Tuesday, June 17, 2008

Colliding Bubbles, US Unemployment, the Credit Crisis and Oil Price Surge

Colliding Bubbles, US Unemployment, the Credit Crisis and Oil Price Surge

By: John Mauldin

Go To Original

Unemployment Jumps to 5.5%, On Its Way to 6%

The headline number said the US lost 49,000 jobs in May, somewhat fewer than expected. The details were much uglier. It is no surprise that construction saw losses of 34,000, but "goods production" also saw a drop of 57,000 and manufacturing was down 26,000. What was up? Health care (34,000), bars and restaurants (11,000), and government added 17,000 (though, as Phillippa Dunne and Doug Henwood of The Liscio Report noted, the gain was all from local governments, as federal and state governments shed jobs).

So, with all the large losses and few gains, how did we show a loss of only 49,000 jobs? As long-time readers will guess, it is our old friend, the birth/death model, which is the estimate of new jobs created by new and small businesses, which are not covered in the survey. Contrary to some opinions, it is not a conspiracy by a government agency to "cook the books" in an attempt to show a number better than it really is. (If it was, they are doing a really bad job!) It is simply a moving-average projection of the past few years. Like any trend-following system, it will be wrong (sometimes badly) at the inflection points of the change in the trend.

Thus, the Bush administration was right to be upset when the birth/death model significantly understated the growth in jobs during the recovery from the last recession, as Democrats talked about the "jobless recovery." Subsequent revisions showed that in fact there were a lot of jobs being created.

And now? As the economy rolls through a recession, the system is overstating the number of jobs created. It is just a function of the model. The BLS is very open with the numbers it uses, if you care to dig into them. In October the BLS will announce new benchmarks and apply them in March 2009, although they will only be applied through March 2008. The number of lost jobs through last March will be revised significantly upward, just about the time the recovery is underway. And also in time to help modestly understate the jobs being created in the recovery. As my friend Dennis Gartman likes to say, anybody who trades on the employment numbers deserves the spanking they get.

For the record, "March was revised down by 7,000, and April by 8,000. We've now had four consecutive months of downward first revisions, and also four consecutive downward second revisions - unusual strings that support the picture of a weakening employment trend." (The Liscio Report)

And the birth/death model? This month it added in an estimated 217,000 new jobs. But looking into the details, the model suggested that 42,000 construction jobs were added. The survey showed lost jobs in construction, but the birth/death model added more construction jobs than were lost. Given the current economic climate, that is highly improbable. Ditto for the 77,000 in leisure and hospitality. Do we really think 9,000 jobs were added in financial services or another 9,000 in small manufacturing start-ups?

The reality is that we probably saw a decrease in jobs of at least 100,000. The market was upset with 40,000. What will it do when the monthly number prints 100,000 later this year? And it likely will. The Federal Reserve projects that unemployment will rise to 6%. That means there are a lot more jobs to be lost. And that is if unemployment stops at 6%, which would be a very mild recession indeed.

There are two unemployment surveys. One is for businesses, called the establishment survey, and for whatever reason that is the one most people pay attention to. When they do the household survey, they found that the number of employed people fell by 617,000 last month, spiking the unemployment rate to 5.5%. Some on CNBC said it was just teenage unemployment showing up in the numbers, but that is not true. Teens, according to Phillippa, accounted for just 0.2% of the rise. Adult unemployment rose to 4.8% and accounted for 0.3% of the rise. (By the way, technically, for the three people with no social life actually watching the scorecards, the household survey dropped 250,000 jobs; but after you adjust for factors in the establishment survey and seasonally adjust, you get 617,000.)

One of the best indicators of the direction of employment is temporary employment. If the workload is shrinking, the first thing you do is lay off your temporary help, or simply do not hire them. Normally, unemployment is a lagging indicator, but temporary help is at least a coincident if not a leading indicator. Temporary employment is down 5.7% year over year and is showing continued monthly deterioration with each passing month since last October. That does not bode well either for future employment or consumer spending. We will watch to see when temporary help begins to rebound, to give us a hint that a recovery may be in our future.

What the Tax Numbers Show

Philippa Dunne & Doug Henwood write The Liscio Report. They focus on interpreting the employment numbers and doing in-depth research on tax collections at the state level, plus a lot of interesting "inside" information not typically known by the public. When you see an analyst talking about tax collections at the state level, there is a high likelihood that the source of the number is actually the work of Dunne and Henwood. I find their letter very useful, as I get analysis very quickly after the report comes out, and you always get "the rest of the story" not revealed in the press releases and the media. ( www.theliscioreport.com ) If I ran a trading desk I would want their reports on my desk.

I called Phillippa about a report they sent out this week. Basically, sales tax and income tax collections at the state level are either down or flat. You can do all the surveys and polls you like, but one of the rules of life is that no one pays a penny more in taxes than they have to. The flip side of that premise is that sales tax collections are a VERY good barometer of economic activity.

Phillippa was kind enough to send me a chart to share with my readers. The have a diffusion index which tracks how well states are doing in meeting their projections for tax receipts. This does not show the level of receipts, as a state could be "positive" in this index if it projects lower receipts and meets that target. In general, states have been lowering their projected income.

As it turns out, this index is a fairly consistent indicator of the direction of retail sales, as the graph below will attest. The green bar line is their sales tax diffusion index, and the red bars are retail sales growth. Their index has dropped precipitously in the last few quarters, leading retail sales down. And it suggests there is more pain in retail sales to come.

But wait, didn't we read yesterday that retail sales were up? "Wal-Mart sales, for stores open at least one year, increased 3.9%; Costco US showed a 7% US gain and a 15% foreign gain. BJ's Wholesale Club sales surged 13.4% on gasoline and food sales. BJ reports gasoline sales jumped 6.6% and perishable food sales surged 11% but general merchandise was flat!!!" (The Bill King Report)

Retailers that did not have food and gas to boost their sales showed considerable weakness. GAP was off 14%, JCPenney down 4%, and Limited Brands down 6%. Even the high-end stores like Saks (-9%) were down, and Nordstrom projects that June will be down 22%. Given the sales tax numbers, I would not be buying the retail stocks on the dips. There is an old saying about trying to catch a falling knife.

Auto sales have fallen precipitously on the lack of demand for trucks, which were the most profitable item for car manufacturers. Is it any wonder they are cutting back and closing plants?

Wages declined by 0.2 in April in nominal terms, and forget about it in real, after-inflation numbers. David Rosenberg of Merrill Lynch notes that the 0.2% decline in real spending on durables and semi-durables was the 6 th decline in a row, which has never happened in the 49 years that such data has been tracked. He notes there has never been a time when consumer spending on durables (like cars and appliances) and semi-durables (like clothing) have contracted for two quarters when the economy has not been in a technical recession.

But there are other reasons for the slowdown in consumer spending. Since 2001, the average income of the bottom 90% of wage earners dropped by 0.9%, from $32,371 to $32,080 in 2006, in constant 2006 (inflation-adjusted) dollars. The further down the income scale, the more pressure on the consumer. (source: Center for American Progress)

The top 10% have seen their incomes rise from $221,000 to $254,000, a rise of 15%. Side bet: we will see the average income of the top 10% come down in 2008 and 2009.

From Goldman Sachs: "We estimate that the US government ran a budget deficit of $160 billion in May, about $92bn wider than in May 2007. Most of this reflects tax rebates (about $50bn) and calendar effects (about $27bn). The remaining $15bn is true deterioration, reflecting reduced tax revenue growth as the economy stagnates. In particular, withholding of income and payroll taxes was flat and corporate payments (usually tiny in May) fell."

In short, wherever you look, tax receipts are down. That means income and sales are down. There is no spin that trumps tax receipts. And Phillippa told me that her sources at the various states she surveys are not optimistic about a real recovery in the latter half of the year.

