence budget is going to private companies. Perhaps it is no surprise, then, that the head of DNI is Mike McConnell, the former chair of the board of the Intelligence and National Security Alliance, the private intelligence industry's trade association.

Total Intelligence, which opened for business in February 2007, is a fusion of three entities bought up by Prince: the Terrorism Research Center, Technical Defense and The Black Group--Blackwater vice chair Cofer Black's consulting agency. The company's leadership reads like a Who's Who of the CIA's "war on terror" operations after 9/11. In addition to the twenty-eight-year CIA veteran Black, who is chair of Total Intelligence, the company's executives include CEO Robert Richer, the former associate deputy director of the agency's Directorate of Operations and the second-ranking official in charge of clandestine operations. From 1999 to 2004, Richer was head of the CIA's Near East and South Asia Division, where he ran clandestine operations throughout the Middle East and South Asia. As part of his duties, he was the CIA liaison with Jordan's King Abdullah, a key US ally and Blackwater client, and briefed George W. Bush on the burgeoning Iraqi resistance in its early stages.

Total Intelligence's chief operating officer is Enrique "Ric" Prado, a twenty-four-year CIA veteran and former senior executive officer in the Directorate of Operations. He spent more than a decade working in the CIA's Counterterrorist Center and ten years with the CIA's "paramilitary" Special Operations Group. Prado and Black worked closely at the CIA. Prado also served in Latin America with Jose Rodriguez, who gained infamy late last year after it was revealed that as director of the National Clandestine Service at the CIA he was allegedly responsible for destroying videotapes of interrogations of prisoners, during which "enhanced interrogation techniques," including waterboarding, were reportedly used. Richer told the New York Times he recalled many conversations with Rodriguez, about the tapes. "He would always say, 'I'm not going to let my people get nailed for something they were ordered to do,'" Richer said of his former boss. Before the scandal, there were reports that Blackwater had been "aggressively recruiting" Rodriguez. He has since retired from the CIA.

The leadership of Total Intelligence also includes Craig Johnson, a twenty-seven-year CIA officer who specialized in Central and South America, and Caleb "Cal" Temple, who joined the company straight out of the Defense Intelligence Agency, where he served from 2004 to '06 as chief of the Office of Intelligence Operations in the Joint Intelligence Task Force--Combating Terrorism. According to his Total Intelligence bio, Temple directed the "DIA's 24/7 analytic terrorism target development and other counterterrorism intelligence activities in support of military operations worldwide. He also oversaw 24/7 global counterterrorism indications and warning analysis for the U.S. Defense Department." The company also boasts officials drawn from the Drug Enforcement Agency and the FBI.

Total Intelligence is run out of an office on the ninth floor of a building in the Ballston area of Arlington, Virginia. Its "Global Fusion Center," complete with large-screen TVs broadcasting international news channels and computer stations staffed by analysts surfing the web, "operates around the clock every day of the year" and is modeled after the CIA's counterterrorist center, once run by Black. The firm employs at least sixty-five full-time staff--some estimates say it's closer to 100. "Total Intel brings the...skills traditionally honed by CIA operatives directly to the board room," Black said when the company launched. "With a service like this, CEOs and their security personnel will be able to respond to threats quickly and confidently--whether it's determining which city is safest to open a new plant in or working to keep employees out of harm's way after a terrorist attack."

Black insists, "This is a completely legal enterprise. We break no laws. We don't go anywhere near breaking laws. We don't have to." But what services Total Intelligence is providing, and to whom, is shrouded in secrecy. It is clear, though, that the company is leveraging the reputations and inside connections of its executives. "Cofer can open doors," Richer told the Washington Post in 2007. "I can open doors. We can generally get in to see who we need to see. We don't help pay bribes. We do everything within the law, but we can deal with the right minister or person." Black told the paper he and Richer spend a lot of their time traveling. "I am discreet in where I go and who I see. I spend most of my time dealing with senior people in governments, making connections." But it is clear that the existing connections from the former spooks' time at the agency have brought business to Total Intelligence.

