Monday, July 7, 2008

The Bush Administration Strikes Oil in Iraq

The Bush Administration Strikes Oil in Iraq

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…and speaking of oil, just when we were barely getting used to Big Oil and Iraq hitting the front pages of American newspapers in tandem, here comes Afghanistan! Who now remembers that delegation of Taliban officials, shepherded by Unocal ("We're an oil and gas company. We go where the oil and gas is…"), back in 1999, that made an all-expenses paid visit to the U.S. There was even that side trip to Mt. Rushmore, while the company (with U.S. encouragement) was negotiating a $1.9 billion pipeline that would bring Central Asian oil and natural gas through Afghanistan to Pakistan? Oh, and who was a special consultant to Unocal on the prospective deal? Zalmay Khalilzad, our present neocon ambassador to the U.N., George W. Bush's former viceroy of Kabul and then Baghdad, and a rumored future "Afghan" presidential candidate.

Those pipeline negotiations only broke down definitively in August 2001, one month before, well, you know… and, as Toronto's Globe and Mail columnist Lawrence Martin put it, "Washington was furious, leading to speculation it might take out the Taliban. After 9/11, the Taliban, with good reason, were removed -- and pipeline planning continued with the Karzai government. U.S. forces installed bases near Kandahar, where the pipeline was to run. A key motivation for the pipeline was to block a competing bid involving Iran, a charter member of the 'axis of evil.'"

Well, speak of the dead and not-quite-buried. It turns out that, in April, Turkmenistan, Afghanistan, Pakistan, and India (acronymically TAPI) signed a Gas Pipeline Framework Agreement to build a U.S.-backed $7.6 billion pipeline. It would, of course, bypass Iran and new energy giant Russia, carrying Turkmeni natural gas and oil to Pakistan and India. Construction would, theoretically, begin in 2010. Put the emphasis on "theoretically," because the pipeline is, once again, to run straight through Kandahar and so directly into the heartland of the Taliban insurgency.

Pepe Escobar of Asia Times caught the spirit of the moment perfectly: "The government of Afghan President Hamid Karzai, which cannot even provide security for a few streets in central Kabul, has engaged in Hollywood-style suspension of disbelief by assuring unsuspecting customers it will not only get rid of millions of land mines blocking TAPI's route, it will get rid of the Taliban themselves." Nonetheless, as in Iraq, American (and NATO) troops could one day be directly protecting (and dying for) the investments of Big Oil in a new version of the old imperial "Great Game" with a special modern emphasis on pipeline politics.

There has been a flurry of reportage on the revived pipeline plan in Canada, where -- bizarrely enough -- journalists and columnists actually worry about such ephemeral possibilities as Canadian troops spending the next half century protecting Turkmeni energy. If you happen to live in the U.S., though, you would really have no way of knowing about such developments, no less their backstory, unless you were wandering the foreign press online.

Nick Turse, author of the indispensable new book, The Complex: How the Military Invades Our Everyday Lives, considers the Iraq oil story that did, at last, hit the mainstream news here (only a few years late in the Great Game) and offers suggestions for mainstream reporters now ready to pursue the story wherever it leads, even back into an ignored, and oily, past. Tom

The Iraqi Oil Ministry's New Fave Five

All the Oil News That's Fit to Print (Attn: The New York Times)
By Nick Turse

On June 19th, the New York Times broke the story in an article headlined "Deals with Iraq Are Set to Bring Oil Giants Back: Rare No-Bid Contracts, A Foothold for Western Companies Seeking Future Rewards." Finally, after a long five years-plus, there was proof that the occupation of Iraq really did have something or other to do with oil. Quoting unnamed Iraqi Oil Ministry bureaucrats, oil company officials, and an anonymous American diplomat, Andrew Kramer of the Times wrote: "Exxon Mobil, Shell, Total and BP… along with Chevron and a number of smaller oil companies, are in talks with Iraq's Oil Ministry for no-bid contracts to service Iraq's largest fields."

The news caused a minor stir, as other newspapers picked up and advanced the story and the mainstream media, only a few years late, began to seriously consider the significance of oil to the occupation of Iraq.

As always happens when, for whatever reason, you come late to a major story and find yourself playing catch-up on the run, there are a few corrections and blind spots in the current coverage that might be worth addressing before another five years pass. In the spirit of collegiality, I offer the following leads for the mainstream media to consider as they change gears from no-comment to hot-pursuit when it comes to the story of Iraq's most sought after commodity. I'm talking, of course, about that "sea of oil" on which, as Deputy Secretary of Defense Paul Wolfowitz pointed out way back in May 2003, the month after Baghdad fell, Iraq "floats."

All the News That's Fit to Print Department

In a June 30th follow-up piece, the Times's Kramer cited U.S. officials (again unnamed) as acknowledging the following: "A group of American advisers led by a small State Department team played an integral part in drawing up contracts between the Iraqi government and five major Western oil companies…"

In addition, he asserted, this "disclosure… is the first confirmation of direct involvement by the Bush administration in deals to open Iraq's oil to commercial development and is likely to stoke criticism." This scoop, however, reflected none of the evidence -- long available -- of the direct involvement of Bush administration and U.S. occupation officials in Iraq's oil industry. In fact, since the taking of Baghdad in April 2003, the name of the game has been facilitating relationships between Iraq and U.S.-based and allied Western energy firms when it came to what President Bush used to delicately call Iraq's "patrimony" of "natural resources."

For instance, almost a year ago, the Washington Post'sdrew attention to a call by Bush's Commerce Department for "an international legal adviser who is fluent in Arabic 'to provide expert input, when requested' to 'U.S. government agencies or to Iraqi authorities as they draft the laws and regulations that will govern Iraq's oil and gas sector.'" The document went on to state that, "as part of a U.S. government inter-agency process, the U.S. Department of Commerce" would be "providing technical assistance to Iraq to create a legal and tax environment conducive to domestic and foreign investment in Iraq's key economic sectors, starting with the mineral resources sector." Walter Pincus

This was no aberration. Back in March 2006, for instance, the U.S. Army issued a solicitation for a two-year contract "to allow any organization or entity to support IRMO [Iraq Reconstruction Management Office] (U.S. Embassy Baghdad) to deliver an effective capacity development program utilizing predominantly U.S. and European firms, universities, institutes and professional organizations for personnel within the Iraqi Ministry of Oil..." This was to include participation in "development programs" offered by "private companies," long-term development through "commercial training entities in the United States and Europe for Oil and Gas specialists from the Ministry of Oil," and the implementation of "joint government-industry activities." Translated out of bureaucratic contract-ese, this meant that the U.S. would pay for programs to, among other things, enhance relationships between the Iraq Oil Ministry and… you guessed it… foreign firms.

In October 2006, the Department of Commerce (DOC) put out a call for experts that was nearly identical to the later solicitation discovered by Pincus. They were to aid a program facilitating "the creation of a legal and tax environment conducive to domestic and foreign investment in Iraqs [sic] key economic sectors, starting with the mineral resources sector" and provide "expertise to DOC, to other [U.S. government] agencies, or to Iraqi authorities on creating a legal and tax environment conducive to domestic and foreign investment in Iraqs [sic] oil and gas sector." Such an individual would, in fact, act "as a liaison between [the DOC's technical assistance arm] and key stakeholders in Iraq (such as Iraq's Ministry of Oil, or the oil authorities in Kurdistan)."