I would not want to own any stock whose earnings are tied to the US consumer. Between rising input prices and falling sales, earnings are going to be squeezed. Today's almost 400-point drop in the Dow is just a precursor to the direction of the market, until consumer spending starts to recover. This time, there will not be large mortgage equity withdrawals to bail out the economy. We will see a slow growth/no growth Muddle Through Economy for at least another 12 months.

What's Up With Oil?

The price of a barrel of oil was up $16 in the last two days, to $138.54, a violent 13% move. Is it those nasty speculators? Are fundamentals at work? Is the world worried about Israel bombing Iran? There are numerous factors involved, but the combination produced a kind of perfect storm in the trading pits. Let's look at several items and see if we can find a connection.

First, there is a real connection between the price of dollar and the price of oil. In dollar terms, oil rises as the dollar falls and vice versa. The weak dollar policy that this country has had (in spite of denials) is having an effect. This week, Ben Bernanke took the very unusual stance of commenting on the weakness of the dollar and its possible role in inflation. Typically, the value of the dollar is the responsibility of the US Treasury Department, and the Fed does not get involved. You can bet that Secretary Paulson knew in advance and approved Bernanke's statement. That put a bid under the dollar and hit oil and commodity prices in general.

No one should think that the Fed or the Treasury is getting ready to intervene in the market, which would be a rather futile effort. Rather, it was a clear signal that the Fed is "on hold" and is unlikely to lower rates in the current environment. Since the market felt that the next move from the European Central Bank (ECB) would be to lower rates in response to a weakening environment in Europe, that served to push the dollar higher against the euro.

Note that a German 2-year bond pays 4.64%, and the US 2-year note pays 2.39%. That difference helps put a bid under the euro. Also, note that interest rates in Europe are starting to get flat across the curve.

Then, as the US markets opened on Thursday, Jean Claude Trichet, the president of the ECB, shocked the markets. Let's let Dennis Gartman rewind the tape for us:

"Mr. Trichet made it clear that a number of ECB policy committee members actually support raising rates very quickly, and he suggested that the committee could move to raise rates as soon as the next policy meeting in the first week of July! Mr. Trichet said yesterday that

" 'after having carefully examined the situation, we could decide to move our rates (by) a small amount in our next meeting in order to secure the solid anchoring of inflation expectations.... I don't say it's certain. I say it's possible [for] we had a number of us thinking that, all taken into account, all information, analysis of risks, we had a case for increasing rates... A number of us considered that there was a case for increasing rates, but later some amongst us considered there was not necessarily that case... [yet].'

"Mr. Trichet went on further to say that the ECB is on "heightened alertness" about inflation. At recent meetings Mr. Trichet has made it clear that the decision to keep policy steady was unanimous, but yesterday he said the decision was a consensus, and was not a unanimous decision. That obviously suggested that some on the committee were already voting to tighten, and that, we must admit, caught us off-guard. At the question and answer period following the meeting, Mr. Trichet was asked, following his statement that the decision to hold rate steady was a 'consensus,' why the committee had not moved to raise rates. He said that firstly the committee had to signal to the market that it was on the alert; that the debate had shifted from dead center to the edge; that the needle on the monetary tachometer was moving off of top-dead centre. We do not wish to parse things too severely, but it does seem that the committee is prepared to move at the next meeting, and that is a material change from our perspective, for we had thought that the Bank was poised to do nothing for several more months, and that the next move would instead have been to ease, not tighten. Clearly we had that wrong, and now the facts have changed."

It is not just Dennis who was caught off guard. The entire currency and commodity futures trading markets were surprised (including your humble analyst). The euro exploded up from $1.5395 to $1.5555 in a matter of minutes. Oil rose $6. Gold and grains moved violently. Soybeans "gapped," as commodities of all sorts responded to a weakening dollar.

If Trichet wanted to "signal" the market, it worked. He got everyone's attention very quickly.

There was a lot of short covering in the various markets, but especially in oil. But let's dig deeper.

I have been pondering for a few weeks about whether the long-only commodity index funds are really affecting the markets. Basically, these funds have become a huge part of the commodities market. It is clear that enough buying and in size will affect any market, but these funds do not take delivery. They "roll" their exposure as they get close to expiration, so they are not involved in the spot price. In theory, the spot price should be a function of immediate supply and demand.

But, it is not that simple, as Louis Gave reminded me. Looking at recent CFTC data, investors known as "commercials" were long 827 million barrels of oil. In the early part of the decade it was 3-400 million barrels. Commercials are supposed to be those who are hedging their production of oil. But large oil companies rarely hedge, and smaller producers only hedge a portion of their oil (see more below). Has supply increased over 100%? I think not.

Where is the increase in commercial interest coming from? The clear answer is long-only commodity index funds and ETFs. They simply buy baskets of commodities at whatever the price is, speculating on the rise in the price of the overall commodity market. It is a one-way trade. Jim Rogers is probably the most famous exponent of such trades, but there are scores of funds which mimic what he does. But there are limits to how much exposure speculators can buy, because the CFTC will allow a speculator to only buy so much of any given market, to keep large players from getting a corner on the market and driving up prices, a la the Hunt brothers and silver in 1980. These limits are known as "position limits."

There are no position limits for commercials who are hedging. They are in theory hedging their physical exposure to a given commodity they are selling or buying. Think of a farmer and General Mills. Both want to lock in the price of wheat so they can plan for the future. Speculators are useful in that they provide liquidity to the markets. In fact, they are essential to a properly functioning market.

The CFTC created a loophole when they allowed investment banks to be classified as commercial investors. So, when a long-only commodity index fund wants to buy a million barrels of oil, they can go to the investment bank, who will sell them a "swap" on the price of oil, and then immediately hedge their exposure in the futures market.

To be sure, the long-only index fund can now create positions far in excess of the position limits that are enforced upon normal speculators. These funds can grow to be huge - multi-tens of billions of dollars. Even though they are speculators, they are not included in the data as speculators. Because they get their exposure from an investment bank, they are ultimately listed as a commercial. In total, they represent an enormous part of the commodities markets. But they are providing liquidity, so what's the problem? They are not actually hoarding the commodities. The price is still set at the spot price. But.

But that is not the whole story. They are making it difficult, if not dangerous, to short the market. When massive buying comes into the market, it moves the market and sends the signal to the market that prices are rising. Momentum players move in, and prices rise some more.

In fact, as the price of oil has risen from $90 to $100 and higher, normal speculative open interest has declined, as who can afford to fight the tape? At the least, I expect the CFTC to require those "commercials" that are really long-only index funds to provide transparency. Politicians are demanding that something be done. It is entirely possible that they will impose position limits on the long-only funds. As I said last week, when the elephants are dancing, the mice should leave the floor. And Congress and the regulators are very serious elephants indeed. Let's hope they do whatever they are going to do quickly.

I think smaller investors should take the profits they have made over the last few years in these funds and move to the sidelines until it becomes clear what the rules are going to be. Let me also make it very clear that I am only talking about long-only commodity index funds. Funds that are managed by commodity trading advisors which can go both long and short have the potential to profit from volatility (and of course, they can also lose). In these types of markets, I like funds which are "long vol." (To be long volatility means you have the potential to benefit from volatile markets.)

Now, let's look at how the credit crisis is contributing to the problem. Let's say you are a small oil producer or grain company. You go to the futures market and hedge your oil production or the grain in your silos; and if the price goes up, you don't care, because you are going to deliver the grain at a cost you already know. But there is the matter of that margin call, and you need to borrow from your local bank to meet that call.

You are hedged. Your profits are locked in at some point in the future. But the margin clerk is calling today. And your bank is having a small problem with its capital base. What is the cover story in the Wall Street Journal today? "Real Estate Woes of Banks Mount." Banks, mostly smaller ones, may have to write off as much as $165 billion in bad real estate loans made to developers and commercial builders. Regulators are "encouraging" banks to raise capital and increase their lending standards.