Take the case of Jordan. For years, Richer worked closely with King Abdullah, as his CIA liaison. As journalist Ken Silverstein reported, "The CIA has lavishly subsidized Jordan's intelligence service, and has sent millions of dollars in recent years for intelligence training. After Richer retired, sources say, he helped Blackwater land a lucrative deal with the Jordanian government to provide the same sort of training offered by the CIA. Millions of dollars that the CIA 'invested' in Jordan walked out the door with Richer--if this were a movie, it would be a cross between Jerry Maguire and Syriana. 'People [at the agency] are pissed off,' said one source. 'Abdullah still speaks with Richer regularly, and he thinks that's the same thing as talking to us. He thinks Richer is still the man.' Except in this case it's Richer, not his client, yelling 'show me the money.'"

In a 2007 interview on the cable business network CNBC, Black was brought on as an analyst to discuss "investing in Jordan." At no point in the interview was Black identified as working for the Jordanian government. Total Intelligence was described as "a corporate consulting firm that includes investment strategy," while "Ambassador Black" was introduced as "a twenty-eight-year veteran of the CIA," the "top counterterror guy" and "a key planner for the breathtakingly rapid victory of American forces that toppled the Taliban in Afghanistan." Black heaped lavish praise on Jordan and its monarchy. "You have leadership, King Abdullah, His Majesty King Abdullah, who is certainly kind towards investors, very protective," Black said. "Jordan is, in our view, a very good investment. There are some exceptional values there." He said Jordan is in a region where there are "numerous commodities that are being produced and doing well."

With no hint of the brutality behind the exodus, Black argued that the flood of Iraqi refugees fleeing the violence of the US occupation was good for potential investors in Jordan. "We get something like 600, 700,000 Iraqis that have moved from Iraq into Jordan that require cement, furniture, housing and the like. So it is a--it is an island of growth and potential, certainly in that immediate area. So it looks good," he said. "There are opportunities for investment. It is not all bad. Sometimes Americans need to watch a little less TV.... But there is--there is opportunity in everything. That's why you need situation awareness, and that's one of the things that our company does. It provides the kinds of intelligence and insight to provide situational awareness so you can make the best investments."

Black and other Total Intelligence executives have turned their CIA careers, reputations, contacts and connections into business opportunities. What they once did for the US government, they now do for private interests. It is not difficult to imagine clients feeling as though they are essentially hiring the US government to serve their own interests. In 2007 Richer told the Post that now that he is in the private sector, foreign military officials and others are more willing to give him information than they were when he was with the CIA. Richer recalled a conversation with a foreign general during which he was surprised at the potentially "classified" information the general revealed. When Richer asked why the general was giving him the information, he said the general responded, "If I tell it to an embassy official I've created espionage. You're a business partner."

In May, Erik Prince gave a speech in front of his family and supporters in his home state of Michigan. Security was extremely tight, and Blackwater barred cameras and tape recorders from the event. "The idea that we are a secretive facility, and nefarious, is just ridiculous," Prince told the friendly crowd of 750 gathered at the Amway Grand Plaza. In Iraq, Blackwater has banked on the idea that it is a sort of American Express card for the occupation. But for the future, Prince has a different corporate model, as he indicated in his speech. "When you send something overseas, do you use FedEx or the postal service?" he asked.

There are serious problems with this analogy. When you send something by FedEx, you can track your package and account for its whereabouts at all times. You can have your package insured against loss or damage. That has not been the case with Blackwater. The people who foot the sizable bill for its "services" almost never know, until it is too late, what Blackwater is doing, and there are apparently no consequences for Blackwater when things go lethally wrong. "We are essentially a robust temp agency," Prince told his fans in Michigan. He's right about that one. A temp agency serving the most radical privatization agenda in history.