In fact, the U.S. Trade and Development Agency notes that, in 2006 and 2007, it funded a "$2.5 million multifaceted training program for the Iraqi Ministry of Oil" to "provide critical knowledge transfer and establish long-term relationships between the U.S. and Iraqi oil and gas industry public and private sector representatives."

It's worth recalling that Iraq's oil bureaucrats, about to receive such "critical knowledge" and "expertise," were not exactly neophytes in the world of oil management. They had effectively managed the Iraqi oil industry from the time the five oil majors now slated to receive those "service contracts" were tossed out of Iraq, when its industry was nationalized in 1972, until the invasion of 2003. They had kept the country's oil infrastructure going even after the disaster of the First Gulf War of 1990-1991, even through all the desperate final years of sanctions against Saddam Hussein's regime.

The Pentagon-Petroleum Partnership

Another connection, long ignored in the mainstream, that reporters like Kramer might consider pursuing when it comes to the complex ties among Iraqi officials, the Bush administration, the Department of Defense (DoD), and Big Oil is the overt Pentagon connection. The DoD is, as national security expert Noah Shachtman notes, "the world's largest energy consumer." And, when it comes to Pentagon gas-guzzling, its post-9/11 wars and occupations, especially in Iraq, have been a boon. While the Bush administration has been working overtime to clear the path for Big Oil's return to Iraq, the Pentagon has been paying out staggering amounts of U.S. taxpayer dollars to the very oil majors now negotiating with Iraq's Ministry of Oil.

According to recent reports, the proposed Iraqi service contracts, which may be paid off in cash or crude oil, will be worth $500 million each. That is roughly what the Pentagon paid out on June 18th alone -- the day before the Times broke its story about Big Oil's return to Iraq -- for natural gas and aviation fuel. Over half the total amount, in excess of $268 million, was handed over to one of the oil giants set to benefit from the Iraq deal: BP (formerly British Petroleum). Only days earlier, two of the other majors from the coterie of potential no-bid contractors, Exxon Mobil and Chevron, nabbed contracts from the DoD -- in Exxon Mobil's case, a $73 million deal for gasoline and fuel oil; in Chevron's, a $16 million contract for aviation fuel.

Keep in mind, however, that -- although you won't learn this in your daily paper -- this has long been standard operating procedure. Each of the oil giants named in the original New York Times piece -- Exxon Mobil, Shell, Total, BP, and Chevron -- regularly show up on the Pentagon's payroll. In fact, last year, Iraq's new fave five took home more than $4.1 billion from the DoD -- with Shell leading the way with $2.1 billion.

It's no secret that the Pentagon relies on vast quantities of oil to power the ships, planes, helicopters, heavy armor, and other ground vehicles essential to its occupation of Iraq, nor that it regularly pays out vast sums of taxpayer dollars to the very companies that U.S. advisors have aided in working out oil deals with the Iraq Oil Ministry. Despite ample evidence of the Pentagon connection, this circular and mutually-reinforcing relationship has been almost totally ignored in the mainstream media. But think of it this way: Your tax dollars have given the Pentagon the opportunity to use up oil -- bought from the oil majors, in prodigious quantities -- in order to create a situation in Iraq in which those same majors will soon receive no-bid contracts to make money off the Iraqi oil industry and, if all goes well, get far better, longer term deals in the near future.

One Big, Happy, Oily Family

It turns out that, despite that story the Times broke as if something totally new were on the horizon, the Bush administration has been facilitating ties between the Iraqi government and foreign oil companies for years, and the same companies now likely to nab a no-bid toehold in Iraq's oilfields are intimately tied in to the Pentagon to the tune of billions of dollars annually. It's worth noting that most of these firms have also been closely connected to Vice President Dick Cheney from the early days of the Bush administration. In fact, executives from Exxon Mobil, Shell, and BP met behind closed doors with Cheney's energy task force in 2001, when the administration was pounding out its energy policies, according to a White House document obtained by the Washington Post. The Government Accountability Office also found that Chevron was just one of several companies that "gave detailed energy policy recommendations" to the task force.

It's almost impossible to tease out all the interconnections between Big Oil, the White House, the Pentagon, and the Iraqi Ministry of Oil, since they are tied together in a web of contracts and mutually supporting relationships built up over many years. However, just in case the Times wants to set its staff loose on the recent past, there is no mistaking the many ties that exist. (A small tip for Times researchers: Skip the Times archives. They will be of little help.)

Should further evidence be necessary, when it comes to those U.S. advisors at work in Iraq, mainstream reporters need look no further than the solicitations sent out by the Iraqi Ministry of Oil itself. Consider, for instance, a recent "tender" for a contractor to drill "two deep exploration wells" in the South Rumaila and Luhais oil fields in the Basra District of southern Iraq. Not only does the solicitation (the deadline for which is July 27, 2008) contain special instructions for "Companies outside Iraq," but it asks potential contractors to send their bids to the Ministry of Oil not in Arabic, but "in the English language."

Nick Turse is the associate editor and research director of He has written for the Los Angeles Times, the San Francisco Chronicle, Adbusters, the Nation, and regularly for His first book, The Complex: How the Military Invades Our Everyday Lives, an exploration of the new military-corporate complex in America, was recently published by Metropolitan Books. His website, Nick has been newly revamped and expanded.

The buck doesn't stop here; it just keeps falling

The buck doesn't stop here; it just keeps falling

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Things in the U.S. sure are tough. Brother, can you spare a euro? Signs saying "We accept euros" are cropping up in the windows of some Manhattan retailers. A Belgium company is trying to gobble up St. Louis-based Anheuser-Busch, the nation's largest brewer and iconic Super Bowl advertiser.

The almighty dollar is mighty no more. It has been declining steadily for six years against other major currencies, undercutting its role as the leading international banking currency. The long slide is fanning inflation at home and playing a major role in the run-up of oil and gasoline prices everywhere.

Vacationing Europeans are finding bargains in the U.S., while Americans in Paris and other world capitals are being clobbered by sky-high tabs for hotels, travel and even sidewalk cafes. Northern border-city Americans who once flocked into Canada for shopping deals are staying home; it's the Canadians flocking here now.

Everything made in America - from goods to entire companies - is near dirt cheap to many foreigners. Meanwhile, American consumers, both those who travel and those who stay at home, are seeing big price increases in energy, food and imported goods. The dollar has lost roughly a quarter of its purchasing power against the currencies of major U.S. trading partners from its peak in 2002.

Since oil is bought and sold in dollars worldwide, the devalued dollar has made the recent surge in energy prices even worse for Americans, leading to $4 gasoline in the United States. Analysts suggest that of the $140 a barrel that oil fetches globally, some $25 may be due to the devalued dollar.

Further declines in the dollar will add to oil's appeal as a commodity to be traded.

Oil, suggests influential energy consultant Daniel Yergin, is "the new gold."

The limp greenback has had one big benefit to the U.S. economy: Since it makes American goods cheaper overseas, it has helped manufacturers who export and other U.S. based companies with international reach. Exports have been one of the few bright spots in an otherwise darkening U.S. economy.

Franklin Vargo, vice president of international economic affairs at the National Association of Manufacturers, welcomes the dollar slide, as do members of his organization.

"We can see that, when the dollar's not overpriced, that people around the world want American goods and our exports are going gangbusters now," he said.

He doesn't see the dollar as undervalued. He sees it as having being overpriced in the 1990s - and what's happened since as something along the lines of a correction.