So banks have less capital to lend. Your banker looks at you when you ask for more money to meet those margin calls, and says, "There are two types of problems. Mine, and not mine. Yours is of the latter variety." And you have to cover your hedges. Enter the margin clerk (the person who calls you and tells you to come up with more money or they will sell out your position at whatever the market price is.)

When Bubbles Collide

So, what happens? Bernanke talks the dollar up and commodities and oil go down. Two days later a French president of the ECB gets inflation religion and the markets react swiftly. Commodity prices rise and more money comes into the market. Traders start covering their shorts as quickly as possible.

Then this morning, the margin clerks of the world go to work and oil spikes as the pits smell blood. Morgan Stanley issues a call for $150 oil in July. The euro rises to $1.5778! Interest rates drop. The stock market falls large at the open.

And rumors of an attack on Iran? An Israeli politician says that Israel would need to bomb Iran to keep them from getting a nuclear weapon, just as it becomes clear Obama might be the next president and would not act to prevent such a problem?

Who can aggressively short in this environment? In a conversation with Dennis Gartman this afternoon, he commented that it felt like the NASDAQ. But is it 1999 or 2000? The oil market will continue to go up until it doesn't, and no one knows when that is. It will continue to rise until all the shorts that are not strong hands have been covered. The margin clerks are in control, and they will have their way. Was it all over today? I rather doubt it.

I wonder if some of the majors aren't tempted to sell some of their production at $138? I mean, really. If you don't think that is a reasonable price, and they tell us they don't, then why doesn't Exxon just go in and start taking all the bids they can? They and the other majors would be the ultimate strong hand. But then, what do I know?

Central banks, short covering, a respected analyst issuing a near-term call for a $20 rise in oil, conspiracy theories and Iran, long-only funds buying, everyone scared to short, margin calls, and a credit crisis all give us the perfect storm.

Add to that the ugly employment numbers, and the Dow drops almost 400 points. The S&P 500 violates all sorts of technical signals to the downside. The market sold off big at the close. Monday should be interesting.

Three quick points. I think oil is lower at the end of the year. Inflation in Asia and rising subsidies are going to force more and more Asian countries to allow the price of oil to rise and send the proper signals to consumers to use less oil. Over the next decade, oil will be much higher, but I think the pressure over the next year will be to the downside. But don't ask me how high it can go in the short term. Ask the margin clerks.

America on a Diet

Second, corn is going to go higher. Bad weather has meant that not enough got planted, and that will probably hurt yields in the fall. This is going to mean even higher meat prices and ethanol prices. Corn ethanol is such a bad idea. This is what happens when government decides to mess with the market.

Anecdotal inflation note: I eat two chicken fajita pitas without cheese from Jack-in-the Box for lunch about three times a week (after the gym!). I throw away the pita bread and just eat the chicken at my desk. The last three days the price has been the same, but the amount of chicken is noticeably smaller, perhaps 25% smaller. Where's the hedonic price adjustment in the BLS statistics for that? A friend of mine notes that the filet from his favorite steak house is now seven ounces instead of eight. But the steak is still the same price. Maybe portion control will finally get America to go on a diet.

Finally: George Friedman told me that the Saudis are taking in something like $10 billion a week! The entire gulf is awash in dollars. He thinks it may have nowhere else to go but to the stock markets of the world. We'll see. Unintended consequences.

Montreal, A New Book, and a Wedding

Next week Tiffani and I go to Montreal to speak at a conference for Canaccord, and we will get to have dinner with Martin Barnes and Pierre Casgrain. And it looks like Dennis and Margaret Gartman may be able to join us. Now that will be a fun dinner. I should get some fodder for next week's letter.

Tiffani (my daughter, who in fact runs the business and lets me research, travel, speak and write - what a deal!) and I are going to take the train from Toronto to Montreal so we can work on a new project. Basically, she has an idea for a new book that we can write together, and we are going to use the time to think about how we go about it. But we are going to need your help. I will let you know in a week or so, but it is going to be great fun for all of us.

And speaking of Tiffani, she is getting married to Ryan on August 8 (08-08-08). Plans are coming together, as well as expenses. This is going to be a most different wedding, as those of you who know Tiffani might suspect. Not traditional at all. One of the best photographers in Dallas has been working with them. Because they are willing to try different things, he is getting them to do things he has always wanted to do but never had a couple adventurous or "fun enough" to do. The following photo is just a sample. This is a groom that is definitely in for a challenge. If you want to see more pictures (the underwater photos are fun, the "Hillbilly Tiffani and Ryan" is a hoot) you can go to www.fatedlove888.com and click on the picture. Dad is only a little proud.

There are 20 college-age kids from my daughter Amanda's cheerleading instruction team at the office watching the baseball game, and three of my other kids. (You can watch the game from my office balcony.) Of course, the Rangers are losing. I am literally writing with foam ear plugs, trying to concentrate, so I think I will just hit the send button and enjoy my kids.

Your doing my best to stimulate the economy with wedding expenses analyst,

By John Mauldin

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

Empire or Republic?

Empire or Republic?

By Robert Scheer

Go To Original

War doesn’t pay, nor does imperial ambition. This proposition should be evident to anyone who has paid attention to the fivefold increase in the price of oil since George W. Bush took office. The principle of nonintervention is neither liberal nor conservative in orientation, and at the inception of the Republic it was accepted as a commonsense.

The dominant assumption of our nation’s founders was to avoid “foreign entanglements,” to use Thomas Jefferson’s words of warning. Indeed, the policy of nonintervention was considered by the founders as a basic demarcation between the politics of the Old and New Worlds. Explaining in his farewell address why he, as our first President, followed “our true policy to steer clear of permanent alliances, with any portion of the foreign world,” George Washington cautioned his countrymen to “moderate the fury of party spirit, to warn against the mischiefs of foreign intrigue, to guard against the impostures of pretended patriotism.”

What has happened to the American people that these modest yet profound sentiments seem so foreign to the tongues of our politicians and the ears of their constituents? Who among our top leaders, Democrat or Republican, dares warn against the “impostures of pretended patriotism”?

As Washington warned, it is extremely difficult to unmask “pretended patriotism” when the nation is frightened by enemies real and imagined. But Washington could not have anticipated the sort of mass media society in which government propaganda becomes compelling and inconvenient truths are concealed behind the veil of national security. He certainly did not anticipate the modern militarized state, in which a permanent war footing has been the norm since the onset of the cold war.

For these reasons, Washington’s concerns needed the updating provided by our other great general turned President, Dwight David Eisenhower. Ike’s farewell address provides a perfect bookend to Washington’s, for it marks a modern President’s recognition that the fears of our first President had been realized. The Empire had come to replace the Republic. The “military-industrial complex” that Eisenhower warned against was merely the logical extension of a stark policy of American intervention into the affairs of nations on every continent and the imperial reach of forward military bases throughout the world. What alarmed Eisenhower most was that the system that had grown up to counter communism (something he saw as a real threat) was self-perpetuating and disconnected from the defensive tasks at hand. Eisenhower predicted exactly what has come to pass. Despite the collapse of the Soviet Union, and with it the rationale for the cold war, the military-industrial complex soon found another enemy: terrorism.

The disconnect between the arsenal of the terrorist enemy and that arrayed against it in the post-9/11 years affirms Eisenhower’s warning about the military-industrial complex’s “unwarranted influence.” One wonders how lobbyists and politicians maintain a straight face as they argue, as Senator Joe Lieberman has, for $2.5 billion submarines to fight terrorists who lack even a dinghy. I don’t doubt that the lobbyists will continue to make their case and that the money spent toward that end will secure political and pundit support, but the gambit is wearing thin. So too is the effort to manufacture crises with “rogue nations” and to exaggerate the cohesion and power of the “terrorist” enemy.

The U.S. military budget is roughly equal to those of all other nations combined, and it is inconceivable that any hostile state could emerge in the next twenty years to match the United States in a combat zone, even if no new weapons are added to the U.S. arsenal. Indeed, our major rivals, China and Russia, are moving deeper into the fray of commercial markets rather than the theater of war games.

The benefits of a substantial cut in military spending would be dramatic, freeing government funds for other purposes, including health and education programs that would make the nation stronger. Neither party wants to raise taxes, and as a result, existing and new programs must compete for a fixed pool of tax dollars. Government funds are further limited because mandatory expenditures, like Social Security and Medicare, will not be cut, for fear of voter resentment. For these reasons, the full range of nonmandated programs, from farm subsidies to children’s health insurance to medical research, are competing with the military budget.

Therefore, after mandated programs are funded, the military consumes roughly six out of ten dollars. As a consequence, increases in domestic spending must be funded by cutbacks in military spending. That is the most honest way to judge the opportunity cost of the military dollar, as in, two unneeded submarines versus health insurance for 4 million kids.

There is, however, a greater cost to having a huge permanent military: the vitality of our democracy. As we saw in the run-up to the Iraq War, the fearmongers who seek an expanded military are not above using their enormous lobbying power to influence the debate. The public will not support the military unless it feels its activities are connected with a real threat, so the military and its suppliers and other allies have to exaggerate that threat. Such is the risk of “the total influence--economic, political, even spiritual” of the military-industrial complex, which Eisenhower warned is “felt in every city, every Statehouse, every office of the federal government.” It is a built-in and well-financed constituency that stresses the military option over the diplomatic one, that exaggerates the strength of the enemy rather than realistically appraises it and that desperately finds new wars to be fought.

What is going on in our name is irrational, costly and dangerous, but there are powerful vested interests that want to keep it that way. Those interests remain so strong that neither Barack Obama nor John McCain has called for cutting a military budget that is the largest since World War II. But without such cuts all the campaign promises about funding domestic programs, from education to healthcare, are an obvious fraud.

This piece is excerpted from Robert Scheer’s latest book, “The Pornography of Power: How Defense Hawks Hijacked 9/11 and Weakened America,” and was originally posted on The Nation.

No apologies from arrogant USA

No apologies from arrogant USA

By Yvonne Ridley

Go To Original

Does being president of the United States mean you never have to say sorry?

Just how difficult is it to apologize when you are head of a global superpower and you’ve blundered?

It was a thought which occurred to me as I was walking around the dust and the rubble of the bombed out Al Shifa pharmaceutical plant in Sudan recently.

Hundreds, if not thousands, of blood-soaked pieces of scorched earth which scar our planet are testimony to a whole raft of blunders by various U.S. presidents and intelligence agencies.

Despite all the bilge that comes out of Washington about honesty and accountability, the consequences of the lies from U.S. administrations have scarred the globe.

But there seems to be some sort of unwritten rule in Washington that U.S. presidents can commit atrocities anywhere on the planet, so long as they don’t do it in their own backyard.

It seems that a ‘domestic lie’ will send Congress into a spin and have my lily-livered colleagues in the American Fourth Estate finding some lead in their pencils as they demand resignations and impeachments.

But if the lie happens overseas it seems no one in the U.S. press corps really cares.

This all brings me back to the site of the Al Shifa factory in Sudan. It bears testimony to the recklessness of U.S. presidents and the buffoons who advise them.

More than a dozen cruise missiles laid the factory on the outskirts of Khartoum to waste because, according to U.S. intelligence, the plant was manufacturing chemicals to produce VX nerve gas.

Not only that, the CIA asserted that the factory was being financed by Osama bin Laden.

The truth would be funny if the outcome had not been so devastating… Al Shifa manufactured aspirin.

So the intelligence was bogus (nothing new there, then) and guess what? No one has resigned, quit in shame, or even said sorry. Not even the then president of the United States.

And the U.S. media did their usual rendition of the three wise monkeys.

Thomas D. Tullius, chair of Boston University’s chemistry department, said there was no scientific evidence of chemical weapons production, and evidence from ex-CIA agents in the employ of Kroll O’Gara, the international investigative firm, showed there were no financial, political, or terrorist ties between the owner and Mr. Bin Laden.

In the days which followed, national security advisor Sandy Berger and other foolish White House lackeys repeatedly claimed that Al Shifa produced “no commercial products”, had a “secured perimeter patrolled by the Sudanese military”, “in fact makes the components for VX gas and other chemical weapons”, and “had links to Osama bin Laden.”

The media was too dumb or too lazy (you can never tell with the White House press corps) to challenge the information, but within days news was leaking out that the Clinton administration had bombed an aspirin factory.

Time to say sorry? No bloody way!

The CIA resorted to even more lies as it dug itself into a deeper hole. CIA briefers, on condition of anonymity, said the factory had been under surveillance for 18 months and that soil samples proved chemicals were being produced to make the deadly VX gas.

What the briefers overlooked was the fact that the CIA had pulled out of Khartoum in 1996 (a decision based largely on even more false intelligence reports by a totally unreliable CIA asset), which meant that the CIA relied on intelligence from assets with an axe to grind. Sound familiar? Remember Curve Ball… one million dead and four million refugees later no one is anywhere near to apologizing for the disaster which is Iraq.

So, if you’re a U.S. president and you realize that your advisers are the equivalent of Dumb and Dumber, you can literally get away with murder just as long as the crime isn’t committed on U.S. soil.

What I have established is that behind every intelligence failure is a policy failure, and that is self-evident when you look at the U.S. approach to dealing with Sudan.

Sadly, it looks as though former U.S. president Bill Clinton got off scot-free over his decision to bomb Al Shifa despite the best efforts of investigative reporter Seymour Hersh, the equivalent of a journalistic oasis in a sea of American media mediocrity.

However, I suppose I should give credit where credit is due -- Bill Clinton did make a dramatic break with the policy of previous presidents by expressing regret for the role the United States played in backing a brutal counter-terrorism campaign that caused the deaths of thousands of civilians in Guatemala’s civil war.

He made the apology in Guatemala City in March 1999 following the publication in February 1999 of the findings of the independent Historical Clarification Commission which concluded that the U.S. was responsible for most of the human rights abuses committed during the 36-year war in which 200,000 people died.

“It is important that I state clearly that support for military forces or intelligence units which engaged in violent and widespread repression of the kind described in the report was wrong,” Mr. Clinton said. “And the United States must not repeat that mistake. We must and we will instead continue to support the peace and reconciliation process in Guatemala.”

He made the apology as the U.S. declassified thousands of documents made available to the commission which tell how the U.S. initiated and sustained a murderous war conducted by Guatemalan security forces against civilians suspected of aiding left-wing guerrilla movements.

A report released by the Guatemala Truth Commission has confirmed that entire communities were massacred. It said children were killed, abducted, forcibly recruited as soldiers, illegally adopted, and sexually abused. Fetuses were cut from their mothers’ wombs and young children were smashed against walls or thrown alive into pits.

I suppose we should take comfort from the fact that Clinton did apologize for that evil.

But I wonder when -- if ever -- we will hear George W. Bush apologize for the illegal war in Iraq, the one million dead, the four million refugees, the torture, murder, and abuse in Abu Ghraib, Bagram, and other U.S. detention facilities.

Will he ever apologize to the Afghans for the deaths of 50,000 plus as a fruitless, pointless war continues in Afghanistan -- a war, which like Iraq’s, can not be won by U.S. soldiers, or any occupying force, come to that?

Will he ever apologize for twiddling his thumbs while Israel unleashed cluster bombs over the civilian population of southern Lebanon after the Zionist army was beaten into retreat by a victorious Hezbollah?

I am on my way to Guantanamo Bay very soon (I know, it is encouraging they are allowing me in with a Press TV film crew… let’s hope they let us out as well!)

But I wonder if Bush will apologize for detaining hundreds of innocent men, including a number of young boys, without trial and without charge.