Still, Vargo acknowledges the dollar's decline has brought a measure of pain to some consumers. "As the dollar has gone down in value, that has added to the dollar cost of oil. No question. So having the dollar decline is not unambiguously a plus. That's why we say there's got to be a balance there somewhere. What we want is a Goldilocks dollar. Not too strong, not too weak. But just right. And only the market can determine that," Vargo said.

Mark Zandi, chief economist at Moody's, said expanding exports due to a weak dollar are "an important source of growth, but it doesn't add a lot to jobs, it doesn't mean very much for the average American household. For the average American, for the average consumer, these are pretty tough times."

The loss of the dollar's purchasing power and international respect has some experts worrying that the euro might one day replace the dollar as the so-called primary reserve currency. And that could trigger a dollar rout as foreign governments and international investors flee from U.S. Treasury bonds and other dollar-denominated investments.

Making matters worse: The gaping U.S. current-account deficit - the amount by which the value of goods, services and investments bought in the U.S. from overseas exceeds the amount the U.S. sells abroad - and the low levels of domestic savings means that foreigners must purchase more than $3 billion every business day to fund the imbalance.

Since roughly half of the nation's nearly $10 trillion national debt is held by foreigners, mostly in Treasury bills and bonds, such a withdrawal could have enormous consequences.

Yet Washington finds its options limited.

President Bush asserts longtime support for a "strong" dollar, and made that point again Sunday in a news conference in Japan with Prime Minister Yasuo Fukuda. "In terms of the dollar, the United States strongly believes - believes in a strong dollar policy and believes that the strength of our economy will be reflected in the dollar."

But not once in his presidency has the U.S bought dollars on foreign exchange markets - called intervention - to help prop up the greenback. There's no telling where the buck will stop these days, although for the past few weeks it seems to be in a holding pattern. Even as three Bush Treasury secretaries in a row spouted the strong-dollar mantra, the dollar kept tumbling against the euro, the pound, the yen, the Canadian dollar and most other major currencies.

The Federal Reserve could prop up the dollar by increasing interest rates under its control. Increased yields would make dollar-denominated investments more attractive to foreigners. But that could undercut the already anemic economic growth in a frail U.S. economy rocked by soaring fuel costs, falling home prices and rising unemployment - and the lowest reading of consumer confidence in 16 years.

The Fed must do a balancing act between keeping the domestic economy from going into recession and keeping inflation at bay.

Furthermore, no Fed likes to raise rates aggressively in a presidential election year. It seems more inclined to hold interest rates low for now to give financial markets time to recover from the housing meltdown and credit crunch. It did just that in its meeting on June 25, leaving a key short-term rate at 2 percent. The rate reached that level in April after a series of aggressive cuts that brought it down 3.25 percentage points since September. Those cuts helped ease the housing and credit crises - but drove the dollar further down.

In early June, Bush declared before his trip to Europe: "A strong dollar is in our nation's interests. It is in the interests of the global economy." That, plus a warning by Fed Chairman Ben Bernanke that the dollar's weakness was contributing to U.S. inflation, seemed to temporarily break the dollar's tumble. Presidents and Fed chairmen don't usually talk directly about the dollar and exchange rates - leaving that up to the Treasury secretary - and international bankers and investors took note of the high-level attention.

Over the past few weeks, the dollar has remained relatively stable, although it took a dip after the Fed decided to leave rates unchanged. The long slide may not be over.

Still, if the Fed moves to lift rates later this year, as some traders and investors anticipate, it could buttress the dollar and spur an exodus of speculators from the oil market - helping to both prop up the dollar and drive down oil prices. But few economists are sanguine that the economy will improve any time soon.

The other main tool to move the dollar - intervention in currency markets by buying dollars and selling other currencies - is risky.

It would take great sums of money to make any difference. The foreign exchange market is the largest in the world, with over $1 trillion traded each day. Seeing the U.S. trying to prop up the greenback by buying dollars could be taken as a sign of desperation and possibly trigger a renewed round of selling.

Furthermore, there has been little encouragement for such a strategy from finance ministers from the Group of Eight wealthy democracies - Japan, Britain, Germany, France, Italy, Canada and Russia plus the U.S.

Leaders of the eight countries were to meet in Japan beginning Monday, but the falling dollar was not even on the formal agenda. It's too touchy an issue, and the dollar's relative stability over the past few weeks makes it easier for world leaders to steer clear. "People will be talking about it in the corridors," said Reginald Dale, a senior fellow with the Center for Strategic and International Studies.

Treasury Secretary Henry Paulson has suggested that nothing is "off the table" including intervention. But Bush has made statements suggesting he intends to let market forces set exchange rates.

The dollar has fallen so far, it will be difficult to halt or reverse its slide.

U.S. efforts to persuade Saudi Arabia and other major oil-producing nations to increase their production - and help ease pressure on both oil prices and the dollar - have brought scant results.

"There's no magic wand," said White House press secretary Dana Perino. "It's not going to be a problem that we solve overnight."

The impact of the falling dollar is not always visible to the average consumer. Not like the big numbers on gas pumps that give stark evidence of price levels.

But imported goods, from fuel to cars from Japanese automakers and toys from China - are getting more expensive just as U.S. wages are either stagnant or falling.

American companies suddenly look cheap to acquisition-minded foreigners, particularly those based in Europe.

Belgian-based InBev's hostile bid for Anheuser-Busch is a recent example. It has bid $46 billion to acquire the company - a 30 percent premium above where Anheuser's shares traded before the June 11 proposal.

A successful acquisition by InBev would put the last remaining mass-market American brewer in foreign hands. InBev is based in Belgium but run by Brazilians. Anheuser-Busch, which brews both Budweiser and Bud light, holds a 48.5 percent share of U.S. beer sales. Anheuser-Busch rejected InBev's bid, but the Belgian brewer forged ahead, seeking to unseat Anheuser's 13-member board and take its offer directly to shareholders.

If the takeover goes through, it might open the floodgates to other foreign takeovers of American companies.

Some of the dollar's decline depends on hard-to-measure factors, like the psychology of foreign investors.

When the U.S. economy is weakening, many investors stay away. The slide of the dollar has coincided with a long period of relatively low interest rates.

And some of the decline in the dollar's global role "is due to the foreign policy failures of the Bush administration, not just to recent economic developments and policies," suggests Adam S. Posen, deputy director of the Peterson Institute for International Economics and a former economist at the Federal Reserve Bank of New York. In other words, some international investors unhappy with Bush's policy on Iraq or toward other parts of the world might not wish to invest in American companies or buy U.S. bonds.

Still, he argues that the euro is unlikely to replace the dollar as the world's main reserve currency, and that the euro may be at "a temporary peak of influence."

David Wyss, chief economist at Standard & Poor's in New York, says he envisions a day when the dollar and the euro will share billing as the world's reserve currencies.

He predicts that the dollar will remain roughly at its present levels "for a couple years." Still, he says, "We might not be done with this down leg."

Another big problem for the dollar is that the European Central Bank is likely to hike rates while the Federal Reserve stands pat, giving euro-based investments a bigger yield advantage.

"I could see more downward pressure on the dollar, over the course of the summer, not dramatically, if the ECB does raise rates," said Robert Dye, an economist with PNC Financial Services Group. "If it is one and done, pressure will be minimal. But if it's an ongoing pattern of rate increases, there will be more substantial pressure."

A euro now buys as much as $1.55 in the United States.

The dollar has been the leading international currency for as long as most people can remember. But its dominant role can no longer be taken for granted.

Paul Volcker, who headed the Federal Reserve from 1979-87, warned in April that the nation was in a dollar crisis, and that what is happening now reminds him of the early 1970s, when serious inflation erupted as economic growth stagnated.

Then, as now, a weak economy limited the Fed's options. The result was a spiral of rising prices and wages - until the Fed, led by Volcker, suppressed double-digit inflation with huge interest rate increases that pushed the economy into a steep recession in 1982. He recently criticized the current Fed as defending the economy and the market, instead of defending the dollar. Volcker said that will make defending the greenback much harder later.

Energy consultant Yergin, chairman of Cambridge Energy Research Associates, recently told the House-Senate Joint Economic Committee that oil had become "the new gold."

"Oil has become a storehouse of value - reflecting broad global economic trends and imbalances. At the same time, oil is increasingly seen as an asset by financial investors, an uncorrelated alternative to equities, bonds, and real estate," he said.

When the credit crisis broke last summer, the result was a sharp reduction in interest rates by the Fed. That, in turn, accelerated the fall of the dollar.

"Instead of the traditional flight to the dollar' during a time of instability, there has been a flight to commodities' in search of stability during a time of currency instability and a falling dollar," Yergin said. "There's a painful irony here: The crisis that started in the subprime market in the United States has traveled around the world and, through the medium of a weaker dollar, has come back home to Americans in terms of higher prices at the pump."

Small Banks' Reckoning Day Is Coming

Small Banks' Reckoning Day Is Coming

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Wall Street is bracing for regional and small banks to fess up to large losses from their mounting volume of soured construction loans made primarily to home builders.

According to the Federal Deposit Insurance Corp., $45.4 billion of the $631.8 billion in construction loans outstanding at the end of the first quarter were delinquent. When banks announce second-quarter results in coming weeks, they are expected to report sharp increases in loans that builders can't repay. Banks are also facing intensifying pressure from federal and state regulators to deal with the problem loans on their books.

That will put additional pressure on an already stressed financial system. Banks have begun to dump bad construction and land loans at discounts, curtail new lending and halt construction projects that are under way to preserve capital. Some analysts even see a wave of bank failures as a possibility.

"Across the industry, the second quarter is going to be a tough quarter," says Keith Maio, chief executive of the National Bank of Arizona, a unit of Zions Bancorp, which lent heavily to home builders and developers. "It's going to continue to be tough until the real-estate market hits a bottom."


Scores of banks were already suffering headaches by the end of the first quarter, according to a review by The Wall Street Journal of FDIC-filed reports by 6,919 banks that make construction loans. The smallest banks, those with total assets of less than $5 billion, faced the biggest problems. The WSJ analysis didn't include savings-and-loan institutions, or so-called thrift banks.

Nearly one in three of the banks analyzed -- or 2,182 -- had construction-loan portfolios that exceeded 100% of their total risk-based capital, a red flag to regulators, although it doesn't mean the bank is in danger of failing. Risk-based capital is a cushion that banks can dig into to cover losses.

Even more alarming, 73 of those banks had construction-loan delinquency rates of more than 25%. Executives at all of the banks that responded to questions acknowledged the problems but expressed confidence they had the capital to weather the storm.

At Bremerton, Wash.-based Westsound Bank, new Chief Executive Terry Peterson agreed that his bank became "much, much too concentrated" in construction loans. About 43% of Westsound Bank's construction and land loans in the first quarter were delinquent.

Mr. Peterson was appointed CEO recently to clean up the troubled bank, after regulators issued a "cease and desist" order in March requiring the bank to change lending practices. "We are pretty much using all of our human capital to address our loan problems," he says.

Larger regional banks also face mounting construction-loan problems, but are in decent shape. Thirty-eight of them had more than 100% of their total risk-based capital in construction loans at the end of the first quarter, but only nine of those faced delinquency rates of more than 10%.

Over the next few quarters, banks are expected to begin recording much larger losses. In 2007 and the first quarter of this year, U.S. banks wrote down just 0.7% of their residential construction and land assets as bad debt, according to Zelman & Associates, a research firm. Over the next five years that figure could rise to 10% and 26%, which would amount to about $65 billion to $165 billion, Zelman projects.

During the housing boom, many small and regional banks doubled down on construction loans because they were largely shut out of the home mortgage market dominated by large originators. But now the banks' difficulties are threatening to sharply shrink the home-building industry. Credit Suisse analyst Dan Oppenheim estimates that as many as 50% of the closely held builders won't survive because of the tightening lending environment and housing downturn.

Strategies for coping with the problem loans vary widely. Large banks, such as IndyMac Bancorp Inc. and KeyBank, have been trying to sell billions of dollars of construction and land loans. IndyMac said in a filing Monday that it is working with regulators to shore up its capital. (See related article.)


"The banks are running as fast as they can to get out of housing," says Tom McCormick, president of Astoria Homes, a large, closely held builder in Las Vegas.

Mr. McCormick is involved in a fight with KeyBank, which recently initiated foreclosure proceedings on a $24 million construction loan financing a Las Vegas housing project. Mr. McCormick says the bank took that action even though his company was current on debt payments. In court documents, KeyBank says the builder fell behind.

Mr. McCormick says he found investors to buy out his loans at 70 cents on the dollar, but the bank refused. He also says that KeyBank has prevented him from closing home sales. "I personally think the fact that you would punish any innocent home shameful," Mr. McCormick wrote in an email to KeyBank executives. A spokeswoman for KeyCorp, KeyBank's parent, declined to comment.

Many smaller banks have been more willing to work with struggling builders rather than foreclose on their projects. But these banks are coming under pressure from regulators to more aggressively write down their loans, amid declining real-estate values. This process could force many more loans into default.

Some community banks are bristling under the regulatory pressure. "The federal government is being too reactionary," says Damian Kassab, chief executive of Michigan-based Warren Bank, which reported that 47% of its construction loans are delinquent. "They want to see it done as quickly as possible. I say 'can't we just relax, take a deep breath and work with the borrowers.'"

Analysts question whether some small banks are putting off foreclosures because they lack adequate capital to absorb the large losses.

Banks seeking a quick fix by selling off their troubled loans may find fewer buyers. Laurence Pelosi, an executive director of Morgan Stanley Real Estate, a major land investor, told the Pacific Coast Builders Conference last week that the appetite for distressed residential real estate may be waning among some investors. "The complexity of the business and the increasing opportunities in the commercial sector may lead to a shift away from residential," Mr. Pelosi says. "That will have a further impact on values."

Financial market losses could top 1,600 billion dollars: report

Financial market losses could top 1,600 billion dollars: report

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The global financial crisis could lead to losses of 1,600 billion dollars for financial institutes, according a report in the Swiss Sunday newspaper SonntagsZeitung. It quoted a confidential study by the hedge fund Bridgewater Associates as saying losses for banks holding risky assets could be four times greater than the 400 billion dollars previously estimated.

The hedge fund expressed doubts that the financial institutes would be able to drum up enough funds to cover the losses, something it said could exacerbate the crisis.

Bridgewater, one of the world's biggest hedge funds, based its calculations on the state of risky debt-based US assets, such as mortgages, credit and credit card demands.

The value of such risky assets is 26,600 billion dollars, according to the hedge fund. The losses would amount to 1,600 billion dollars if these assets were valued at market rates and not in the form of securitization, the newspaper said.