Why is ‘sorry’ the hardest word to say, Mr. President

Addressing America's "Deeper Malignancies"

Addressing America's "Deeper Malignancies"

By Walter C. Uhler

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If you want to know what's wrong with the foreign policy establishment in the United States, look no further than Condoleezza Rice's article, "The New American Realism," published in the July/August 2008 issue of Foreign Affairs." Not only has the Council on Foreign Relations spread its pages wide open for an infamous interventionist -- a lying and deceitful enabler of the Bush administration's illegal, immoral unprovoked invasion of Iraq - it also readmitted Ms. Rice without requiring anything resembling a mea culpa for the crimes against humanity that have lowered her, the Bush administration and the United States to the depths of moral disrepute around the world.

Why publish the words of a liar and alleged war criminal? Who takes her seriously? Was her article accepted for publication because of her high position in the thoroughly discredited and morally bankrupt Bush administration? Or was publication a "no brainer," simply because the foreign policy elite at the Council on Foreign Relations actually shares Ms. Rice's smug interventionist conceit?

Whatever the excuse, it doesn't pass the smell test. Why? Because Rice's unimaginative, evasive and euphemism-riddled whitewash of Bush's disastrous "Time of Troubles" would barely merit a grade of "C" in any freshman course devoted to U.S. foreign policy.

Ms. Rice's case is not a matter of affirmative action encountering the Peter Principle. Instead, it's a matter of compensating for the Peter Principle with poorly disguised moral turpitude. For example, during the propaganda run up to the invasion of Iraq, Ms Rice lied when she said that the aluminum tubes sought by Iraq could "only" be used in nuclear weapons. We know she lied, because her assertion came after she learned of the disagreements within the intelligence community about how such tubes might be used.

Ms Rice also attempted to deceive members of the House of Representatives. She told them that, after 9/11, the U.S. had no choice, but to engage in what the September 2002 National Security Strategy euphemistically called "preemptive" wars. As we now know, the euphemism of preemption was a fig leaf for the "preventive" wars - otherwise known as wars of aggression - which the Bush administration actually intended to launch.

Unabashed by such deception, Ms. Rice was in the process of making her pitch for preemptive war when she was confronted by a Democrat, who asked her whether America should have invaded the Soviet Union in 1948 in order to prevent it from acquiring nuclear weapons. Rice responded, "In light of 50 years of bondage of Eastern Europe, that was probably a reasonable thing to do." Her response not only revealed her moral turpitude, but also cost her the right to be considered a serious Russia scholar. Nobody but a hack or a fraud would have said such a thing. (To understand why, read http://www.walter-c-uhler.com/Reviews/VE_Day.html

Thus, it's no surprise to find her "C" paper in Foreign Affairs riddled with hypocrisy, deceitful evasions and blatant propaganda. Not only does she project America's worst sins onto others, she also refuses to accept any responsibility for the many ills that the Bush administration has inflicted upon the U.S., Iraq and the rest of the world.

Consider Ms. Rice's disappointment over Russia's failure to move "closer to us in terms of values." Perhaps, if Messrs. Medvedev and Putin ordered the unprovoked invasion of Georgia, that would bring Russia's values closer to America's.

According to Rice, the U.S. has nothing to fear from China's rising power, provided such "power is used responsibly." Perhaps, China could demonstrate American-style responsibility by falsely accusing Japan of building weapons of mass destruction as a pretext for an invasion.

According to Rice, "the Iranian regime," not the Bush regime, "seeks to subvert states and extend its influence throughout the Persian Gulf region." According to Rice, it is Iran (not the American invasion and occupation) that "is destabilizing Iraq, endangering U.S. forces and killing innocent Iraqis." And, according to Rice, Iran -- not the U.S. -- is "a state fundamentally out of step with the norms and values of the international community."

Rice fails to connect the dots linking the Bush administration's crimes and blunders in Iraq with Iran's geopolitical gains in the Middle East. Thus, when I read Rice's psychological projections of America's sins onto Iran, I couldn't help but wonder whether she's become the American version of Baghdad Bob. Makes you wonder why Foreign Affairs would published such blatant propaganda, doesn't it?

Unfortunately, Rice goes from bad to worse, when she attempts to justify the U.S. invasion of Iraq. First, there's not a word in her "C" paper about the Bush administration's exaggerations, lies and intelligence blunders concerning Saddam's weapons of mass destruction (which, we now know, didn't exist). Second, there's not a word acknowledging that the threat posed by these (non-existent) weapons of mass destruction - recall Rice's warning about a "mushroom cloud" -- was trumpeted repeatedly as the primary justification for war. Like Winston Smith in Nineteen Eighty-Four, Ms Rice simply has tossed such inconvenient facts down America's memory hole.

Instead, Rice dishonestly justifies invading Iraq - after the fact -- by alluding to Saddam's intention to "reconstitute his weapons of mass destruction programs as soon as international pressure had dissipated." In a word, she's learned nothing.

Listen carefully, Ms. Rice. Country A does not have the right, under international law, to attack Country B, simply because Country B "intends," at some future date, to do something potentially harmful to Country A. Country B's threat must be imminent - something Saddam's threat never was!

Predictably, Ms. Rice is at her despicable, immoral worst, when she perpetuates the BIG LIE about Iraq: "The war on terror…[was] linked to Iraq." No, it was not. Iraq had nothing to do with al Qaeda's terrorist attacks on September 11, 2001.

Moreover, as Rice unabashedly admits, the Bush administration actually fabricated such a link as the pretext for invading Iraq: "Our goal after September 11 was to address the deeper malignancies of the Middle East…It is very hard to imagine how a more just and democratic Middle East could ever have emerged with Saddam still at the center of the region." (This is the point where every decent human being should be screaming: "Who made you God?")

Even worse, Ms. Rice's admission -- damning though it be -- is but another limited-hangout half-truth designed to deceive. She's conveniently overlooked the fact that she convened National Security Council meetings, beginning in January 2001, which riveted on regime change in Iraq as a way to "address the deeper malignancies of the Middle East." In reality, the events of September 11 were simply used to provide a patina of legitimacy to Bush's long-planned evil war of aggression.

Given Bush's interminable, evil war of aggression and, now, Condoleezza Rice's infantile and dishonest whitewash of it in Foreign Affairs, perhaps the most critical question is this: When will the rest of the world unite to "address the deeper malignancies" of the United States - malignancies that make wars of choice appear necessary to a large segment of America's population and especially attractive to its foreign policy elite?

Walter C. Uhler is an independent scholar and freelance writer whose work has been published in numerous publications, including The Nation, the Bulletin of the Atomic Scientists, the Journal of Military History, the Moscow Times and the San Francisco Chronicle. He also is President of the Russian-American International Studies Association (RAISA).

Iraqi Refugees Facing Desperate Situation

Iraqi Refugees Facing Desperate Situation

By Amnesty International

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The Iraqi refugee crisis

By Amnesty International

"Omar, a 69-year-old refugee from Baghdad, said he will die a 'slow death' if assistance is stopped. He and his family have depended on food and medical assistance since they fled to Syria in 2006." – UNHCR, May 2008.

Iraq remains one of the most dangerous places in the world. Its refugee crisis is worsening. According to the United Nations High Commissioner for Refugees (UNHCR), since the US-led invasion of Iraq in March 2003, an estimated 4.7 million have been displaced both within and outside Iraq and for many the situation is desperate.

A new report by Amnesty International, Rhetoric and reality: the Iraqi refugee crisis, says that the international community continues to fail to respond to the crisis in a meaningful way. Countries like Jordan and Syria host most of the refugees but are simply not equipped to meet the needs of all those arriving.

Syria alone may be hosting more than a million refugees. As of 2007, only 1 percent of the total Iraqi displaced population was estimated to be in the industrialized world.

To mark World Refugee Day, Amnesty International has called on the international community and, in particular, those states who participated in the US-led invasion of Iraq, to take real steps to alleviate the suffering of those displaced. The organization said these countries must urgently act on their responsibility to assist the host nations and humanitarian organizations operating in the region to support the large numbers of refugees.