Supreme Court, Inc.: Supremely Pro-Business

Supreme Court, Inc.: Supremely Pro-Business

By Stephen Lendman

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Pro-business Supreme Court rulings are nothing new, and it's likely most damaging one ever occurred in 1886. In Santa Clara County v. Southern Pacific Railway, the High Court granted corporations legal personhood. Ever since, they've had the same rights as people but not the responsibilities. Their limited liability status exempts them. They've profited hugely as a result and have continued to win favorable rulings since. Today more than ever from the Roberts Court. One observer described its first full (2006-07) term as a "blockbuster" with the Court's conservative wing prevailing in most key cases. It's much the same in 2007-08, and it shows in its pro-business rulings.

Take its June 21, 2007 Tellabs, Inc. v. Makor Issues & Rights, Ltd decision for example. In fraud cases, the Court set strict investor suit guidelines in ruling for Tellabs against its shareholders. This and similar rulings got Robin Conrad, executive vice-president of the US Chamber of Commerce and head of its litigation team, to describe the 2006-07 Court term "our best (one) ever" with business winning 12 of 14 cases and another at the time to be decided. When it was, business won that one, too.

One was the Court's $80 million punitive damage award reversal in Philip Morris USA v. Williams, a lung cancer victim widow. But that paled compared to the DOJ's June 2005 turnaround. It pertained to its landmark tobacco industry civil racketeering settlement. Instead of the original $130 billion agreed on, it sought just 8% (or $10 billion) in spite of a government expert's testimony. He stated that the larger sum was essential to fund meaningful smoking-cessation programs to counter a "decades-long (industry) pattern of material misrepresentations, half-truths, deceptions and lies that continue to this day."

The June 2006 Bell Atlantic v. Twombly decision was another for business. It henceforth raised the bar for plaintiffs in alleged antitrust conspiracies. And the (April 17, 2007) Watters v. Wachovia one prevented states from regulating subsidiaries of national banks' just as the subprime crisis was emerging. Stripped of that power, consumers remain vulnerable to predatory lending practices any time.

It's no different for business in the current term, and it showed up prominently in three late June decisions and two notable January ones. In Regents of the University of California v. Merrill Lynch (on January 22), the Court threw out a huge lawsuit - for restitution from Enron's collusion and fraud against investors. In dismissing the case, it effectively immunized Enron's bankers from any liability in the company's malfeasance.

Earlier (on May 31, 2005), it did the same thing for Enron's accountant, Arthur Andersen. In unanimously overturning its obstruction of justice conviction, it found jury instructions were inappropriate. They "failed to convey the requisite consciousness of wrongdoing" because jurors were told to convict Andersen if it had an "improper purpose" even if it thought it was acting legally.

On January 15, 2008, it issued a similar ruling in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. It dismissed charges against cable TV set-top box makers in a scheme with Charter Communications. It involved over-charging customers for equipment, then rebating revenue to Charter in purchased advertising.

In Davis v. Federal Elections Commission, the Court (on June 26) struck down the "Millionaire's Amendment" McCain-Feingold Act provision. It let candidates accept larger than normal contributions against wealthy opponents with enough resources to outspend them. They have no restrictions and may self-finance as "robustly" as they wish.

Then on June 26, the Court distorted the Second Amendment in siding with the gun lobby. In District of Columbia v. Heller, Antonin Scalia and four other Justices said they were well "aware of the problem of handgun violence in this country." However, "constitutional rights necessarily (take) certain policy choices off the table." The Court will not "pronounce the Second Amendment extinct." Justices Stevens, Souter, Ginsburg and Breyer had a different view. They called the decision "law-changing (and) a dramatic upheaval in the law."

A day earlier on June 25, another far-reaching decision came down. After 19 years, the Exxon Valdez matter was settled with implications far beyond this one case. In Exxon Shipping v. Baker, the Court reduced an original $5 billion in punitive damages to $500 million and ended the lengthy litigation process. It began on March 24, 1989 when the Exxon Valdez spilled 11 million gallons of crude into Prince William Sound, Alaska and changed the lives of its people forever. They're now denied meaningful restitution and worse.

The case is significant in its precedent-setting implications. Yet they began showing up earlier in High Court rulings involving lesser punitive damage award amounts. In BMW of North America, Inc. v. Gore (May 20, 1996), the Supreme Court said $2 million in punitive damages was excessive in a case involving $4000 in compensatory ones. It declined to define what's constitutionally acceptable, but noted that the maximum penalty under Alabama's Deceptive Trade Practices Act (where BMW's plant is located) is $2000.

In State Farm Mutual Automobile Insurance Co. v. Campbell (April 7, 2003), the Supreme Court called a $145 million punitive award excessive in a case involving $1 million in compensatory damages. It didn't impose a "bright line" rule on the permissible amount but cautioned that any ratio greater than nine-to-one is unreasonable. It further suggested that this case "would likely justify" a one-to-one ratio.

These and similar cases lower the bar for future malfeasance settlements. They give business more latitude to be reckless and make it easier than ever to be negligent and get away with it. After Exxon Shipping v. Baker, the price is even lower so business is freer to endanger the public and know right wing courts are supportive. Even worse are the constitutional implications, the protections it no longer affords, and government's failure to fulfill its minimum function.

When it works, it's to ensure the public welfare. It's so stated in the Preamble and Article I, Section 8 that "The Congress shall have power to....provide for....(the) 'general welfare' of the United States" - the so-called "welfare clause." It long ago eroded. They're mere words on parchment paper because governments lie, connive, misinterpret and discharge their duties in their own self-interest and for society's privileged class. The public is denied. Now more than ever as the people of Alaska can attest.

The Exxon Valdez Case

At 12:04AM on March 24, 1989, the BBC reported that "An oil tanker has run aground on a reef off the Alaskan coast, releasing gallons of crude oil into the sea. The Exxon Valdez got into trouble in Prince William Sound when it hit Bligh Reef, splitting its side open and releasing oil, with reports of an eight-mile slick. High winds are affecting attempts to suck (it) from the sea's surface and residents have reported poor air quality as emergency crews try to burn off its top layer."

The report continued that booms were ineffective. Environmentalists battled to save 10 million sea ducks. Seals and other fauna as well. The Coast Guard used chemicals to break up the slick, but local officials said Exxon responded too slowly. The tanker was a mile off course. The captain was in his quarters at the time, and businessmen said tourism would be affected. What about local fishermen and Native Alaskans. BBC didn't say even though they were most affected. It later reported that the Exxon Valdez was repaired, remained a single-hulled tanker, was renamed the Sea River Mediterranean, and was banned from Alaskan waters.

In its final March 25, 1989 edition, the Anchorage Daily News reported the following:

-- a hasty debate began on how to prevent a disaster "in one of America's most sensitive coastal zones;"

-- never before was so much oil spilled into such a "rich and confined northern coastal environment;"

-- the area (then) represented a "$100 million commercial fish(ing industry) and its abundance of birds and marine mammals;"

-- immediate concerns focused mainly on three wildlife species: sea otters, immature salmon, and spawning herring; sea birds, ducks, and other fauna as well;

-- fishermen in Cordova and Valdez "were just getting ready to fish" when it happened; they were furious about the accident; in 1971, they sued to stop the transAlaskan pipeline because they feared spills in the Sound; they settled out of court and got an oil industry commitment (reneged on) for state-of-the-art spill equipment and trained personnel on site to operate it;

-- the area is ecologically rich in flora and fauna;

-- the slick was spreading, expected to hit the beaches, and threatened one of the state's "most ambitious ocean ranching programs;" its long-term effects were feared, and a state Department of Fish and Game biologist said "the potential for serious problems is just staggering;" the Cordova District Fisherman's United vice-president said it was "like getting hit with a 25-ton sledge hammer."

Station KTUU Anchorage reported key oil spill timeline events:

-- June 20, 1977: oil first enters the Prudhoe Bay Pump Station One pipeline;

-- July 28, 1977: oil reaches Valdez;

-- August 1, 1977: the first tanker, Arco Juneau, sails out of Valdez; many thousands more followed;

-- 9:12PM, March 23, 1989: the Exxon Valdez leaves Valdez carrying 53 million gallons of crude;

-- 12:04AM, March 24, 1989: the ship strikes Bligh Reef spilling 10.8 million gallons of its cargo;

-- 7:27AM, March 24, 1989: the oil slick is about 100 feet wide and four to five miles long;

-- 10AM, March 24, 1989: a urine sample shows Capt Joe Hazelwood with a blood alcohol content of 0.10%;

-- 12PM, March 24, 1989: the Exxon Baton Rouge arrives to take oil from the damaged tanker; the slick is now three miles wide and five miles long;

-- 6PM, March 24, 1989: cleanup crews use dispersant but it's ineffective;

-- 8:15PM, March 25, 1989: 15,000 gallons are burned; it's the only time "in situ" burning was allowed;

-- 11:59PM, March 25, 1989: the slick's leading edge is 16.5 miles southwest of Bligh Reef;

-- March 29, 1989: In Anchorage Superior Court, two Prince William Sound fishermen file the first lawsuits against Exxon, the Alyeska Pipeline Service Company (TAPS), and the state Department of Environmental Conservation for damages from the accident and botched cleanup efforts;

-- by August 15, 1989, 140 lawsuits were filed against Exxon; the same day, the state of Alaska sues the company charging gross deception about its ability to transport crude safely and clean it up when it failed;

-- on October 23, 1989: Exxon sues the state of Alaska for interfering in and slowing the cleanup process;

-- on February 27, 1990: an Anchorage federal grand jury indicts Exxon and other oil defendants on five counts - two felony and three misdemeanor charges;

-- on March 13, 1991: in Juneau, Exxon settles claims with the state and federal government for $1 billion;

-- on September 30, 1991: state and federal authorities reach a second deal with Exxon; it's similar to the first except that Alaska intended to share scientific and legal data with other potential plaintiffs;

-- on July 13, 1993: Alyeska agrees to pay $98 million to settle claims with Native corporations, fishermen, business owners and others;

-- on September 16, 1994: in Exxon Shipping v. Baker, an Anchorage jury awards $287 million in compensatory damages and $5 billion in punitive ones to 32,677 fishermen, Native Alaskans, landowners and other aggrieved parties;

-- on December 6, 2002: the Ninth US Circuit Court of Appeals orders punitive damages reduced to $4 billion;

-- Exxon appeals and on January 28, 2004: District Court Judge H. Russell Holland raised the amount to $4.5 billion plus $2.25 billion in interest; his ruling referred to Exxon's "recklessness....(that) did not cause only economic harm....(it) caused harm beyond the purely economic; the social fabric of Prince William Sound and Lower Cook Inlet was torn apart;" so were the lives of the aggrieved who "suffered from severe depression, post-traumatic stress disorder, generalized anxiety disorder, or a combination of all three;"

-- on December 22, 2006: following more appeals, the Ninth US Circuit Court of Appeals reduced punitive damages to $2.5 billion;

-- on May 23, 2007: Exxon appeals to the Supreme Court; and

-- on June 25, 2008: the High Court reduced the amount to $500 million - the equivalent of about 1.5 days profit from its 2008 first quarter operations or hardley enough to matter; ExxonMobil is the world's largest corporation; it had 2007 sales of $404 billion and $40.6 billion in profits; in nominal GDP terms, it ranks 23rd in size ahead of Norway, Austria, Saudi Arabia, Iran and Venezuela; with rising oil prices, Exxon's sales now run at an annualized rate of nearly $470 billion; in nominal 2007 GDP terms, it ranks 18th ahead of Sweden, Indonesia, Belgium and Switzerland.

The True Exxon Valdez Story

When the Exxon Valdez ran aground, Capt. Joe Hazelwood was off duty. He was drunk and below deck sleeping it off. The first and second mates weren't around either. The third mate was in charge and might have avoided a problem had the ship's radar been on. It wasn't because it's complicated, expensive to operate, was broken, and Exxon hadn't repaired it for a year prior to the accident. Why not? To save money with no regard for the consequences if it were needed.

Greg Palast's investigative work uncovered a trail of company fraud and coverup - of "doctored safety records, illicit deals between oil company chiefs, and programmatic harassment of witnesses." It was also "brilliant(ly) success(ful in) cheating the natives." He amassed four volumes of evidence. Almost none of it was reported. Here are some highlights:

-- 10 months in advance, a six company Alyeska Owners Committee internal memo warned that containing an oil spill "at the mid-point of Prince William Sound (wasn't) possible with present equipment;" that's where the Exxon Valdez ran aground; proper equipment would cost millions of dollars; the law required it; the companies promised to install it, but never did;

-- another memo said dispersants alone would be used against spills, and the committee decided that Alyeska would respond only "to oil spills in Valdez Arm and Valdez Narrows;"

-- previous small spills were hidden as "oil-in-water" events;

-- a confidential 1984 letter from Capt. James Woodle, Alyeska's Valdez Port commander, warned that "Due to a reduction in manning, age of equipment, limited training and lack of personnel, serious doubt exists that (we) would be able to contain and clean up effectively a medium or large size oil spill;" Woodle reported a previous Valdez spill coverup; "his supervisor forced him to take back (the report saying), 'You made a mistake. This was not an oil spill;' "

-- the law requires shippers to maintain "round-the-clock oil spill response teams;" Alyeska hired specially qualified Natives for the job, trained them with "special equipment to contain an oil slick at a moments notice;" then in 1979 they were fired; sham teams were created; names of untrained workers were listed on them; and equipment "was missing, broken or existed only on paper;" when the 1989 spill occurred, "there was no Native response team, only chaos."

Exxon drew fire, but British Petroleum (now BP) is just as culpable as Alyeska's major shareholder (46% at the time). "Exxon is a junior partner, and four other oil companies are just along for the ride." Capt. Woodle and other key people worked for BP, yet the company stayed well out of the spotlight. It also had "scandalous" evidence about the Valdez problem. Capt. Woodle personally "delivered his list of missing equipment and 'phantom' personnel (letter) directly (to) BP's Alaska chief, George Nelson."

The company hid the evidence, trumped up bogus marital infidelity charges against Woodle, bought him off to leave the state and not return, and also went after Charles Hamel, an independent oil shipper. He discovered the Valdez problems, reported them to BP, and then was spied on and hounded to silence him.

The Exxon Valdez story is clear. Profit considerations trump all others. Alyeska promised safety, but delivered betrayal, and Palast explained the problem this way: In shipping oil, "the name of the game is 'containment' because, radar or not, some tanker somewhere (will) hit the rocks. Stopping an oil spill catastrophe is a no-brainer....if a ship (hits) a reef (it's only necessary) to surround (it) with a big rubber curtain (a 'boom') and suck up the corralled oil. In signed letters to the state and Coast Guard, BP, ExxonMobil and partners promised that no oil would move unless the equipment was (available) and the oil-sucker ship (the 'containment barge') was close by....The oil majors fulfilled their promise the cheapest way: They lied."

When the Exxon Valdez hit Bligh Reef, no equipment was there. If it had been as promised, they'd have been no disaster and no need for the Supreme Court to reward Exxon and cheat Native Alaskans and fishermen.