"Many refugees are finding it difficult to survive," said Philip Luther, Deputy Director of Amnesty International's Middle East and North Africa Programme. "They are banned from working and unable to pay rents, buy adequate food for themselves and their families, or obtain medical treatment. Those lucky enough to escape Iraq rely on savings which, for many, are rapidly running out."

Many families are destitute and facing impossible choices and new risks, like having to resort to child labour and the prospect of being forced through circumstances to undertake "voluntary" return to Iraq.

Humanitarian agencies cannot cope with growing demands as more refugees need help with the basics to survive. The UNHCR had planned that by the end of the year it would be distributing food to around 300,000 people in Syria alone. However, the agency recently announced that inadequate funding means that, by August 2008, it will not be able to "cover all basic health needs of Iraqis, and many serious and chronically ill Iraqis will not be able to receive their monthly medication."

Current food aid for 150,000 refugees in Syria and Jordan could be reduced, forcing many Iraqis "into further destitution and raise the likelihood of higher malnutrition rates and increased child labor."

Amnesty International believes it is imperative that the international community increase its contributions to humanitarian agencies such as UNHCR, as well as to the countries hosting Iraqi refugees. Furthermore, there must be a real and sustained effort to resettle vulnerable refugees, such as those with serious medical conditions, to countries where they will receive adequate care.

Manal (not her real name), a refugee living in Damascus, told Amnesty International in February 2008 that three of her children, aged between six and 15 years, work so the family can survive.

Her six-year-old boy sells chewing gum in the street, for about one US dollar a day; her 10-year-old daughter sells chewing gum about three days a week; her oldest son polishes shoes, for the equivalent of about US$2 a day. Her daughter is the only one who goes to school. The family fled to Syria in 2006 after their house in Baghdad was damaged by explosions.

Despite claims among the international community that an "improvement" in the security situation in Iraq has led to people "voluntarily" returning, in reality, most return because they have run out of money and can no longer survive. They return despite the real danger to their lives.

Apart from failing to provide adequate practical and financial support, some states are also rejecting the asylum claims of Iraqis at an alarming rate. More European states are deporting rejected asylum-seekers to Iraq, including countries like Sweden, once a positive example to its European neighbours. Some states are using indirect ways to return people to Iraq, for example cutting off assistance to rejected Iraqi asylum-seekers and therefore forcing them to return "voluntarily".

The failure to respond to the crisis is contributing to the severe deterioration of human rights protection for individuals forced to flee their homes in search of safety. Support is desperately needed so that host countries in the region can meet their own responsibilities in allowing access to all those fleeing violence and human rights abuses.

External Link:

Iraqis in Egypt: Time is running out (Video)

Amnesty International is not responsible for the contents of external sites.

Iraq: Rhetoric and reality: the Iraqi refugee crisis

Index Number: MDE 14/011/2008
Date Published: 15 June 2008
Categories: Iraq

This document is also available in:


Iraq: Suffering in silence: Iraqi refugees in Syria

Index Number: MDE 14/010/2008
Date Published: 12 May 2008
Categories: Iraq, Syria

This briefing summarizes key findings of the assessment conducted by Amnesty International into the situation of refugees from Iraq in Syria. In particular, Amnesty International reviewed the impact of recent developments, including the introduction by Syria of visa requirements for Iraqis, reports of improved security in parts of Iraq, and reports of the return of large numbers of refugees to Iraq. The organisation also looked into the economic conditions of Iraqis living in Syria, their access to services such as education and health, as well as protection concerns, particularly those relating to women and girls.

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Iraq: al - Tanf camp. Trauma continues for Palestinians fleeing Iraq

Index Number: MDE 14/012/2008
Date Published: 14 April 2008
Categories: Iraq

Iraq: Carnage and despair: Iraq five years on

Index Number: MDE 14/001/2008
Date Published: 17 March 2008
Categories: Iraq


Five years after the US-led invasion that toppled Saddam Hussain, Iraq is one of the most dangerous countries in the world. Hundreds of people are being killed every month in the pervasive violence, while countless lives are threatened every day by poverty, cuts to power and water supplies, food and medical shortages, and rising violence against women and girls. Sectarian hatred has torn apart families and neighbourhoods that once lived together in harmony.

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Iraq: Millions in flight: the Iraqi refugee crisis

Index Number: MDE 14/041/2007
Date Published: 24 September 2007
Categories: Iraq, Middle East And North Africa, Middle East And North Africa


This report provides information on the situation faced by refugees currently in Jordan and Syria, and analyses the response of the international community. It includes recommendations addressed to the members of the international community, in particular those who were involved in the US-led invasion of Iraq, highlighting the need to live up to their responsibility sharing obligations and to cease practices that further call the safety of Iraqis into question.

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Iraq: The situation of Iraqi refugees in Syria

Index Number: MDE 14/036/2007
Date Published: 26 July 2007
Categories: Iraq, Middle East And North Africa, Middle East And North Africa

This briefing summarizes the findings of Amnesty International's visit to Syria to assess the situation of refugees from Iraq. It includes a number of recommendations addressed to the Syrian, Jordanian and Iraqi governments and to the international community, particularly those states who pledged financial and other assistance at the April conference in Geneva to deliver on those pledges and to take further action to meet the needs of refugees and IDPs.

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Supreme Court to rule on whether Ashcroft can be sued

Supreme Court to rule on whether Ashcroft can be sued

A Pakistani man who was arrested after the Sept. 11 attacks says he was illegally detained and beaten. The justices will examine whether high-ranking officials are immune from such lawsuits.

By David G. Savage

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The Supreme Court came to the aid of former Atty. Gen. John Ashcroft on Monday by agreeing to hear his claim that he and other high-level Bush administration officials are shielded from being sued by immigrants who say they were rounded up, abused and beaten after the attacks of Sept. 11, 2001.

The court's move stops for now a lawsuit by a Pakistani man who was held for nearly six months in solitary confinement in New York.

The justices voted to decide whether the president's top appointees are immune from lawsuits growing out of their response to "an unprecedented national security crisis."

After the Sept. 11 attacks, hundreds of immigrants, nearly all of them Muslim men, were taken into custody and questioned. Officials feared then that the Al Qaeda terrorist network could have "sleeper cells" in the United States, and that these operatives might have been planning more attacks.

As the head of the Justice Department, Ashcroft ordered the FBI to move aggressively and to use all available legal means to question suspects and gather intelligence.

The government held most of the immigrants on charges that they had violated immigration laws by, for example, overstaying their visas.

Javaid Iqbal, the plaintiff who sued Ashcroft, was arrested at his Long Island home on Nov. 2, 2001. Two months later, he was put in solitary confinement.

He said at one point he was taken into a room where 15 officers were waiting. He was thrown against the wall, kicked in the stomach and punched in the face, he said. All the while, the officers screamed at him, calling him a terrorist and a Muslim.

Iqbal said the abuse continued for several months. He was eventually cleared of any connections to terrorism, but he pleaded guilty to a fraud charge and was deported to Pakistan in 2003.

He then sued Ashcroft, FBI Director Robert S. Mueller III and several other officials, alleging they had violated his constitutional rights by singling out Muslim men for arrest because of their religion and nationality and for abusing them in custody.

Government lawyers said the suit should be dismissed, but a federal judge in Brooklyn and the U.S. court of appeals in Manhattan refused to do so. The judges said Iqbal's allegations, if true, would amount to a violation of the Constitution. And they said his lawyers should be permitted to move forward and to question Ashcroft and Mueller under oath.

To win his lawsuit, Iqbal would have to show that the two top officials were responsible for his mistreatment.

In February, Bush administration lawyers appealed to the Supreme Court and said the suit against Ashcroft and Mueller should be halted.

They said Cabinet officers should not face the threat of "crippling personal liability" for their official actions, especially when they were "charged with responding to an extraordinary national security crisis like the Sept. 11 attacks."

In Monday's order, the court said it would hear the case of Ashcroft and Mueller vs. Iqbal in the fall.