The oil industry was well-served by "the fable of the drunken skipper." It turned Alyeska's lawlessness into a "one-time accident" because of "human frailty." It "made the spill an inevitability, not an accident" and assures future ones are coming and not just in Alaska.

In the late 1990s, an Exxon Prince William Sound brochure pronounced the water "clean and plant, animal and sea life are healthy and abundant." In fact, it's mirror opposite. Palast revisited Alaska in 1999. On Chenega, rocks were still being scrubbed with 20 tons of sludge removed from beaches that one summer. At Nanwalek village, the state declared clams poisoned from "persistent hydrocarbons" and inedible. The Montague Island sea lion rookery is empty. The herring never returned, and salmon still have abscesses and tumors. All along the beaches it's the same. "Kick over a rock and you'll get a whiff of an Exxon gas station."

Since 1989 on a positive note, Clarkson Research Services reports that 77% of oil tankers are double-hulled compared to 6% in 1989. On the other hand, spills and shoddy industry practices remain common, and oil now tops $140 a barrel. Back then, it was $13.58 in January. What about the Exxon Valdez? It's still single-hulled, and this year a Hong Kong company bought it to carry bulk ore. It's now called the Dong Fang Ocean.

Averting Catatrophe: When the Leaders are the Problem

Averting Catatrophe: When the Leaders are the Problem

By Dr. Daniel Ellsberg

Go To Original

The following text was first published as an afterword to Flirting with Disaster: Why Accidents Are Rarely Accidental (Hardcover) by Marc S. Gerstein and Michael Ellsberg [click for details]

Dr. Gerstein's final chapter has given guidelines for leaders on how they might avert the kinds of catastrophes described in this book. It would be good for society (and all organizations) if more leaders exhibited this kind of concern and followed the suggestions he gives.

However, in my own experience in government, and in my study of national security policy catastrophes in the decades since, I have come to believe that the most dangerous practices in the national security realm reflect priorities, in general, that are set by top officials: getting reelected, avoiding condemnation for past actions, or other political or bureaucratic objectives. Those priorities generally take great precedence over safety or preventing public harm.

The behavior of the people down below in the hierarchy is generally responsive to those priorities, because the way for them to keep their jobs and get ahead is self-evidently to conform to the priorities of their superiors, and especially the top boss. It isn't as though the lower people in the organization themselves profit by adopting those priorities over other priorities, such as safety. But they want to keep their jobs, and they keep them by delivering to their superiors what they want. And what those superiors often want is help in avoiding or concealing documentation of warnings or recommendations that might convict them, on later examination, of self-interest or recklessness in choosing or continuing policies that failed.

Many of the examples in this book involve leaders consciously gambling with other people's lives, on a catastrophic scale. In the case of Challenger, there was only a single instance when the engineers from Morton Thiokol, who had to sign off on the launch, tried to stop it. It wasn't as though they were Chicken Littles, always getting in the way and making trouble. Launches were routinely being postponed for a day, but not by the Thiokol engineers. So that was an unprecedented warning by them. Yet the decision-makers went ahead.

You don't have to be especially sympathetic to the decision-makers in these cases to assume that they didn't consciously desire the disastrous outcomes that arose. That's generally obvious. But the public tends to accept as a corollary: "No reasonable, decent person could have consciously risked this outcome if they recognized it was a serious possibility."

That is a very plausible assumption. It expresses our deeply ingrained sense of ourselves and other human beings. But it is wrong. It is a widely held misunderstanding of the way we ordinary humans act in organizational settings, either in positions of power and responsibility, or as subordinates. Officials who have a public responsibility to make responsible choices do take reckless, unreasonable risks, more often and on a greater scale than most outsiders can even imagine. That fact is unfamiliar because, to avoid accountability and blame, those same officials conceal it, and direct their subordinates to cover it up; and the subordinates do so, again for understandable (though not admirable) career motives, acting as bystanders while risky gambles are undertaken. Dr. Gerstein focuses especially on the latter behavior, that of subordinates. Let me add some reflections on the behavior of the leaders.

What Dr. Gerstein shows is that reasonable people, who are not malicious, and whose intent is not to kill or injure other people, will nonetheless risk killing vast numbers of people. And they will do it predictably, with awareness. The Merck officials knew they were risking vast numbers of lives with Vioxx. So did the decision-makers responsible for protecting New Orleans. They knew the risks from the beginning, at every stage. In these and other cases, the responsible decision-makers may have underrated the risks in their own minds, but they knowingly took great efforts to conceal evidential data, at the time and later, from those who might judge differently.

In most of the cases in this book—Challenger, Katrina, Vioxx, Columbia, Chernobyl, Andersen—the leaders chose, in the face of serious warnings, to consciously take chances that risked disaster. What are the circumstances under which leaders take these kinds of gambles? My own experience and research suggests, very often, the following answer: when the potentially disastrous gamble offers the possibility of avoiding loss altogether, coming out even or a little ahead; and when the alternative to taking the gamble assures the certainty of loss in the short run—a loss that impacts the leader personally.

The sure loss that is rejected may appear small or even trivial to an observer, compared with the much greater damage, perhaps societally catastrophic, that is risked and often subsequently experienced. The latter damage, however, may be to "other people," outside the decision-maker's organization or even nation, and inflicted in "the long run": thus, less easily attributed to this decision-maker, who may well have moved on by the time of the disaster. In effect, the decision-maker acts as if a sure, short-term loss to his own position—a perceived failure, risking his job or reelection or his influence—were comparably disastrous to a possible social catastrophe that costs many lives: an avoidable war, a widely used drug that proves to have lethal side effects, a dangerous product, the explosion of a nuclear plant or space vehicle.

In the leader's eyes, both of these outcomes are "disasters." One of them, resulting from a particular course of action, is sure to occur. The other is uncertain, a possibility under another course of action, though perhaps very likely—and it is combined with the possibility, not available with the other course, of coming out even or perhaps ahead, winning or at least not losing. In choosing the latter option, he sees himself as accepting the possibility of a loss—in the hope of coming out even—rather than accepting a certainty of a failure, defeat. It seems—and it is so presented to him by some advisers—a simple, inescapable decision, "no real choice": the possibility of winning, or at least of avoiding or postponing defeat, versus a "no-win" course of action or, worse, a sure loss in the short run. He and these advisers simply ignore the fact that the scale of the respective losses, and who it is that mainly suffers them, are vastly different in the two courses. (I observed this bureaucratically over and over in Vietnam, and it is evident in current advocacy of occupying Iraq or attacking Iran.)

It was, in fact, the experimental work on choice by Kahneman and Tversky described by Dr. Gerstein that led me to recognize the frequency of the above choice-context, and of the resulting choice of a gamble involving possible catastrophe, as a common precursor to organizational or social disaster. In particular, these researchers' discovery of the special salience given to "sure" outcomes, and of the greater strength of the impulse to avoid any loss—relative to some chosen benchmark—than to increase one's gain, led me to understand in a new way otherwise baffling decisions that have led to major catastrophes in national security.

Applying hypotheses suggested by this research to decisions— including the escalation of the Vietnam War (in which I participated personally, on a staff level), the decision to invade and occupy Iraq, and to serious, secret threats to initiate nuclear war in more than a dozen crises—I have been forced to the following unhappy conclusion (which applies, on a smaller but still tragic scale, to many of the examples in this book): Men in power are willing to risk any number of human lives to avoid an otherwise certain loss to themselves, a sure reversal of their own prospects in the short run.