Investigation Advances for US Attorneys Scandal

Investigation Advances for US Attorneys Scandal

Evan Perez

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Washington - Justice Department lawyers have filed a grand-jury referral stemming from the 2006 U.S. attorneys scandal, according to people familiar with the probe, a move indicating that the yearlong investigation may be entering a new phase.

The grand-jury referral, the first time the probe has moved beyond the investigative phase, relates to allegations of political meddling in the Justice Department's civil-rights division, these people say. Specifically, it focuses on possible perjury by Bradley Schlozman, who served a year as interim U.S. attorney in Kansas City, Mo.

Mr. Schlozman left the Justice Department last year after he was challenged over his hiring of conservative lawyers at the civil-rights division and his decision later as U.S. attorney to bring voter-fraud charges against members of a left-leaning voter-registration group days before the 2006 election.

Mr. Schlozman declined to comment.

It's unlikely that the attention on Mr. Schlozman will clear up the multifaceted and politically charged scandal that began in 2006 with accusations that the Bush administration inappropriately fired a number of U.S. attorneys. Over the next 18 months, it grew to encompass accusations of political interference, criticism of Justice Department hiring policies and allegations of improper prosecutions in the department's civil-rights division, which Mr. Schlozman briefly ran.

In testimony before the Senate Judiciary Committee, Mr. Schlozman conceded boasting to associates about the number of Republicans he managed to hire at the department. The allegations against him helped feed months of scandal that eventually forced the resignation of Attorney General Alberto Gonzales in August.

A grand-jury referral isn't an indication that criminal charges will be filed in an investigation. Prosecutors gather testimony from witnesses and can decide later not to pursue charges.

Separate investigations into the department's handling of the prosecutor firings and related issues, which are being conducted by the Justice Department's Office of Professional Responsibility and the Inspector General, are expected to be completed within the next few weeks, lawyers familiar with the probe said. Both want to abide by department guidelines aimed at clearing up politically sensitive investigations well before the elections, to avoid accusations they could influence the outcome.

It wasn't clear which of Mr. Schlozman's comments prosecutors are focusing on. He has declined to be interviewed by investigators since leaving the department. One possibility focuses on Mr. Schlozman's 2007 testimony to Congress, one part of which he later retracted.

At a Senate hearing last June, Democrats zeroed in on allegations that Mr. Schlozman was part of an effort by Republican political officials to pursue vote-fraud investigations in important swing states as a way to gain electoral advantage.

Mr. Schlozman's promotion to the U.S. attorney's office in Kansas City came after the department asked his predecessor, Todd P. Graves, to resign. Mr. Graves was among several U.S. attorneys who had shown reluctance to bring vote-fraud-related cases, according to testimony and documents gathered by Senate investigators last year.

After Mr. Schlozman's arrival in Kansas City, prosecutors filed charges against workers from a left-leaning activist group, Acorn. The workers eventually pleaded guilty to violations related to voter registration. The timing of the indictment, five days before a close Senate election, drew criticism from Democrats.

In his Senate testimony Mr. Schlozman denied the timing violated Justice Department guidelines governing politically sensitive investigations. He also said he had been "directed" to file the charges by an official in the department's Public Integrity Section.

Later, Mr. Schlozman filed a clarification to his Senate testimony, saying that he had only consulted with Justice headquarters.

"I want to be clear that, while I relied on the consultation with, and suggestions of, the Election Crimes Branch in bringing the indictments when I did, I take full responsibility for the decision to move forward with the prosecutions related to Acorn while I was the interim U.S. Attorney," he said in the clarification.

At the time, lawyers from the Justice Department's civil-rights section took the unusual measure of writing to members of Congress alleging patterns of political meddling in the division's hiring decisions. Mr. Schlozman denied that he deliberately favored conservative lawyers.

Pentagon Pre-Planned Harsh Interrogation Techniques

Report Questions Pentagon Accounts

Officials Looked Into Interrogation Methods Early On

By Joby Warrick

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A Senate investigation has concluded that top Pentagon officials began assembling lists of harsh interrogation techniques in the summer of 2002 for use on detainees at Guantanamo Bay and that those officials later cited memos from field commanders to suggest that the proposals originated far down the chain of command, according to congressional sources briefed on the findings.

The sources said that memos and other evidence obtained during the inquiry show that officials in the office of then-Defense Secretary Donald H. Rumsfeld started to research the use of waterboarding, stress positions, sensory deprivation and other practices in July 2002, months before memos from commanders at the detention facility in Cuba requested permission to use those measures on suspected terrorists.

The reported evidence -- some of which is expected to be made public at a Senate hearing today -- also shows that military lawyers raised strong concerns about the legality of the practices as early as November 2002, a month before Rumsfeld approved them. The findings contradict previous accounts by top Bush administration appointees, setting the stage for new clashes between the White House and Congress over the origins of interrogation methods that many lawmakers regard as torture and possibly illegal.

"Some have suggested that detainee abuses committed by U.S. personnel at Abu Ghraib in Iraq and at Guantanamo were the result of a 'few bad apples' acting on their own. It would be a lot easier to accept if that were true," Sen. Carl M. Levin (D-Mich.), chairman of the Senate Armed Services Committee, wrote in a statement for delivery at a committee hearing this morning. "Senior officials in the United States government sought out information on aggressive techniques, twisted the law to create the appearance of their legality, and authorized their use against detainees."

The new evidence challenges previous statements by William J. "Jim" Haynes II, who served as Defense Department general counsel under Rumsfeld and is among the witnesses scheduled to testify at today's hearing. Haynes, who resigned in February, suggested to a Senate panel in 2006 that the request for tougher interrogation methods originated in October 2002, when Guantanamo Bay commanders began asking for help in ratcheting up the pressure on suspected terrorists who had stopped cooperating. A memo from the prison's top military lawyer that same month had suggested specific techniques and declared them legal.

Haynes suggested that the requests had created a dilemma for the Pentagon's top civilian leaders. "Many people struggled over that question," he told the Senate Judiciary Committee in 2006. "I struggled over that question."

But memos and e-mails obtained by investigators reveal that in July 2002, Haynes and other Pentagon officials were soliciting ideas for harsh interrogations from military experts in survival training, according to two congressional officials familiar with the committee's investigation. By late July, a list was compiled that included many of the techniques that would later be formally approved for use at Guantanamo Bay, including stress positions, sleep deprivation and the hooding of detainees during questioning. The techniques were later used at the Abu Ghraib detention facility in Iraq.

Nearly all the ideas were derived from U.S. military programs known as Survival, Evasion, Resistance and Escape, or SERE, the congressional officials said. In training, some military pilots and Special Forces troops are subjected to harsh treatment to simulate conditions they might face if captured by enemy troops. One of the techniques suggested was waterboarding, a form of simulated drowning that was used by CIA interrogators but was never approved for use by the military.

In his prepared statement, Levin said the evidence collected in the committee's 18-month investigation highlights a "particularly disturbing part of the story: how the techniques -- used to teach American soldiers to resist abusive interrogations by enemies that refuse to follow the Geneva Conventions -- were turned on their head and sanctioned by senior leaders for their use offensively against detainees."

The Senate committee's investigation began in January 2007 and involved Republican and Democratic staff members. The final report is expected by the end of the year.

Haynes and other senior administration officials also visited Guantanamo Bay in September 2002 to "talk about techniques," said one congressional official. Also on the trip was David S. Addington, chief of staff to Vice President Cheney.

The Guantanamo Bay visit and the effort to compile interrogation tactics appear to show that Pentagon officials were moving toward a formal policy on interrogation before military commanders at the detention camp requested special measures, the officials said. However, top military officers objected to the proposals in a series of memos in November 2002, much earlier than previously reported, congressional investigators said. In early 2003, Rumsfeld formally authorized the techniques for use at Guantanamo Bay.