That grim proposition sounds extreme, I would say, largely because of near-universal and effective efforts to conceal the organizational decision-making data on alternatives and prospects that would reveal such preferences. Failure to conceal these data would point to culpability, recklessness, perhaps criminality on the part of specific decision-makers or a whole organizational team. Results could range from embarrassment, loss of prestige and influence, to expulsion from job or office, the downfall of an administration, even a prison sentence. The cover-up to avoid such accountability is usually successful. Hence, specific disasters—when the gambles are lost—appear to the public as shocking, inexplicable surprises. (And the public mistakenly infers, as it is meant to, that it appears the same way to the decision-makers involved.)

One lesson of this book is that you will not reduce those risks adequately by action within the firm or government agency. The organization has to be monitored by other organizations that are not under the same management, that don't respond to the same boss. You can set up processes within the organization that make truth-telling, realistic assessments, and warnings of danger somewhat more likely. But that isn't close to being an adequate solution. Subordinates who act like bystanders (to keep their jobs) are indeed part of the problem, as Gerstein argues, but the organization's leaders themselves are the major part.

The most promising solution—in the case of government—is going back to the system that our founders set up. It obviously didn't provide any guarantee, but it was an ingenious system of confronting men of power with other men of power within the system. Checks and balances; investigative powers of Congress, with subpoenas; investigators with some degree of independence from the president; an independent judiciary. All of these are things that you don't have in a dictatorship. They are institutions that leaders such as Vice President Richard Cheney, for one, openly disdain.

These are not just luxuries that make us feel more free and privileged. They are vital safety mechanisms. Democratic, republican, constitutional government of the form invented here, revered at least in principle till recently, is less efficient and decisive than unrestrained executive power in what is effectively an absolute monarchy or dictatorship. Things move less fast, and there are constant complaints that nothing gets done, compared with a "unitary executive," a presidency of unlimited "inherent powers" of the sort that Cheney and his special band of legal advisers prefer and proclaim. But the latter leads straight to a succession of Iraqs. As Tom Paine put it, most wars arise from "the pride of kings."

Similar checks to unaccountable power and secrecy are needed, as Gerstein's case studies show, in nongovernmental organizations and corporations. To mention a spectacular case not covered in this book, where cover-up was even more blatant than in most of Gerstein's examples and the lethal effects even greater (comparable to the death tolls in major wars): Tobacco executives didn't need more truth-telling within their organization to reduce vast dangers to the public. (For a recent account, see The Cigarette Century by Allan M. Brandt.) They were busily engaged in muffling every subordinate who brought up any warning, and preventing or neutralizing any warning by outsiders. All the major tobacco CEOs perjured themselves when they said in sworn testimony before Congress that "We have no knowledge that our product is carcinogenic, or that we market it to minors, or that it is addictive." That was clear-cut perjury in every case, quite apart from the arguable criminality and certain lethality of their practices. Yet not one of them has been brought up on criminal charges, or even contempt of Congress.

Such indictments would be useful. It would save lives in the future if not only figures such as Jeffrey Skilling of Enron but also, more important, a lot of other leaders who take and conceal risks to the lives of others were to be indicted or impeached and subjected to criminal prosecution, if convicted, prison.

But above all, we need more whistle-blowers from within. Their truth-telling to outside authorities and audiences is essential. And the only way to get it—since dangers to their own careers in their organizations cannot be eliminated—is to somehow encourage them to accept those risks, for the benefit of others.

Is that asking the impossible? Difficult, unusual, unlikely, yes: yet it is humanly possible, and essential. Humans have the capability for great concern, altruism, and even self-sacrifice in the interest of others outside their immediate families and teams, and they very often show it: only not often enough, indeed quite rarely, in their official roles within organizations. Unfortunately, as human beings, we also all have the capability of being selective in our concern, and of being manipulated in our selectivity of concern by our leaders and colleagues in our groups.

A major reason for the occurrence of disasters is that, as humans, we often choose keeping our job, protecting our reputation, getting promoted, maintaining our access to inside information, getting reelected, assuring college education for our children, preserving our marriage, and holding on to our house in a nice neighborhood—all considerations that are neither trivial nor discreditable for any of us— over actions, including truth-telling to the public, that would risk some of these but which could potentially save vast numbers of other people's lives.

I would like readers to realize—and this book has great potential for alerting them—that there may well come times when the amount of harm they could avert by speaking out could well outweigh the personal harm they might suffer by doing so, great though that might be.

When I released the Pentagon Papers in 1971, former senator Wayne Morse told me that if I had given him those documents at the time of the Tonkin Gulf Resolution in 1964 (when I had many of them in my office safe in the Pentagon), "The Resolution would never have gotten out of committee. And if it had been brought to a vote, it would never have passed." That's a heavy burden to bear. But scores of other officials, perhaps a hundred, could have given those documents to the Senate as well as I.

More recently, any one of a hundred people within the government could have averted the Iraq War by telling the public—with documents—what they knew about the lies the president was feeding the public. Yet no one did. A middle manager or even lower-level person could have saved the Challenger, or rung the bell on Vioxx. Shouldn't one of them have done it, or more than one? Every one of the stories Dr. Gerstein tells could have had a happier ending if his book, existing earlier, had inspired one person in the respective organization—at the top, bottom, or in between—to act with moral courage.

When confronted with potential looming catastrophes, people within large organizations often think, Somebody else will take care of this. And surely the top people know more than I do. It's their job to take care of it, and surely they will. The truth is, there's no likelihood at all that the leaders will take care of it. If readers who find themselves facing organizational disasters realize, perhaps from this book, It's up to me, and if I don't do it, it's probably not going to get done. The others aren't going to do it. Maybe I'm the one who needs to do it, some may be more willing to take personal risks to avert catastrophes.

Thus, reading this book could change lives. From the examples given, a reader could recognize two things. First, in the words of a Chinese proverb my wife, Patricia, likes to quote: "If you don't change course, you are likely to end up where you are heading." If the course your team, your organization, or your nation is on looks to you as though it is going over a cliff, heading for a disaster, it may well be doing so.

Second, readers should realize, If I see this, and lots of other people see it, too, it does not follow that somebody else will take care of it. Disasters occur because leaders often choose crazy or dangerous courses and people like me don't rock the boat. You, the reader, can choose otherwise.

In the situations Dr. Gerstein describes, the leaders do not lack for subordinates giving warnings within the organizational chain of command. The problem is that the warnings are stifled or overridden; subsequently, those who see the dangers and even see them happening keep their silence. My hope is that people reading this book might decide that averting catastrophe can be worth going outside the organization—warning the public, Congress, investigative bodies— and the media directly with documents to back it up. Many individuals inside government and corporations, from low-level clerks to upper managers and cabinet members, have that power—at the risk of their careers, to be sure—to tell the truth, and perhaps to rescue their own organizations or countries from disaster, as well as rescuing other potential victims.

For the last six years, since the Iraq War first approached (and more recently, equally disastrous prospects of attack on Iran), I have been urging patriotic and conscientious insiders who may be in the situation I once was in—holding secret, official knowledge of lies, crimes, and dangers of impending, wrongful, catastrophic wars or escalations—to do what I wish I had done in 1964 or early 1965, years earlier than I did: Go to Congress and the press and reveal the truth, with documents. The personal risks are real, but a war's-worth of lives might be saved.

The above text was first published as an afterword to Flirting with Disaster: Why Accidents Are Rarely Accidental (Hardcover) by Marc S. Gerstein and Michael Ellsberg [click for details]