Attempts to reach Haynes and Rumsfeld were unsuccessful. A Pentagon official declined to comment on the Senate panel's conclusions, but defended the interrogation program as effective and humane. Navy Cmdr. J.D. Gordon, a spokesman, said the program yielded insights into al-Qaeda's organizational structure, training and strategy. "The United States operates safe, humane and professional detention facilities for enemy combatants," he said. "Our policy is, and always has been, to treat detainees humanely."

Gordon also noted that, in 13 major reviews of detention operations, Pentagon investigators have "not found any policy that ever condoned or tolerated abuse of detainees."

The Senate committee's findings echo earlier claims by many congressional Democrats, human rights groups and other administration critics who have maintained that responsibility for the controversial interrogation practices lies at the highest levels of the administration.

"It is increasingly clear that the decision to abandon the rule of law and order torture and abuse was made at the very top," said Caroline Fredrickson, director of the American Civil Liberties Union's Washington legislative office. "We look forward to the full investigative report from the Armed Services Committee and call on Congress to hold accountable any and all public officials involved in ordering illegal torture."

A group of 56 Congressional Democrats last week asked the Justice Department to appoint a special counsel to investigate whether any Bush administration officials may have broken laws in approving the use of harsh interrogation techniques for suspected terrorists.

Army Overseer Tells of Ouster Over KBR Stir

Army Overseer Tells of Ouster Over KBR Stir

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The Army official who managed the Pentagon's largest contract in Iraq says he was ousted from his job when he refused to approve paying more than $1 billion in questionable charges to KBR, the Houston-based company that has provided food, housing and other services to American troops.

The official, Charles M. Smith, was the senior civilian overseeing the multibillion-dollar contract with KBR during the first two years of the war. Speaking out for the first time, Mr. Smith said that he was forced from his job in 2004 after informing KBR officials that the Army would impose escalating financial penalties if they failed to improve their chaotic Iraqi operations.

Army auditors had determined that KBR lacked credible data or records for more than $1 billion in spending, so Mr. Smith refused to sign off on the payments to the company. "They had a gigantic amount of costs they couldn't justify," he said in an interview. "Ultimately, the money that was going to KBR was money being taken away from the troops, and I wasn't going to do that."

But he was suddenly replaced, he said, and his successors — after taking the unusual step of hiring an outside contractor to consider KBR's claims — approved most of the payments he had tried to block.

Army officials denied that Mr. Smith had been removed because of the dispute, but confirmed that they had reversed his decision, arguing that blocking the payments to KBR would have eroded basic services to troops. They said that KBR had warned that if it was not paid, it would reduce payments to subcontractors, which in turn would cut back on services.

"You have to understand the circumstances at the time," said Jeffrey P. Parsons, executive director of the Army Contracting Command. "We could not let operational support suffer because of some other things."

Mr. Smith's account fills in important gaps about the Pentagon's handling of the KBR contract, which has cost more than $20 billion so far and has come under fierce criticism from lawmakers.

While it was previously reported that the Army had held up large payments to the company and then switched course, Mr. Smith has provided a glimpse of what happened inside the Army during the biggest showdown between the government and KBR. He is giving his account just as the Pentagon has recently awarded KBR part of a 10-year, $150 billion contract in Iraq.

Heather Browne, a spokeswoman for KBR, said in a statement that the company "conducts its operations in a manner that is compliant with the terms of the contract." She added that it had not engaged in any improper behavior.

Ever since KBR emerged as the dominant contractor in Iraq, critics have questioned whether the company has benefited from its political connections to the Bush administration. Until last year, KBR was known as Kellogg, Brown and Root and was a subsidiary of Halliburton, the Texas oil services giant, where Vice President Dick Cheney previously served as chief executive.

When told of Mr. Smith's account, Representative Henry A. Waxman, the California Democrat who is chairman of the House Oversight and Government Reform Committee, said it "is startling, and it confirms the committee's worst fears. KBR has repeatedly gouged the taxpayer, and the Bush administration has looked the other way every time."

Mr. Smith, a civilian employee of the Army for 31 years, spent his entire career at the Rock Island Arsenal, the Army's headquarters for much of its contracting work, near Davenport, Iowa. He said he had waited to speak out until after he retired in February.

As chief of the Field Support Contracting Division of the Army Field Support Command, he was in charge of the KBR contract from the start. Mr. Smith soon came to believe that KBR's business operations in Iraq were a mess. By the end of 2003, the Defense Contract Audit Agency told him that about $1 billion in cost estimates were not credible and should not be used as the basis for Army payments to the contractor.

"KBR didn't move proper business systems into Iraq," Mr. Smith said.

Along with the auditors, he said, he pushed for months to get KBR to provide data to justify the spending, including approximately $200 million for food services. Mr. Smith soon felt under pressure to ease up on KBR, he said. He and his boss, Maj. Gen. Wade H. McManus Jr., then the commander of the Army Field Support Command, were called to Pentagon meetings with Tina Ballard, then the deputy assistant secretary of the Army for policy and procurement.

Ms. Ballard urged them to clear up KBR's contract problems quickly, but General McManus ignored the request, Mr. Smith said. Ms. Ballard declined to comment for this article, as did General McManus.

Eventually, Mr. Smith began warning KBR that he would withhold payments and performance bonuses until the company provided the Army with adequate data to justify the expenses. The bonuses — worth up to 2 percent of the value of the work — had to be approved by special boards of Army officials, and Mr. Smith made it clear that he would not set up the boards without the information.

Mr. Smith also told KBR that, until the information was received, he would withhold 15 percent of all payments on its future work in Iraq.

"KBR really did not like that, and they told me they were going to fight it," Mr. Smith recalled.

In August 2004, he told one of his deputies, Mary Beth Watkins, to hand deliver a letter about the threatened penalties to a KBR official visiting Rock Island. That official, whose name Mr. Smith said he could not recall, responded by saying, "This is going to get turned around," Mr. Smith said.

Two officials familiar with the episode confirmed that account, but would speak only on the condition of anonymity out of concern for their jobs.

The next morning, Mr. Smith said he got a call from Brig. Gen. Jerome Johnson, who succeeded General McManus when he retired the month before. "He told me, "You've got to pull back that letter,"' Mr. Smith recalled. General Johnson declined to comment for this article.

A day later, Mr. Smith discovered that he had been replaced when he went to a meeting with KBR officials and found a colleague there in his place. Mr. Smith was moved into a job planning for future contracts with Iraq. Ms. Watkins, who also declined to comment, was reassigned as well.

Mr. Parsons, the contracting director, confirmed the personnel changes. But he denied that pressure from KBR was a factor in the Army's decision making about the payments. "This issue was not decided overnight, and had been discussed all the way up to the office of the secretary of defense," he said.

Soon after Mr. Smith was replaced, the Army hired a contractor, RCI Holding Corporation, to review KBR's costs. "They came up with estimates, using very weak data from KBR," Mr. Smith said. "They ignored D.C.A.A.'s auditors," he said, referring to the Defense Contract Audit Agency.

Lt. Col. Brian Maka, a Pentagon spokesman, disputed that. He said in a statement that the Army auditing agency "does not believe that RCI was used to circumvent" the Army audits.

Paul Heagen, a spokesman for RCI's parent company, the Serco Group, said his firm had insisted on working with the Army auditors. While KBR did not provide all of the data Mr. Smith had been seeking, Mr. Heagen said his company had used "best practices" and sound methodology to determine KBR's costs.

Bob Bauman, a former Pentagon fraud investigator and contracting expert, said that was unusual. "I have never seen a contractor given that position, of estimating costs and scrubbing D.C.A.A.'s numbers," he said. "I believe they are treading on dangerous ground."

The Army also convened boards that awarded KBR high performance bonuses, according to Mr. Smith.

High grades on its work in Iraq also allowed KBR to win more work from the Pentagon, and this spring, KBR was awarded a share in the new 10-year contract. The Army also announced that Serco, RCI's parent, will help oversee the Army's new contract with KBR.

"In the end," Mr. Smith said, "KBR got what it wanted."